485BPOS2020-12-310001020425false0.04160.16240.13780.19960.09410.35140.21470.06320.11070.02720.03580.01870.05520.00770.11980.04610.06870.21150.23610.04510.09910.20800.02080.27550.30450.05620.08520.19520.05020.08370.0630<div style="display:none">~ http://www.mastersfunds.com/role/ShareholderFeesPartnerselectEquityFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualFundOperatingExpensesPartnerselectEquityFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ExpenseExampleTransposedPartnerselectEquityFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualTotalReturnsBarChartPartnerselectEquityFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AverageAnnualTotalReturnsTransposedPartnerselectEquityFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ShareholderFeesPartnerselectInternationalFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualFundOperatingExpensesPartnerselectInternationalFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ExpenseExampleTransposedPartnerselectInternationalFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualTotalReturnsBarChartPartnerselectInternationalFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AverageAnnualTotalReturnsTransposedPartnerselectInternationalFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ShareholderFeesPartnerselectHighIncomeAlternativesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualFundOperatingExpensesPartnerselectHighIncomeAlternativesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ExpenseExampleTransposedPartnerselectHighIncomeAlternativesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualTotalReturnsBarChartPartnerselectHighIncomeAlternativesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AverageAnnualTotalReturnsTransposedPartnerselectHighIncomeAlternativesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ShareholderFeesPartnerselectAlternativeStrategiesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualFundOperatingExpensesPartnerselectAlternativeStrategiesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ExpenseExampleTransposedPartnerselectAlternativeStrategiesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualTotalReturnsBarChartPartnerselectAlternativeStrategiesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AverageAnnualTotalReturnsTransposedPartnerselectAlternativeStrategiesFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ShareholderFeesPartnerselectOldfieldInternationalValueFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualFundOperatingExpensesPartnerselectOldfieldInternationalValueFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ExpenseExampleTransposedPartnerselectOldfieldInternationalValueFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ShareholderFeesPartnerselectSbhFocusedSmallValueFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/AnnualFundOperatingExpensesPartnerselectSbhFocusedSmallValueFund column period compact * ~</div><div style="display:none">~ http://www.mastersfunds.com/role/ExpenseExampleTransposedPartnerselectSbhFocusedSmallValueFund column period compact * ~</div>Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the Equity Fund, has contractually agreed, through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the Equity Fund’s daily net assets retained by Litman Gregory is 0.40%. This agreement may be terminated at any time by the Board of Trustees of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement.Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the International Fund, has contractually agreed, through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the International Fund’s daily net assets retained by Litman Gregory is 0.40% on the first $1 billion of the International Fund’s assets and 0.30% on assets over $1 billion. This agreement may be terminated at any time by the Board of Trustees (the “Board”) of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement.Total Annual Fund Operating Expenses shown in the table above may not correspond to the ratio of operating expenses to average net assets in the “Financial Highlights” section of this Prospectus to the extent that Acquired Fund Fees and Expenses are included in the table above.Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the High Income Alternatives Fund, has contractually agreed to limit the High Income Alternatives Fund’s operating expenses (excluding any taxes, interest, brokerage commissions, borrowing costs, dividend expenses, acquired fund fees and expenses and extraordinary expenses such as but not limited to litigation costs) through April 30, 2022 to an annual rate of 0.98% for the Institutional Class (the “Operating Expense Limitation”). This agreement may be renewed for additional periods not exceeding one (1) year and may be terminated by the Board of Trustees (the “Board”) of Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory. Litman Gregory may also decline to renew this agreement by written notice to the Trust at least thirty (30) days before the renewal date. Pursuant to this agreement, Litman Gregory may recoup reduced fees and expenses only within three years, provided that the recoupment does not cause the High Income Alternatives Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment.Litman Gregory Fund Advisors LLC has separately contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the High Income Alternatives Fund’s daily net assets retained by Litman Gregory is 0.40% on the first $1 billion of assets, 0.375% on the next $1 billion of assets, 0.35% on the next $1 billion of assets, 0.325% on the next $1 billion of assets and 0.30% on assets in excess of $4 billion. This agreement may be terminated at any time by the Board of Trustees of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement at its expiration on April 30, 2022 by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this advisory fee waiver agreement.Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the Alternative Strategies Fund, has contractually agreed, through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the Alternative Strategies Fund’s daily net assets retained by Litman Gregory is 0.50% on the first $2 billion of the Alternative Strategies Fund’s assets, 0.40% of the next $1 billion of the Alternative Strategies Fund’s assets, 0.35% of the next $1 billion of the Alternative Strategies Fund’s assets and 0.30% on assets over $4 billion. This agreement may be terminated at any time by the Board of Trustees (the “Board”) of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement.Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the SBH Focused Small Value Fund, has contractually agreed to limit the Fund’s operating expenses (excluding any taxes, interest, brokerage commissions, borrowing costs, dividend expenses, acquired fund fees and expenses and extraordinary expenses) through April 30, 2022 to an annual rate of 1.15% for the Institutional Class (the “Operating Expense Limitation”). This agreement may be renewed for additional periods not exceeding one (1) year and may be terminated by the Board of Trustees (the “Board”) of Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory. Litman Gregory may also decline to renew this agreement by written notice to the Trust at least thirty (30) days before the renewal date. Any fee waiver or expense reimbursement made by Litman Gregory pursuant to this agreement is subject to the repayment by the Fund only within three (3) years of the date such amounts were waived or reimbursed, provided that the repayment does not cause the Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board.Litman Gregory has contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the Fund’s daily net assets retained by Litman Gregory is 1.15%. This agreement may be terminated at any time by the Board of the Trust upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement at its expiration on April 30, 2022 by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. While Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement, Litman Gregory may be reimbursed for non-advisory related expenses.Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the Fund, has contractually agreed to limit the Fund’s operating expenses (excluding any taxes, interest, brokerage commissions, borrowing costs, dividend expenses, acquired fund fees and expenses and extraordinary expenses) through April 30, 2022 to an annual rate of 0.94% for the Institutional Class (the “Operating Expense Limitation”). This agreement may be renewed for additional periods not exceeding one (1) year and may be terminated by the Board of Trustees (the “Board”) of Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory. Litman Gregory may also decline to renew this agreement by written notice to the Trust at least thirty (30) days before the renewal date. Any fee waiver or expense reimbursement made by Litman Gregory pursuant to this agreement is subject to the repayment by the Fund only within three (3) years of the date such amounts were waived or reimbursed, provided that the repayment does not cause the Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board. Litman Gregory has contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the Fund’s daily net assets retained by Litman Gregory is 0.35%. This agreement may be terminated at any time by the Board of the Trust upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement at its expiration on April 30, 2022 by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. While Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement, Litman Gregory may be reimbursed for non-advisory related expenses. 0001020425 2021-04-30 2021-04-30 0001020425 lgft:S000005593Member 2021-04-30 2021-04-30 0001020425 lgft:S000005594Member 2021-04-30 2021-04-30 0001020425 lgft:S000057610Member 2021-04-30 2021-04-30 0001020425 lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 lgft:S000069933Member 2021-04-30 2021-04-30 0001020425 lgft:S000068190Member 2021-04-30 2021-04-30 0001020425 lgft:S000005593Member lgft:C000015260Member 2021-04-30 2021-04-30 0001020425 lgft:S000005594Member lgft:C000015261Member 2021-04-30 2021-04-30 0001020425 lgft:C000183970Member lgft:S000057610Member 2021-04-30 2021-04-30 0001020425 lgft:C000103965Member lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 lgft:C000103966Member lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 lgft:S000069933Member lgft:C000222757Member 2021-04-30 2021-04-30 0001020425 lgft:S000068190Member lgft:C000218348Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsMember lgft:C000015260Member lgft:S000005593Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsAndSalesMember lgft:C000015260Member lgft:S000005593Member 2021-04-30 2021-04-30 0001020425 lgft:Russell3000IndexMember lgft:S000005593Member 2021-04-30 2021-04-30 0001020425 lgft:MorningstarLargeBlendCategoryMember lgft:S000005593Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsMember lgft:C000015261Member lgft:S000005594Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsAndSalesMember lgft:C000015261Member lgft:S000005594Member 2021-04-30 2021-04-30 0001020425 lgft:MsciAcwiExusIndexMember lgft:S000005594Member 2021-04-30 2021-04-30 0001020425 lgft:MsciEafeIndexMember lgft:S000005594Member 2021-04-30 2021-04-30 0001020425 lgft:MorningstarForeignLargeBlendCategoryMember lgft:S000005594Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsMember lgft:C000183970Member lgft:S000057610Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsAndSalesMember lgft:C000183970Member lgft:S000057610Member 2021-04-30 2021-04-30 0001020425 lgft:BloombergBarclaysUsAggregateBondIndexMember lgft:S000057610Member 2021-04-30 2021-04-30 0001020425 lgft:IceBofamlUsHighYieldTrUsdIndexMember lgft:S000057610Member 2021-04-30 2021-04-30 0001020425 lgft:HfrxFixedIncomeCreditIndexMember lgft:S000057610Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsMember lgft:C000103965Member lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 rr:AfterTaxesOnDistributionsAndSalesMember lgft:C000103965Member lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 lgft:ThreemonthLiborMember lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 lgft:BloombergBarclaysUsAggregateBondIndexMember lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 lgft:MorningstarMultialternativeCategoryMember lgft:S000033728Member 2021-04-30 2021-04-30 0001020425 lgft:HfrxGlobalHedgeFundIndexMember lgft:S000033728Member 2021-04-30 2021-04-30 iso4217:USD xbrli:pure
As filed with the U.S. Securities and Exchange Commission on April 29, 2021
SECURITIES AND EXCHANGE COMMISSION
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THE SECURITIES ACT OF 1933
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☒
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Pre-Effective
Amendment No.
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☐
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Post-Effective Amendment No.
103
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☒
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THE INVESTMENT COMPANY ACT OF 1940
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☒
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(Check appropriate box or boxes)
LITMAN GREGORY FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
1676 N. California Blvd., Suite 500, Walnut Creek, California 94596
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, including Area Code)
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1676 N. California Blvd., Suite 500
Walnut Creek, California 94596
(Name and Address of Agent for Service)
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Copies of Communications to:
101 California Street, 48th Floor
San Francisco, California 94111
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Approximate Date of Proposed Public Offering:
As soon as practicable following effectiveness.
It is proposed that this filing will become effective (check appropriate box)
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immediately upon filing pursuant to paragraph (b)
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☒
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on April 30, 2021 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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☐
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on (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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☐
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on (date) pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
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this post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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(Share Class – Ticker Symbol)
PartnerSelect Equity Fund
(formerly, Litman Gregory Masters Equity Fund)
Institutional Class – MSEFX
PartnerSelect International Fund
(formerly, Litman Gregory Masters International Fund)
Institutional Class – MSILX
PartnerSelect Alternative Strategies Fund
(formerly, Litman Gregory Masters Alternative Strategies Fund)
Institutional Class – MASFX
Investor Class – MASNX
PartnerSelect High Income Alternatives Fund
(formerly, Litman Gregory Masters High Income Alternatives Fund)
Institutional Class – MAHIX
PartnerSelect SBH Focused Small Value Fund
Institutional Class – PFSVX
PartnerSelect Oldfield International Value Fund
Institutional Class – POIVX
April 30, 2021
As with all mutual funds, the U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved these securities, nor has the SEC judged whether the information in this Prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.
Paper copies of the Funds’ annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Funds’ website (www.partnerselectfunds.com), and you will be notified by mail each time a report is posted and provided with a website link to access the report.
You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you receive paper copies of your reports. If you invest directly with the Trust, you can
call 1-800-960-0188. Your
election to receive reports in paper will apply to all Funds in the Trust or held with your financial intermediary.
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2
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2
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6
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11
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18
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26
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29
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32
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32
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32
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32
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33
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54
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54
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58
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63
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67
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74
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79
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81
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83
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90
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92
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PartnerSelect Equity Fund
The PartnerSelect Equity Fund (the “Equity Fund”) seeks long-term growth of capital; that is, the increase in the value of your investment over the long term.
Fees and Expenses of the Equity Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the Equity Fund.
Shareholder Fees (fees paid directly from your investment)
Annual Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
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Management Fees
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1.10%
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Other Expenses
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0.24%
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Interest and Dividend Expenses
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0.01%
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Total Other Expenses
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0.25%
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Total Annual Fund Operating Expenses
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1.35%
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Fee Waiver and/or Expense Reimbursement
(1)
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(0.12)%
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Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
(1)
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1.23%
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(1)
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Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the Equity Fund, has contractually agreed, through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the Equity Fund’s daily net assets retained by Litman Gregory is 0.40%. This agreement may be terminated at any time by the Board of Trustees of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement.
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This example is intended to help you compare the cost of investing in the Equity Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Equity Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Equity Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Institutional Class
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$
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125
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$
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412
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$
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724
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$
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1,610
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The Equity Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when shares of the Equity
Fund are held in a taxable account as compared to shares of investment companies that hold investments
for
a longer period. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Equity Fund’s performance. During the most recent fiscal year, the Equity Fund’s portfolio turnover rate was 56.91% of the average value of its portfolio.
The Equity Fund invests in the securities of companies that the
sub-advisors
to the Fund (each, a “manager” or
“sub-advisor”)
believe have strong appreciation potential. Under normal conditions, each
sub-advisor
manages a portion of the Equity Fund’s assets by independently managing a portfolio typically composed of at least 5, but not more than 15, stocks. There is no minimum or maximum allocation of the Fund’s portfolio assets to each
sub-advisor. Under
normal market conditions, the Equity Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities. Equity securities in which the Equity Fund may invest include common stocks, preferred stocks and convertible debt securities, which may be converted on specified terms into stock of the issuer. Concentration of investments in certain sectors – including, but not limited to, the communications services, consumer discretionary, financial, healthcare, industrial and technology sectors – may occur from time to time as a result of the implementation of the Equity Fund’s investment strategy by the
sub-advisors.
The Fund invests primarily in the securities of large-,
mid-
and
small-sized
U.S. companies, as measured by market capitalization at the time of acquisition, although the managers also have flexibility to invest in the securities of foreign companies. Up to 50% of the Equity Fund’s net assets may be invested in foreign equity securities, which may include emerging markets. Litman Gregory defines an emerging market country as any country that is included in the MSCI Emerging Markets Index.
Each
sub-advisor
uses its own discretion to invest in any sized company it deems appropriate. By executing its investment strategy, the Equity Fund seeks to:
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combine the efforts of several experienced, high quality managers;
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access the favorite stock-picking ideas of each manager at any point in time;
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deliver a portfolio that is prudently diversified in terms of stocks (typically 60 to 100) and industries while allowing each manager to run a portion of the portfolio focused on only its favorite stocks; and
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further diversify across
different-sized
companies and stock-picking styles by incorporating managers with a variety of stock-picking disciplines.
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Generally, a security may be sold: (1) if the manager believes the security’s market price exceeds the manager’s estimate of intrinsic value; (2) if the manager’s view of the business fundamentals or management of the underlying company changes; (3) if a more attractive investment opportunity is found;
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Litman Gregory Funds Trust
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(4) if general market conditions trigger a change in the manager’s assessment criteria; or (5) for other portfolio management reasons.
Investment in stocks exposes shareholders of the Equity Fund to the risk of losing money if the value of the stocks held by the Equity Fund declines during the period an investor owns shares in the Equity Fund. The following risks could affect the value of your investment. Each risk summarized below is considered a “principal risk” of investing in the Equity Fund, regardless of the order in which it appears. Some or all of these risks may adversely affect the Equity Fund’s net asset value per share, total return and/or ability to meet its objective.
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As with all mutual funds that invest in common stocks, the value of an individual’s investment will fluctuate daily in response to the performance of the individual stocks held in the Equity Fund. The stock market has been subject to significant volatility recently, which has increased the risks associated with an investment in the Equity Fund.
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Public Health Emergency Risk
This is the risk that pandemics and other public health emergencies, including outbreaks of infectious diseases such as the current outbreak of the novel coronavirus
(“COVID-19”),
can result, and in the case of
COVID-19
is resulting, in market volatility and disruption, and materially and adversely impact economic conditions in ways that cannot be predicted, all of which could result in substantial investment losses. Containment efforts and related restrictive actions by governments and businesses have significantly diminished and disrupted global economic activity across many industries. Less developed countries and their health systems may be more vulnerable to these impacts. The ultimate impact of
COVID-19
or other health emergencies on global economic conditions and businesses is impossible to predict accurately. Ongoing and potential additional material adverse economic effects of indeterminate duration and severity are possible. The resulting adverse impact on the value of an investment in the Fund could be significant and prolonged.
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.
This is the risk that the value of equity securities may fluctuate, sometimes rapidly and unpredictably, due to factors affecting the general market, an entire industry or sector, or particular companies. These factors include, without limitation, adverse changes in economic conditions, the general outlook for corporate earnings, interest rates or investor sentiment; increases in production costs; and significant management decisions. This risk is greater for small- and
medium-sized
companies, which tend to be more vulnerable to adverse developments than larger companies.
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Convertible Securities Risk.
This is the risk that the market value of convertible securities may fluctuate due to changes in, among other things, interest rates; other general economic conditions; industry fundamentals; market sentiment; the issuer’s operating results, financial statements, and credit ratings; and the market value of the underlying common or preferred stock.
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•
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The Equity Fund may invest a portion of its assets in the securities of small- and
mid-sized
companies. Securities of small and
mid-cap
companies are generally more volatile and less liquid than the securities of
large-cap
companies. This is because smaller companies may be more reliant on a few products, services or key personnel, which can make it riskier than investing in larger companies with more diverse product lines and structured management.
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•
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.
This is the risk that an investment in foreign
(non-U.S.)
securities may cause the Fund to experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies, due to factors such as currency conversion rate fluctuations, and the political and economic climates and differences in financial reporting, accounting and auditing standards in the foreign countries where the Fund invests or has exposure.
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: This is the risk that the value of the Fund’s emerging markets investments will decline due to the greater degree of economic, political and social instability of emerging or developing countries as compared to developed countries.
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: This is the risk that foreign currencies will decline in value relative to the U.S. dollar and affect the Fund’s investments in foreign
(non-U.S.)
currencies or in securities that trade in, and receive revenues in, or in derivatives that provide exposure to, foreign
(non-U.S.)
currencies.
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Multi-Style Management Risk.
Because portions of the Equity Fund’s assets are managed by different portfolio managers using different styles, the Equity Fund could experience overlapping security transactions. Certain portfolio managers may be purchasing securities at the same time other portfolio managers may be selling those same securities, which may lead to higher transaction expenses compared to a Fund using a single investment management style.
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Large Shareholder Purchase and Redemption Risk.
The Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund. Such large shareholder redemptions may cause the Fund to sell its securities at times when it would not otherwise do so, which may negatively impact the Fund’s net asset value and liquidity. Similarly, large share purchases may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. In addition, a large redemption could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio.
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•
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To the extent that the Fund emphasizes, from time to time, investments in a particular sector, the Fund will be subject to a greater degree to the risks particular to that sector, including the sectors described below. Market conditions, interest rates, and economic, regulatory, or financial developments could significantly affect a single sector. By focusing its investments in a particular sector, the Fund may face more risks than if it were diversified broadly over numerous sectors.
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PartnerSelect Equity Fund
— (Continued)
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Communications Services Sector Risk.
The Fund may invest a portion of its assets in the communications services sector. Media and communications companies may be significantly affected by product and service obsolescence due to technological advancement or development, competitive pressures, substantial capital requirements, fluctuating demand and changes in regulation.
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Consumer Discretionary Sector Risk.
The Fund may invest a portion of its assets in the consumer discretionary sector. The success of consumer product manufacturers and retailers is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and consumer spending. Changes in demographics and consumer tastes can also affect the demand for, and success of, consumer products and services in the marketplace.
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The Fund may invest a portion of its assets in the financial services sector and, therefore, the performance of the Fund could be negatively impacted by events affecting this sector, including changes in interest rates, government regulation, the rate of defaults on corporate, consumer and government debt and the availability and cost of capital.
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The Fund may invest a portion of its assets in the healthcare sector. The profitability of companies in the healthcare sector may be adversely affected by government regulations and government healthcare programs, increases or decreases in the cost of medical products and services and product liability claims, among other factors. Many healthcare companies are heavily dependent on patent protection, and the expiration of a company’s patent may adversely affect that company’s profitability. Healthcare companies are subject to competitive forces that may result in price discounting, and may be thinly capitalized and susceptible to product obsolescence.
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The Fund may invest a portion of its assets in the industrial sector. Companies in the industrial sector could be affected by, among other things, government regulation, world events and global economic conditions, insurance costs, and labor relations issues.
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The Fund may invest a portion of its assets in the technology sector, which is a very volatile segment of the market. The nature of technology is that it is rapidly changing. Therefore, products or services that may initially look promising may subsequently fail or become obsolete. In addition, many technology companies are younger, smaller and unseasoned companies which may not have established products, an experienced management team, or earnings history.
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•
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Investment Selection Risk.
The specific investments held in the Fund’s investment portfolio may underperform other funds in the same asset class or benchmarks that are representative of the general performance of the asset class because of a portfolio manager’s choice of securities.
|
The following performance information provides some indication of the risks of investing in the Equity Fund. The bar chart shows changes in the performance of the Equity Fund’s Institutional Class shares from year to year. The table below shows how the Equity Fund’s average annual total returns of the Institutional Class for the
1-,
5-
and
10-year
periods compare to those of a broad-based market index and an index of peer group mutual funds. Past performance, before and after taxes, does not necessarily indicate how the Equity Fund will perform in the future. Updated performance information is available on the Equity Fund’s website at www.partnerselectfunds.com.
PartnerSelect Equity Fund - Institutional Class Calendar Year Total Returns as of December 31
During the period shown above, the highest and lowest quarterly returns earned by the Equity Fund were:
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Quarter ended June 30, 2020
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Quarter ended March 31, 2020
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Litman Gregory Funds Trust
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Average Annual Total Returns
(for the periods ended December 31, 2020)
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PartnerSelect Equity Fund
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Return Before Taxes
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Return After Taxes on Distributions
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Return After Taxes on Distributions and Sale of Fund Shares
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(reflects no deduction for fees, expenses or taxes)
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Morningstar Large Blend Category
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(reflects net performance of funds in this group)
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The Equity Fund’s
after-tax
returns as shown in the table are calculated using the historical highest applicable individual federal marginal income tax rates for the period and do not reflect the impact of state and local taxes. Your actual
after-tax
returns depend on your tax situation and may differ from those shown. If you own shares of the Equity Fund in a
tax-deferred
account, such as a 401(k) plan or an individual retirement account,
after-tax
returns shown are not relevant to your investment. The
after-tax
returns on distributions and sale of Fund shares may be higher than returns before taxes due to the effect of a tax benefit an investor may receive from the realization of capital losses that would have been incurred on the sale of Fund shares.
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Litman Gregory Fund Advisors, LLC
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Jeremy DeGroot, CFA, President of the Trust, Principal, Chief Investment Officer and
Co-Portfolio
Manager
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2005
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Jack Chee, Principal, Senior Research Analyst and
Co-Portfolio
Manager
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2014
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Rajat Jain, CFA, Principal, Senior Research Analyst and
Co-Portfolio
Manager
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2014
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MANAGED THE EQUITY
FUND SINCE:
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Davis Selected Advisers, L.P.
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Christopher C. Davis, Chairman
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1999
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Danton Goei, Portfolio Manager
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2016
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Fiduciary Management, Inc.
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Patrick J. English, CFA, Chairman, Chief Executive Officer, Chief Investment Officer
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2013
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Jonathan T. Bloom, CFA, Director of Research
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2017
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Clyde S. McGregor, CFA, Vice President and Portfolio Manager
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2008
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William C. Nygren, CFA, Vice President, Chief Investment Officer – U.S. Equity, Portfolio Manager and Investment Analyst
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2013
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Scott Moore, CFA, President,
Co-Chief
Investment Officer and Portfolio Manager
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2014
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Chad Baumler, CFA, Vice President,
Co-Chief
Investment Officer and Portfolio Manager
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2020
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Sands Capital Management, LLC
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A. Michael Sramek, CFA, Senior Portfolio Manager, Research Analyst, Managing Director
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2008
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For important information about the purchase and sale of fund shares, tax information and financial intermediary compensation, please turn to the “Summary of Other Important Information Regarding the Funds” section on page 32 of this Prospectus.
PartnerSelect International Fund
The PartnerSelect International Fund (the “International Fund”) seeks long-term growth of capital; that is, the increase in the value of your investment over the long term.
Fees and Expenses of the International Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the International Fund.
(fees paid directly from your investment)
Annual Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
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Management Fees
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1.10%
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Other Expenses
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0.28%
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Interest and Dividend Expense
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0.01%
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Total Other Expenses
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0.29%
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Total Annual Fund Operating Expenses
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1.39%
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Fee Waiver and/or Expense Reimbursement
(1)
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(0.24)%
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Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
(1)
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1.15%
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(1)
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Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the International Fund, has contractually agreed, through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the International Fund’s daily net assets retained by Litman Gregory is 0.40% on the first $1 billion of the International Fund’s assets and 0.30% on assets over $1 billion. This agreement may be terminated at any time by the Board of Trustees (the “Board”) of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement.
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This example is intended to help you compare the cost of investing in the International Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the International Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the International Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Institutional Class
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$
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117
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$
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408
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$
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730
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$
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1,641
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The International Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when shares of the International Fund are held in a taxable account as compared
to shares in
investment
companies that hold investments for a longer period. These costs, which are not reflected in annual fund operating expenses or in the example, affect the International Fund’s performance. During the most recent fiscal year, the International Fund’s portfolio turnover rate was 59.61% of the average value of its portfolio.
The Fund invests in the securities of companies that the
sub-advisors
to the Fund (each, a “manager” or
“sub-advisor”)
believe have strong appreciation potential. Under normal conditions, each
sub-advisor
manages a portion of the International Fund’s assets by independently managing a portfolio typically composed of between 8 and 15 stocks. There is no minimum or maximum allocation of the Fund’s portfolio assets to each
sub-advisor. Under
normal market conditions, the International Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in the securities of companies organized or located outside of the United States, including large-,
mid-,
and
small-cap
companies and companies located in emerging markets, as measured by market capitalization at the time of acquisition. Litman Gregory defines an emerging market country as any country that is included in the MSCI Emerging Markets Index. The International Fund ordinarily invests in the securities markets of at least five countries outside of the United States. Concentration of investments in certain sectors – including, but not limited to, the communications services, consumer discretionary, consumer staples, financial and industrial sectors – may occur from time to time as a result of the implementation of the International Fund’s investment strategy by the
sub-advisors.
Each
sub-advisor
uses its own discretion to invest in any sized company it deems appropriate. The managers have limited flexibility to invest in the securities of U.S. companies. By executing its investment strategy, the International Fund seeks to:
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combine the efforts of several experienced, high quality international managers;
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access the favorite stock-picking ideas of each manager at any point in time;
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deliver a portfolio that is prudently diversified in terms of stocks (typically 32 to 60) and industries while still allowing each manager to run portfolio segments focused on only his favorite stocks; and
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further diversify across different sized companies, countries, and stock-picking styles by including managers with a variety of stock-picking disciplines.
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Generally, a security may be sold: (1) if the manager believes the security’s market price exceeds the manager’s estimate of intrinsic value; (2) if the manager’s view of the business fundamentals or management of the underlying company changes; (3) if a more attractive investment opportunity is found; (4) if general market conditions trigger a change in the manager’s assessment criteria; or (5) for other portfolio management reasons. The International Fund’s managers may trade its portfolio frequently.
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Litman Gregory Funds Trust
|
Investment in stocks exposes shareholders of the International Fund to the risk of losing money if the value of the stocks held by the International Fund declines during the period an investor owns shares in the International Fund. The following risks could affect the value of your investment. The following risks could affect the value of your investment. Each risk summarized below is considered a “principal risk” of investing in the International Fund, regardless of the order in which it appears. Some or all of these risks may adversely affect the International Fund’s net asset value per share, total return and/or ability to meet its objective.
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•
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.
This is the risk that the value of equity securities may fluctuate, sometimes rapidly and unpredictably, due to factors affecting the general market, an entire industry or sector, or particular companies. These factors include, without limitation, adverse changes in economic conditions, the general outlook for corporate earnings, interest rates or investor sentiment; increases in production costs; and significant management decisions. This risk is greater for small- and
medium-sized
companies, which tend to be more vulnerable to adverse developments than larger companies.
|
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•
|
|
.
This is the risk that an investment in foreign
(non-U.S.)
securities may cause the Fund to experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies, due to factors such as currency conversion rate fluctuations, and the political and economic climates and differences in financial reporting, accounting and auditing standards in the foreign countries where the Fund invests or has exposure.
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•
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This is the risk that world events – such as political upheaval, financial troubles, or natural disasters – will adversely affect the value of securities issued by companies in foreign countries or regions. Because the Fund may invest a large portion of its assets in securities of companies located in any one country or region, including emerging markets, the Fund’s performance may be hurt disproportionately by the poor performance of its investments in that area. Country/regional risk is heightened in emerging markets.
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Risks Associated with Europe
.
The Fund may invest a significant portion of its assets in issuers based in Western Europe and the United Kingdom (“UK”).
The economies of countries in Europe are often closely connected and interdependent, and events in one country in Europe can have an adverse impact on other European countries. Efforts by the member countries of the European Union (“EU”) to continue to unify their economic and monetary policies may increase the potential for similarities in the movements of European markets and reduce the potential investment benefits of diversification within the region. However, the substance of these policies may not address the needs of all European economies. European financial markets have in recent years experienced increased volatility due to concerns with some countries’ high levels of sovereign debt, budget deficits and unemployment. Markets have also been affected by the decision by the UK to withdraw from the EU (an event commonly known as “Brexit”). There is uncertainty surrounding the impact of Brexit on the UK, the EU
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and the broader global economy. An exit by any member countries from the EU or the Economic and Monetary Union of the EU, or even the prospect of such an exit, could lead to increased volatility in European markets and negatively affect investments both in issuers in the exiting country and throughout Europe.
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Risks Associated with Japan.
The Fund may invest a significant portion of its assets in issuers based in Japan. Investments in Japanese issuers may be subject to political, economic, nuclear and labor risks, among others. Any of these risks, individually or in the aggregate, can impact an investment made in Japan. The growth of Japan’s economy has recently lagged that of its Asian neighbors and other major developed economies. Since 2000, Japan’s economic growth rate has generally remained low relative to other advanced economies, and it may remain low in the future. The Japanese economy faces several concerns, any of which could negatively affect the value of Japanese investments.
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. This is the risk that the value of the Fund’s emerging markets investments will decline due to the greater degree of economic, political and social instability of emerging or developing countries as compared to developed countries.
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•
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: This is the risk that foreign currencies will decline in value relative to the U.S. dollar and affect the Fund’s investments in foreign
(non-U.S.)
currencies or in securities that trade in, and receive revenues in, or in derivatives that provide exposure to, foreign
(non-U.S.)
currencies.
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•
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As with all mutual funds that invest in common stocks, the value of an individual’s investment will fluctuate daily in response to the performance of the individual stocks held in the International Fund. The stock market has been subject to significant volatility recently, which has increased the risks associated with an investment in the International Fund.
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Public Health Emergency Risk
This is the risk that pandemics and other public health emergencies, including outbreaks of infectious diseases such as the current outbreak of the novel coronavirus
(“COVID-19”),
can result, and in the case of
COVID-19
is resulting, in market volatility and disruption, and materially and adversely impact economic conditions in ways that cannot be predicted, all of which could result in substantial investment losses. Containment efforts and related restrictive actions by governments and businesses have significantly diminished and disrupted global economic activity across many industries. Less developed countries and their health systems may be more vulnerable to these impacts. The ultimate impact of
COVID-19
or other health emergencies on global economic conditions and businesses is impossible to predict accurately. Ongoing and potential additional material adverse economic effects of indeterminate duration and severity are possible. The resulting adverse impact on the value of an investment in the Fund could be significant and prolonged.
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•
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The International Fund may invest a portion of its assets in the securities of small- and
mid-sized
companies. Securities of small- and
mid-cap
companies are generally more volatile and less liquid than the securities of large-cap companies. This is because smaller companies may be
|
PartnerSelect International Fund
— (Continued)
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more reliant on a few products, services or key personnel, which can make it riskier than investing in larger companies with more diverse product lines and structured management.
|
|
•
|
|
Multi-Style Management Risk.
Because portions of the International Fund’s assets are managed by different portfolio managers using different styles, the International Fund could experience overlapping security transactions. Certain portfolio managers may be purchasing securities at the same time other portfolio managers may be selling those same securities, which may lead to higher transaction expenses compared to a Fund using a single investment management style.
|
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•
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Large Shareholder Purchase and Redemption Risk.
The Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund. Such large shareholder redemptions may cause the Fund to sell its securities at times when it would not otherwise do so, which may negatively impact the Fund’s net asset value and liquidity. Similarly, large share purchases may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. In addition, a large redemption could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio.
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•
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Investments in special situations (undervalued equities, merger arbitrage situations, distressed companies, etc.) may involve greater risks when compared to other investments the Fund may make due to a variety of factors. For example, mergers, acquisitions, reorganizations, liquidations or recapitalizations may fail or not be completed on the terms originally contemplated, and expected developments may not occur in a timely manner, if at all.
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Value stocks are stocks of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the manager, undervalued. The value of a security believed by the manager to be undervalued may never reach what is believed to be its full (intrinsic) value, or such security’s value may decrease.
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•
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To the extent that the Fund emphasizes, from time to time, investments in a particular sector, the Fund will be subject to a greater degree to the risks particular to that sector, including the sectors described below. Market conditions, interest rates, and economic, regulatory, or financial developments could significantly affect a single sector. By focusing its investments in a particular sector, the Fund may face more risks than if it were diversified broadly over numerous sectors.
|
|
|
|
|
Communications Services Sector Risk.
The Fund may invest a portion of its assets in the communications services sector. Media and communications companies may be significantly affected by product and service obsolescence due to technological advancement or development, competitive pressures, substantial capital requirements, fluctuating demand and changes in regulation.
|
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|
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Consumer Discretionary Sector Risk.
The Fund may invest a portion of its assets in the consumer discretionary sector. The success of consumer product manufacturers and retailers is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and consumer spending. Changes in demographics and consumer tastes can also affect the demand for, and success of, consumer products and services in the marketplace.
|
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Consumer Staples Sector Risk.
The Fund may invest a portion of its assets in the consumer staples sector. The success of companies in this sector may be affected by, among other things, marketing campaigns, changes in consumer demands, government regulations and changes in commodity prices.
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The Fund may invest a portion of its assets in the financial services sector and, therefore, the performance of the Fund could be negatively impacted by events affecting this sector, including changes in interest rates, government regulation, the rate of defaults on corporate, consumer and government debt and the availability and cost of capital.
|
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The Fund may invest a portion of its assets in the industrial sector. Companies in the industrial sector could be affected by, among other things, government regulation, world events and global economic conditions, insurance costs, and labor relations issues.
|
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•
|
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Investment Selection Risk.
The specific investments held in the Fund’s investment portfolio may underperform other funds in the same asset class or benchmarks that are representative of the general performance of the asset class because of a portfolio manager’s choice of securities.
|
The following performance information provides some indication of the risks of investing in the International Fund. The bar chart shows changes in the performance of the International Fund’s Institutional Class shares from year to year. The table below shows how the International Fund’s average annual total returns of the Institutional Class for the
1-,
5-
and
10-year
periods compare to those of a broad-based market index, a secondary market index, as well as an index of peer group mutual funds. Past performance, before and after taxes, does not necessarily indicate how the International Fund will perform in the future. Updated performance information is available on the International Fund’s website at www.partnerselectfunds.com.
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Litman Gregory Funds Trust
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PartnerSelect International Fund
Institutional Class Calendar Year Total Returns
During the period shown above, the highest and lowest quarterly returns earned by the International Fund were:
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Quarter ended December 31, 2020
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Quarter ended March 31, 2020
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Average Annual Total Returns
(for the periods ended December 31, 2020)
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PartnerSelect International Fund
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Return Before Taxes
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Return After Taxes on Distributions
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Return After Taxes on Distributions and Sale of Fund Shares
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(reflects no deduction for fees, expenses or taxes)
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(reflects no deduction of fees, expenses or taxes)
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Morningstar Foreign Large Blend Category
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(reflects net performance of funds in this group)
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The International Fund’s
after-tax
returns as shown in the above table are calculated using the historical highest applicable individual federal marginal income tax rates for the period and do not reflect the impact of state and local taxes. Your actual
after-tax
returns depend on your tax situation and may differ from those shown. If you own shares of the International Fund in a
tax-deferred
account, such as a 401(k) plan or an individual retirement account,
after-tax
returns shown are not relevant to your investment. The
after-tax
returns on distributions and sale of Fund shares may be higher than returns before taxes due to the effect of a tax benefit an investor may receive from the realization of capital losses that would have been incurred on the sale of Fund shares.
PartnerSelect International Fund
— (Continued)
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Litman Gregory Fund Advisors, LLC
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Jeremy DeGroot, CFA, President of the Trust, Principal, Chief Investment Officer and
Co-Portfolio
Manager
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2005
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Rajat Jain, Principal, CFA, Senior Research Analyst and
Co-Portfolio
Manager
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2014
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Evermore Global Advisors, LLC
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David E. Marcus, Chief Investment Officer and Portfolio Manager
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2017
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David G. Herro, CFA, Deputy Chairman, Portfolio Manager and Chief Investment Officer, International Equity
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1997
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Lazard Asset Management LLC
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Mark Little, Portfolio Manager/Analyst
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2013
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Pictet Asset Management, Ltd.
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Fabio Paolini, CFA, Portfolio Manager,
Co-Lead
of EAFE Equities
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2016
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Benjamin (Ben) Beneche, CFA, Portfolio Manager,
Co-Lead
of EAFE Equities
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2016
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For important information about the purchase and sale of fund shares, tax information and financial intermediary compensation, please turn to the “Summary of Other Important Information Regarding the Funds” section on page 32 of this Prospectus.
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Litman Gregory Funds Trust
|
PartnerSelect Alternative Strategies Fund
The PartnerSelect Alternative Strategies Fund (the “Alternative Strategies Fund”) seeks to achieve long-term returns with lower risk and lower volatility than the stock market, and with relatively low correlation to stock and bond market indexes.
Fees and Expenses of the Alternative Strategies Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the Alternative Strategies Fund.
Shareholder Fees (fees paid directly from your investment)
Annual Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
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Management Fees
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1.40%
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1.40%
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Distribution and or Service
(12b-1)
Fees
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None
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0.25%
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Other Expenses Not Including Dividend or Interest Expense
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0.21%
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0.20%
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Dividend and Interest Expense
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0.14%
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0.14%
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Total Other Expenses
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0.35%
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0.34%
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Total Annual Fund Operating Expenses
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1.75%
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1.99%
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Fee Waiver and/or Expense Reimbursement
(1)
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(0.28)%
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(0.28)%
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Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
(1)
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1.47%
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1.71%
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(1)
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Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the Alternative Strategies Fund, has contractually agreed, through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the Alternative Strategies Fund’s daily net assets retained by Litman Gregory is 0.50% on the first $2 billion of the Alternative Strategies Fund’s assets, 0.40% of the next $1 billion of the Alternative Strategies Fund’s assets, 0.35% of the next $1 billion of the Alternative Strategies Fund’s assets and 0.30% on assets over $4 billion. This agreement may be terminated at any time by the Board of Trustees (the “Board”) of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement.
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This example is intended to help you compare the cost of investing in the Alternative Strategies Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Alternative Strategies Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Alternative Strategies Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Institutional Class
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$
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150
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$
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514
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$
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914
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$
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2,031
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Investor Class
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$
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174
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$
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588
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$
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1,038
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$
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2,286
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The Alternative Strategies Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when shares of the Alternative Strategies Fund are held in a taxable account as compared to shares in investment companies that hold investments for a longer period. These costs, which are not reflected in the annual fund operating expenses or in the example, will affect the Alternative Strategies Fund’s performance. During the most recent fiscal year, the Alternative Strategies Fund’s portfolio turnover rate was 193.98% of the average value of its portfolio.
Over the long term, the goal of Litman Gregory Fund Advisors, LLC, the advisor to the Alternative Strategies Fund, is to achieve an annualized return of LIBOR plus a range of 4% to 8%. (LIBOR is short for the London Interbank Offered Rate, an interest rate used by banks for short-term loans to each other.) Litman Gregory has established this goal to emphasize the importance of preserving and increasing shareholders’ capital investment rather than simply beating an index, and we use it to select managers and allocate assets among them. Of course there are no guarantees that we will achieve this goal, and investors may experience losses, especially over shorter time periods.
The Alternative Strategies Fund invests in a mix of strategies that Litman Gregory believes offer risk-return characteristics that are attractive individually and even more compelling collectively. The Alternative Strategies Fund is intended to be used by investors as a source of diversification for traditional stock and bond portfolios to reduce volatility and potentially enhance returns relative to various measures of risk.
Allocations among
sub-advisors
are based on a number of factors, including Litman Gregory’s expectation for the risk-adjusted return potential of each
sub-advisor’s
strategy and the impact on overall portfolio risk, with the objective of maximizing return subject to the goals of low volatility and relatively low correlation with broad financial markets, especially the stock market. Litman Gregory may at times adjust the allocations of capital to
sub-advisors
if it believes there is a highly compelling tactical opportunity in a particular
sub-advisor’s
strategy. A tactical opportunity could represent the potential for an exceptional risk-adjusted return opportunity relative to the other strategies, or it may represent a superior risk reduction opportunity that could benefit the Alternative Strategies Fund’s overall portfolio. Portfolio assets will be tactically allocated to the
sub-advisors
in accordance with the target allocation range for each
sub-advisor
as measured at the time of allocation. It is possible that additional managers and strategies will be added to the Alternative Strategies Fund in the future.
Sub-advisor
strategies may seek to benefit from: opportunities to combine securities with differing risk characteristics; market inefficiencies; arbitrage opportunities; opportunities to provide
PartnerSelect Alternative Strategies Fund
— (Continued)
liquidity; tactical opportunities in asset classes or securities; special situations such as spin offs; as well as other opportunities in areas such as real estate or managed futures. In the aggregate, the managers can invest globally in stocks of companies of any size, domicile or market capitalization, government and corporate bonds and other fixed income securities and currencies, including short positions of any of the foregoing, within their respective segments of the Alternative Strategies Fund. They may also invest in derivatives, including, without limitation, options, futures contracts, participatory notes
(“P-Notes”)
and swaps, to manage risk or enhance return and can also borrow amounts up to one third of the value of the Fund’s total assets (except that the Fund may exceed this limit to satisfy redemption requests or for other temporary purposes). Each of the managers may invest in illiquid securities; however, the Alternative Strategies Fund as a whole may not hold more than 15% of its net assets in illiquid securities. In some cases, the
sub-advisors
may seek to replicate strategies they employ in their private (hedge) funds. In other cases, the
sub-advisors
may seek to enhance strategies they run in other public funds by focusing on their highest conviction ideas to a greater extent or by pursuing certain aspects of their strategies with greater flexibility. However, the Alternative Strategies Fund will only invest directly in portfolio securities selected by the
sub-advisors
and will not invest in any pooled investment vehicles or accounts managed by the
sub-advisors.
Each
sub-advisor
will have an investment approach that generally focuses on a particular asset class or specific strategies. Currently, the strategies the
sub-advisors
focus on are as follows: (1) an arbitrage oriented strategy, (2) an opportunistic income strategy which will often focus on mortgage related securities, (3) a contrarian opportunity strategy that allows tactical investments throughout the capital structure (stocks and bonds), asset classes, market capitalization, industries and geographies, (4) a long/short credit strategy, and (5) a strategic alpha strategy that focuses on the tactical allocation of long and short global fixed income opportunities and currencies. Litman Gregory may hire
sub-advisors
that focus on other strategies in the future, and not all strategies that may be appropriate will be represented in the Alternative Strategies Fund’s portfolio at all times.
The
sub-advisor
that manages the arbitrage strategy seeks to generate long-term returns of at least
mid-single-digits
with low correlation to the equity and bond markets and may follow merger arbitrage, convertible arbitrage and capital structure arbitrage strategies. This objective is pursued by investing in equity and debt securities of U.S. and
non-U.S.
companies that are impacted by corporate events such as mergers, acquisitions, restructurings, refinancings, recapitalizations, reorganizations or other special situations.
The
sub-advisor
that manages the opportunistic income strategy allocates investments to fixed income instruments and other investments with no limit on the duration of the portfolio. The
sub-advisor
may invest in, without limitation, asset-backed securities; domestic and foreign corporate bonds, including high-yield bonds; municipal bonds; bonds or other obligations issued by domestic or foreign governments, including emerging markets countries; real estate investment trust (“REIT”) debt securities;
and mortgage related securities. Litman Gregory defines an emerging market country as any country that is included in the MSCI Emerging Markets Index. When investing in mortgage-related securities, the
sub-advisor
may invest in obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government; collateralized mortgage obligations (“CMOs”) issued by domestic or foreign private issuers that represent an interest in or are collateralized by mortgage related securities issued by agencies or instrumentalities of the U.S. Government; commercial mortgage backed securities (“CMBS”); obligations issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or mortgage related securities without a government guarantee but typically with some form of private credit enhancement; “interest only” and “principal only” stripped mortgage securities; inverse floating rate securities; and debt or equity tranches of collateralized debt obligations collateralized by mortgage related securities. The
sub-advisor
may purchase or sell mortgage-backed securities on a delayed delivery or forward commitment basis through the
(TBA) market. With TBA transactions, the particular securities to be delivered are not identified at the trade date but the delivered securities must meet specified terms and standards. The
sub-advisor
will generally enter into TBA transactions with the intention of taking possession of the underlying mortgage-backed securities. However, in an effort to obtain underlying mortgage-backed securities on more preferable terms or to enhance returns, the
sub-advisor
may extend the settlement by entering into “dollar roll” transactions in which the
sub-advisor
sells mortgage-backed securities and simultaneously agrees to purchase substantially similar securities on a future date. The
sub-advisor
also expects to engage in short sales of TBA mortgages, including short sales on TBA mortgages the Fund does not own, to potentially enhance returns or manage risk.
The
sub-advisor
that manages the contrarian opportunity strategy focuses on investments that offer absolute rather than relative value. The goal is to provide equity-like returns over longer periods (
, five to seven years) while protecting against the permanent loss of capital. Attention is directed toward those companies offering the best combination of such quality criteria as strong market share, good management, and high normalized return on capital.
The
sub-advisor
that manages the long-short credit strategy employs a systematic portfolio construction process underpinned by a proprietary, fundamental model of credit risk and valuation. The
sub-advisor’s
investment process is designed to exploit information gaps between credit and equity markets and other market inefficiencies to identify and capture mispricing at the individual asset level. The strategy is expected to generate returns from idiosyncratic credit selection, as the strategy systematically curtails rate duration and credit beta exposure. Correlations to systematic market risks including high yield and equity market returns are expected to be minimal, and strategy returns are not expected to be correlated to the returns of other active strategies. The portfolio is managed with the intention that the sensitivity of the long portfolio to market-wide credit spread movements will be offset in part by the sensitivities of the short portfolio to such market-wide movements. The
sub-advisor
may invest in corporate
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Litman Gregory Funds Trust
|
bonds issued by domestic and
non-U.S.
based companies, U.S. Treasury securities and long (sold protection) single name credit default swaps (CDS), interest rate futures and swaps and foreign exchange forwards (for hedging and currency conversion purposes). The short portfolio may be invested in short (bought protection) single name Credit Default Swap (CDS), short positions in Credit Default Indices (CDX Indices), and short positions in Total Return Swaps (TRS).
The
sub-advisor
that manages the strategic alpha strategy seeks to achieve positive total returns over a full market cycle with relatively low volatility. The
sub-advisor
intends to pursue its objective by utilizing a flexible investment approach that allocates investments across a global range of investment opportunities related to credit, currencies and interest rates, while employing risk management strategies designed to mitigate downside risk. Under normal market conditions, the
sub-advisor
may invest (1) up to 75% of the total assets allocated to it in below investment-grade fixed income securities and related derivatives; (2) up to 75% of the total assets allocated to it in investments denominated in
non-U.S.
currencies and related derivatives, including up to 50% in investments denominated in emerging market currencies and related derivatives; and (3) up to 20% of the total assets allocated to it in equity related securities and derivatives as measured at time of allocation. A “related derivative” of a financial instrument means any derivative whose value is based upon or derived from that financial instrument or a related derivative of that financial instrument. The
sub-advisor
incorporates systematic and quantitative models into its investment process.
As with all mutual funds, it is possible to lose money on an investment in the Alternative Strategies Fund. An investment in the Alternative Strategies Fund is not a deposit of any bank and is not guaranteed, endorsed or insured by any financial institution, government authority or the Federal Deposit Insurance Corporation (FDIC). The principal risks of investing in the Alternative Strategies Fund are:
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•
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.
This is the risk that the value of equity securities may fluctuate, sometimes rapidly and unpredictably, due to factors affecting the general market, an entire industry or sector, or particular companies. These factors include, without limitation, adverse changes in economic conditions, the general outlook for corporate earnings, interest rates or investor sentiment; increases in production costs; and significant management decisions. This risk is greater for small- and
medium-sized
companies, which tend to be more vulnerable to adverse developments than larger companies.
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•
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.
This is the risk that the value and liquidity of debt securities may be reduced under certain circumstances. The value of debt securities can fluctuate in response to issuer activity and changes in general economic and credit market conditions, including changes in interest rates. It is likely there will be less governmental action in the near future to maintain low interest rates. The negative impact on debt
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securities from the resulting rate increases for that and other reasons could be swift and significant. In recent years, dealer capacity in the debt and fixed income markets appears to have undergone fundamental changes, including a reduction in dealer market-making capacity. These changes have the potential to decrease substantially liquidity and increase volatility in the debt and fixed income markets.
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•
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|
Public Health Emergency Risk
This is the risk that pandemics and other public health emergencies, including outbreaks of infectious diseases such as the current outbreak of the novel coronavirus
(“COVID-19”),
can result, and in the case of
COVID-19
is resulting, in market volatility and disruption, and materially and adversely impact economic conditions in ways that cannot be predicted, all of which could result in substantial investment losses. Containment efforts and related restrictive actions by governments and businesses have significantly diminished and disrupted global economic activity across many industries. Less developed countries and their health systems may be more vulnerable to these impacts. The ultimate impact of
COVID-19
or other health emergencies on global economic conditions and businesses is impossible to predict accurately. Ongoing and potential additional material adverse economic effects of indeterminate duration and severity are possible. The resulting adverse impact on the value of an investment in the Fund could be significant and prolonged.
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•
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As with all mutual funds that invest in common stocks, the value of an individual’s investment will fluctuate daily in response to the performance of the individual stocks held in the Fund. The stock market has been subject to significant volatility recently, which has increased the risks associated with an investment in the Fund.
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•
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|
Below Investment-Grade Fixed Income Securities Risk
. This is the risk of investing in below investment-grade fixed income securities (also known as “junk bonds”), which may be greater than that of higher rated fixed income securities. These securities are rated Ba1 through C by Moody’s Investors Service (“Moody’s”) or BB+ through D by Standard & Poor’s Rating Group (“S&P”) (or comparably rated by another nationally recognized statistical rating organization), or, if not rated by Moody’s or S&P, are considered by the
sub-advisors
to be of similar quality. These securities have greater risk of default than higher rated securities. The market value of these securities is more sensitive to corporate developments and economic conditions and can be volatile. Market conditions can diminish liquidity and make accurate valuations difficult to obtain. There is no limit to the Alternative Strategies Fund’s ability to invest in below investment-grade fixed income securities; however, under normal market conditions, it does not expect to invest more than 50% of its total assets in below investment-grade fixed income securities.
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•
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. This is the risk that debt securities will decline in value because of changes in interest rates. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.
|
PartnerSelect Alternative Strategies Fund
— (Continued)
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•
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|
. This is the risk that the Alternative Strategies Fund could lose money if the issuer or guarantor of a fixed income security, or the counterparty of a derivatives contract or other transaction, is unable or unwilling (or is perceived to be unable or unwilling) to make timely payment of principal and/or interest, or to otherwise honor its obligations.
|
|
•
|
|
Convertible Securities Risk
. This is the risk that the market value of convertible securities may fluctuate due to changes in, among other things, interest rates; other general economic conditions; industry fundamentals; market sentiment; the issuer’s operating results, financial statements, and credit ratings; and the market value of the underlying common or preferred stock.
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•
|
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Capital Structure Arbitrage Risk
. The perceived mispricing identified by the
sub-advisor
may not disappear or may even increase, in which case losses may be realized.
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•
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Convertible Arbitrage Risk
. Arbitrage strategies involve engaging in transactions that attempt to exploit price differences of identical, related or similar securities on different markets or in different forms. A Fund may realize losses or reduced rate of return if underlying relationships among securities in which investment positions are taken change in an adverse manner or a transaction is unexpectedly terminated or delayed. Trading to seek short-term capital appreciation can be expected to cause the Fund’s portfolio turnover rate to be substantially higher than that of the average equity-oriented investment company, resulting in higher transaction costs and additional capital gains tax liabilities.
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•
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|
. Event-driven investments involve the risk that certain of the events driving the investment may not happen or the market may react differently than expected to the anticipated transaction. In addition, although an event may occur or is announced, it may be renegotiated, terminated or involve a longer time frame than originally contemplated. Event-driven investment transactions are also subject to the risk of overall market movements. Any one of these risks could cause the Fund to experience investment losses, impacting its shares negatively.
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•
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|
Asset-Backed Securities Risk
. This is the risk that the impairment of the value of the collateral underlying a security in which the Fund invests, such as the
non-payment
of loans, will result in a reduction in the value of the security. The value of these securities may also fluctuate in response to the market’s perception of the value of issuers or collateral.
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•
|
|
Mortgage-Backed Securities Risk
. This is the risk of investing in mortgaged-backed securities, which includes interest rate risk, prepayment risk and the risk of defaults on the mortgage loans underlying these securities.
|
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•
|
|
TBAs and Dollar Rolls Risk.
This is the risk that, although the securities that are delivered in TBA transactions must meet certain standards, the actual securities received by the Fund may be less favorable than what was anticipated when entering into the transaction. TBA transactions are collateralized but
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they still involve the risk that a counterparty will fail to deliver the security, exposing the Fund to potential losses. Whether or not the Fund takes delivery of the securities at the termination date of a TBA transaction, it will nonetheless be exposed to changes in the value of the underlying investments during the term of the agreement. Forward settling securities, such as TBAs, involve leverage which may magnify investment risks and can cause losses to be realized more quickly.
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|
•
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|
.
This is the risk that an investment in foreign
(non-U.S.)
securities may cause the Fund to experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies, due to factors such as currency conversion rate fluctuations, and the political and economic climates and differences in financial reporting, accounting and auditing standards in the foreign countries where the Fund invests or has exposure.
|
|
•
|
|
: This is the risk that the value of the Fund’s emerging markets investments will decline due to the greater degree of economic, political and social instability of emerging or developing countries as compared to developed countries.
|
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•
|
|
: This is the risk that foreign currencies will decline in value relative to the U.S. dollar and affect the Fund’s investments in foreign
(non-U.S.)
currencies or in securities that trade in, and receive revenues in, or in derivatives that provide exposure to, foreign
(non-U.S.)
currencies.
|
|
•
|
|
. This is the risk that leverage may cause the effect of an increase or decrease in the value of the Alternative Strategies Fund’s portfolio securities to be magnified and the Alternative Strategies Fund to be more volatile than if leverage was not used. Leverage may result from certain transactions, including the use of derivatives and borrowing.
|
|
•
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|
. This is the risk that an investment in derivatives may not correlate completely to the performance of the underlying securities and may be volatile and that the insolvency of the counterparty to a derivative instrument could cause the Alternative Strategies Fund to lose all or substantially all of its investment in the derivative instrument, as well as the benefits derived therefrom.
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. This is the risk that an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves and may be subject to a complete loss of the amounts paid as premiums to purchase the options.
|
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|
. This is the risk that an investment in futures contracts may be subject to losses that exceed the amount of the premiums paid and may subject the Alternative Strategies Fund’s net asset value to greater volatility.
|
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. This is the risk that the performance results of
P-Notes
will not replicate exactly the performance of the issuers or markets that the
P-Notes
seek to replicate. Investments in
P-Notes
involve risks normally associated with
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Litman Gregory Funds Trust
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a direct investment in the underlying securities as well as additional risks, such as counterparty risk.
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. Risks inherent in the use of swaps include: (1) swap contracts may not be assigned without the consent of the counterparty; (2) potential default of the counterparty to the swap; (3) absence of a liquid secondary market for any particular swap at any time; and (4) possible inability of the Alternative Strategies Fund to close out the swap transaction at a time that otherwise would be favorable for it to do so.
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•
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. This is the risk that the value of a security the Alternative Strategies Fund sells short does not go down as expected. The risk of loss is theoretically unlimited if the value of the security sold short continues to increase. In addition, short sales may cause the Alternative Strategies Fund to be compelled, at a time disadvantageous to it, to buy the security previously sold short, thus resulting in a loss. To meet current margin requirements, the Alternative Strategies Fund is required to deposit with the broker additional cash or securities so that the total deposit with the broker is maintained daily at 150% of the current market value of the securities sold short.
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•
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. This is the risk that a proposed reorganization in which the Alternative Strategies Fund invests may be renegotiated or terminated.
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•
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. This is the risk that that one or all of the proprietary systematic and quantitative models may fail to identify profitable opportunities at any time. Furthermore, the models may incorrectly identify opportunities and these misidentified opportunities may lead to substantial losses for the Fund. Models may be predictive in nature and such models may result in an incorrect assessment of future events. Data used in the construction of models may prove to be inaccurate or stale, which may result in losses for the Fund.
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•
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Multi-Style Management Risk.
This is the risk that
the Alternative Strategies Fund could experience overlapping security transactions as a result of having different portfolio managers using different strategies to manage the Alternative Strategies Fund’s assets. Certain portfolio managers may be purchasing securities at the same time other portfolio managers may be selling those same securities, which may lead to higher transaction expenses compared to a fund using a single investment strategy.
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•
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Investment Selection Risk.
The specific investments held in the Fund’s investment portfolio may underperform other funds in the same asset class or benchmarks that are representative of the general performance of the asset class because of a portfolio manager’s choice of securities.
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•
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This is the risk that the Alternative Strategies Fund may experience high portfolio turnover rates as a result of its investment strategies. High portfolio turnover rates may indicate higher transaction costs and may result in higher taxes when shares of the Alternative Strategies Fund are held in a taxable account as compared to shares in investment companies that hold investments for a longer period.
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•
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Unfavorable Tax Treatment Risk.
This is the risk that a material portion of the Alternative Strategies Fund’s return could be in the form of net investment income or short-term capital gains, some of which may be distributed to shareholders and taxed at ordinary income tax rates. Therefore, shareholders may have a greater need to pay regular taxes than compared to other investment strategies that hold investments longer. Due to this investment strategy, it may be preferable for certain shareholders to invest in the Fund through
pre-tax
or
tax-deferred
accounts as compared to investment through currently taxable accounts. Potential shareholders are encouraged to consult their tax advisors in this regard.
|
The following performance information provides some indication of the risks of investing in the Alternative Strategies Fund. The bar chart shows changes in the performance of the Alternative Strategies Fund’s Institutional Class shares from year to year. The table below shows how the Alternative Strategies Fund’s average annual total returns of the Institutional Class and Investor Class for the
1-,
5-year
and since inception periods compare to those of the
3-month
LIBOR, two secondary market indexes as well as an index of peer group mutual funds. Past performance, before and after taxes, does not necessarily indicate how the Alternative Strategies Fund will perform in the future. Updated performance information is available on the Alternative Strategies Fund’s website at www.partnerselectfunds.com.
PartnerSelect Alternative Strategies Fund
Institutional Class Calendar Year Total Returns
During the period shown above, the highest and lowest quarterly returns earned by the Alternative Strategies Fund were:
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Quarter ended June 30, 2020
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Quarter ended March 31, 2020
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PartnerSelect Alternative Strategies Fund
— (Continued)
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Average Annual Total Returns
(for the periods ended December 31, 2020)
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PartnerSelect Alternative Strategies Fund
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Return Before Taxes
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Return After Taxes on Distributions
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Return After Taxes on Distributions and Sale of Fund Shares
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Return Before Taxes
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(reflects no deduction for fees, expenses or taxes)
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Bloomberg Barclays U.S. Aggregate Bond Index
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(reflects no deduction for fees, expenses or taxes)
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Morningstar Multialternative Category
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(reflects net performance of funds in this group)
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HFRX Global Hedge Fund Index
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(reflects no deduction for fees, expenses or taxes)
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The Alternative Strategies Fund’s
after-tax
returns as shown in the table are calculated using the historical highest applicable individual federal marginal income tax rates for the period and do not reflect the impact of state and local taxes. Your actual
after-tax
returns depend on your tax situation and may differ from those shown. If you own shares of the Alternative Strategies Fund in a
tax-deferred
account, such as a 401(k) plan or an individual retirement account
after-tax
returns shown are not relevant to your
investment.
After-tax
returns are shown for only the Alternative Strategies Fund’s Institutional Class, and
after-tax
returns for the Alternative Strategies Fund’s Investor Class will vary. The
after-tax
returns on distributions and sale of Fund shares may be higher than returns before taxes due to the effect of a tax benefit an investor may receive from the realization of capital losses that would have been incurred on the sale of Fund shares.
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Litman Gregory Funds Trust
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Litman Gregory Fund Advisors, LLC
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Jeremy DeGroot, CFA, President of the Trust, Principal, Chief Investment Officer and Portfolio Manager
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2011
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Jason Steuerwalt, CFA, Principal, Senior Research Analyst and
Co-Portfolio
Manager
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2019
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Blackstone Credit Systematic Strategies LLC
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Stephen Kealhofer, Head of Research and Portfolio Manager
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2017
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Paul Harrison, Chief Investment Officer and Portfolio Manager
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2017
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Adam Dwinells, Head of Portfolio Management and Portfolio Manager
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2017
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Jeffrey Gundlach, Chief Executive Officer, Chief Investment Officer and Portfolio Manager
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2011
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Jeffrey Sherman, CFA, Deputy Chief Investment Officer and Portfolio Manager
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2017
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First Pacific Advisors, LP
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Steven Romick, CFA, Managing Partner and Portfolio Manager
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2011
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Brian Selmo, CFA, Partner, Portfolio Manager and Director of Research
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2011
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Mark Landecker, CFA, Partner and Portfolio Manager
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2011
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Loomis, Sayles & Company, L.P.
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Matthew J. Eagan, CFA, Executive Vice President, Director and Portfolio Manager
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2011
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Todd P. Vandam, CFA, Vice President and Portfolio Manager
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2011
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Brian P. Kennedy, Vice President and Portfolio Manager
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2021
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Elaine M. Stokes, Executive Vice President, Director and Portfolio Manager
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2021
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Water Island Capital, LLC
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John Orrico, CFA, President, Chief Investment Officer and Portfolio Manager
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2011
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Todd Munn, Portfolio Manager
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2011
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Roger Foltynowicz, CFA, CAIA, Portfolio Manager
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2011
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Gregg Loprete, Portfolio Manager
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2011
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For important information about the purchase and sale of fund shares, tax information and financial intermediary compensation, please turn to the “Summary of Other Important Information Regarding the Funds” section on page 32 of this Prospectus.
PartnerSelect High Income Alternatives Fund
The PartnerSelect High Income Alternatives Fund (the “High Income Alternatives Fund”) seeks to generate a high level of current income from diverse sources, consistent with the goal of capital preservation over time. Capital appreciation is a secondary objective.
Fees and Expenses of the High Income Alternatives Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the High Income Alternatives Fund.
(fees paid directly from your investment)
Annual Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
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Management Fees
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0.95%
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Distribution and or Service
(12b-1)
Fees
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None
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Other Expenses
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0.75%
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Interest and Dividend Expenses
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0.02%
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Acquired Fund Fees and Expenses
(1)
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0.01%
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Total Annual Fund Operating Expenses
(1)
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1.73%
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Fee Waiver and/or Expense Reimbursement
(2), (3)
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(0.72)%
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Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
(2
), (3
)
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1.01%
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(1)
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Total Annual Fund Operating Expenses shown in the table above may not correspond to the ratio of operating expenses to average net assets in the “Financial Highlights” section of this Prospectus to the extent that Acquired Fund Fees and Expenses are included in the table above.
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(2)
|
Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the High Income Alternatives Fund, has contractually agreed to limit the High Income Alternatives Fund’s operating expenses (excluding any taxes, interest, brokerage commissions, borrowing costs, dividend expenses, acquired fund fees and expenses and extraordinary expenses such as but not limited to litigation costs) through April 30, 2022 to an annual rate of 0.98% for the Institutional Class (the “Operating Expense Limitation”). This agreement may be renewed for additional periods not exceeding one (1) year and may be terminated by the Board of Trustees (the “Board”) of Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory. Litman Gregory may also decline to renew this agreement by written notice to the Trust at least thirty (30) days before the renewal date. Pursuant to this agreement, Litman Gregory may recoup reduced fees and expenses only within three years, provided that the recoupment does not cause the High Income Alternatives Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment.
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(3)
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Litman Gregory Fund Advisors LLC has separately contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the High Income Alternatives Fund’s daily net assets retained by Litman Gregory is 0.40% on the first $1 billion of assets, 0.375% on the next $1 billion of assets, 0.35% on the next $1 billion of assets, 0.325% on the next $1 billion of assets and 0.30% on assets in excess of $4 billion. This agreement may be terminated at any time by the Board of Trustees of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement at its expiration on April 30, 2022 by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this advisory fee waiver agreement.
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This example is intended to help you compare the cost of investing in the High Income Alternatives Fund with the cost of
investing in other mutual funds. The example assumes that you invest $10,000 in the High Income Alternatives Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the High Income Alternatives Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Institutional Class
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$
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103
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$
|
451
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$
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848
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$
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1,960
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The High Income Alternatives Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when shares of the High Income Alternatives Fund are held in a taxable account as compared to shares in investment companies that hold investments for a longer period. These costs, which are not reflected in the annual fund operating expenses or in the example, will affect the High Income Alternatives Fund’s performance. During the most recent fiscal year, the High Income Alternatives Fund’s portfolio turnover rate was 87.63%.
The High Income Alternatives Fund invests in a mix of strategies that Litman Gregory believes offer risk-return characteristics that are attractive individually and even more compelling collectively. The High Income Alternatives Fund is intended to be used by investors seeking high current income consistent with capital preservation over time, and with long-term capital appreciation a secondary objective.
Litman Gregory is responsible for hiring and firing investment managers and carefully chooses the
sub-advisors.
Before hiring a
sub-advisor,
Litman Gregory performs extensive due diligence. This includes quantitative and qualitative analysis including, but not limited to, evaluation of: the investment process; the consistency of its execution and discipline; portfolio construction; individual holdings; strategies employed; past mistakes; risk controls; team depth and quality; operations and compliance; and business focus and vision. Litman Gregory’s evaluation process includes review of literature and documents, detailed quantitative historical performance evaluation, extensive discussions with members of the investment team, and firm management and background checks through industry contacts. Each
sub-advisor’s
management fee is also an important consideration. It is Litman Gregory’s objective to hire
sub-advisors
who it believes are skilled and will deliver strong portfolio income relative to investment-grade fixed income portfolios, with low to moderate volatility relative to the stock market and volatility typically less than the high yield credit indexes. Litman Gregory prefers managers who it believes will add value by flexibly responding to evolving market conditions by adjusting duration and credit exposure, among other factors.
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Litman Gregory Funds Trust
|
Allocations among
sub-advisors
are based on several factors, including Litman Gregory’s expectation for the risk-adjusted return potential of each
sub-advisor’s
strategy and the impact on overall portfolio risk, with the objective of maximizing return subject to the goal of high income relative to investment-grade fixed income portfolios without taking undue risk. Litman Gregory may at times adjust the allocations of capital to
sub-advisors
if it believes there is a highly compelling tactical opportunity in a particular
sub-advisor’s
strategy. A tactical opportunity could represent the potential for an exceptional risk-adjusted return opportunity relative to the other strategies, or it may represent a superior risk reduction opportunity that could benefit the High Income Alternatives Fund’s overall portfolio. No strategy will be allocated less than 10% of portfolio assets or more than 60% of portfolio assets as measured at the time of allocation. It is possible that additional managers and strategies will be added to (or removed from) the High Income Alternatives Fund in the future and/or there may be adjustments in the allocation ranges.
Sub-advisor
strategies may seek to benefit from: opportunities to combine securities with differing risk characteristics; market inefficiencies; opportunities to provide liquidity; tactical opportunities in asset classes or securities; special situations such as spin-offs; as well as other opportunities in other areas. In the aggregate, the managers can invest globally in debt and equity securities of companies of any size, domicile or market capitalization, government and corporate bonds, loans, loan participation interests, mortgage or other asset-backed securities and other fixed income securities and currencies, including short positions of any of the foregoing, within their respective segments of the High Income Alternatives Fund. The managers may invest without limitation in below investment grade fixed income securities. Under normal market conditions, the Fund does not expect to invest more than 25% of its total assets in emerging market securities Litman Gregory defines an emerging market country as any country that is included in the MSCI Emerging Markets Index.
The managers may also write options, invest in derivatives, including, without limitation, options, futures contracts, participatory notes
(“P-Notes”)
and swaps, to manage risk or enhance return and can also borrow amounts up to one third of the value of the High Income Alternatives Fund’s total assets (except that the Fund may exceed this limit to satisfy redemption requests or for other temporary purposes). Each of the managers may invest in illiquid securities; however, the High Income Alternatives Fund as a whole may not hold more than 15% of its net assets in illiquid securities.
Each
sub-advisor
will have an investment approach that generally focuses on a particular asset class or specific strategies. Currently, the strategies the
sub-advisors
focus on are as follows: (1) a credit value strategy, (2) a multi credit strategy, and (3) an option income strategy. Litman Gregory may hire
sub-advisors
that focus on other strategies in the future, and not all strategies that may be appropriate will be represented in the High Income Alternatives Fund’s portfolio at all times.
The
sub-advisor
that manages the credit value strategy seeks to achieve the fund’s investment objectives by primarily investing its
segment of the Fund in fixed income securities it believes to have the potential for excess return. The
sub-advisor’s
investment strategy will be to invest in fixed income securities from a wide variety of sectors, asset-backed securities, commercial mortgage-backed securities, corporate bonds, floating-rate loans and municipal bonds. The
sub-advisor
expects to invest in structured and corporate securities. The
sub-advisor’s
emphasis is expected to be on
A/BBB-rated
asset backed securities and
BBB/BB-rated
corporate securities, as these ratings segments have historically offered attractive risk-adjusted returns, along with low default rates. The
sub-advisor
will also invest in U.S. Treasury futures to manage duration of the portfolio, which allows individual security selection to be managed without regard to portfolio duration. Duration is a measure of the expected life of a fixed income security that is used to determine the sensitivity of a security to changes in interest rates. Fixed income securities and portfolios with longer durations are subject to more volatility than those with shorter durations. The
sub-advisor
will not typically own CCC rated or distressed securities.
The
sub-advisor
that manages the multi credit strategy seeks to preserve invested capital and maximize total return through a combination of current income and capital appreciation. The team seeks to achieve its investment objective by investing in a wide range of fixed income and other instruments selected from a variety of credit qualities, and sectors, including, but not limited to, corporate bonds, loans and loan participations, structured finance investments, U.S. government and agency, mezzanine and preferred securities and convertible securities. The team seeks opportunities across fixed income market sectors — especially in
non-index-eligible
securities — and they aim to take advantage of downturns/inefficiencies that occur during times of uncertainty. The strategy is flexible and is not constrained by duration, sector, issuer, or credit quality.
The
sub-advisor
that manages the option income strategy seeks to achieve its goal primarily through a strategy of writing collateralized put options on both U.S. indices, including the S&P 500
®
Index and the Russell 2000
®
Index, and exchange traded funds (“ETFs”). The manager attempts to generate returns through the receipt of option premiums from selling puts, as well as through investments in fixed income instruments, which collectively are intended to reduce volatility relative to what it would be if the Fund held the underlying equity index on which the options are written. The portfolio’s investments in fixed income instruments may be of any duration, may include variable and floating rate instruments, and may include U.S. Treasury securities and other securities issued by the U.S. government and its agencies and instrumentalities, debt securities issued by corporations or trust entities, cash and cash equivalents, mortgage-backed securities and asset-backed securities. The manager also may invest in money market mutual funds and ETFs.
As with all mutual funds, it is possible to lose money on an investment in the High Income Alternatives Fund. An investment in the High Income Alternatives Fund is not a deposit of any bank and is not guaranteed, endorsed or insured by any financial
PartnerSelect High Income Alternatives Fund
— (Continued)
institution, government authority or the Federal Deposit Insurance Corporation (FDIC). The following risks could affect the value of your investment. Each risk summarized below is considered a “principal risk” of investing in the High Income Alternatives Fund, regardless of the order in which it appears. Some or all of these risks may adversely affect the High Income Alternatives Fund’s net asset value per share, total return and/or ability to meet its objective.
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•
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Public Health Emergency Risk
This is the risk that pandemics and other public health emergencies, including outbreaks of infectious diseases such as the current outbreak of the novel coronavirus
(“COVID-19”),
can result, and in the case of
COVID-19
is resulting, in market volatility and disruption, and materially and adversely impact economic conditions in ways that cannot be predicted, all of which could result in substantial investment losses. Containment efforts and related restrictive actions by governments and businesses have significantly diminished and disrupted global economic activity across many industries. Less developed countries and their health systems may be more vulnerable to these impacts. The ultimate impact of
COVID-19
or other health emergencies on global economic conditions and businesses is impossible to predict accurately. Ongoing and potential additional material adverse economic effects of indeterminate duration and severity are possible. The resulting adverse impact on the value of an investment in the Fund could be significant and prolonged.
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•
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Asset-Backed Securities Risk
. This is the risk that the impairment of the value of the collateral underlying a security in which the Fund invests, such as the
non-payment
of loans, will result in a reduction in the value of the security. The value of these securities may also fluctuate in response to the market’s perception of the value of issuers or collateral.
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•
|
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Below Investment-Grade Fixed Income Securities Risk
. This is the risk of investing in below investment-grade fixed income securities (also known as “junk bonds”), which may be greater than that of higher rated fixed income securities. These securities are rated Ba1 through C by Moody’s Investors Service (“Moody’s”) or BB+ through D by Standard & Poor’s Rating Group (“S&P”) (or comparably rated by another nationally recognized statistical rating organization), or, if not rated by Moody’s or S&P, are considered by the
sub-advisors
to be of similar quality. These securities are regarded by the rating organizations as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and therefore have greater risk of default than higher rated securities. The market value of these securities is more sensitive to corporate developments and economic conditions and can be volatile. Market conditions can diminish liquidity and make accurate valuations difficult to obtain.
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•
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. If the Fund’s financial instruments are secured by collateral, the issuer may have difficulty liquidating the collateral and/or the Fund may have difficulty enforcing its rights under the terms of the securities if an issuer defaults. Collateral may be insufficient or the Fund’s right to the collateral may be set aside by a court. Collateral will generally
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consist of assets that may not be readily liquidated, including for example, equipment, inventory, work in the process of manufacture, real property and payments to become due under contracts or other receivable obligations. There is no assurance that the liquidation of those assets would satisfy an issuer’s obligations under a financial instrument.
Non-affiliates
and affiliates of issuers of financial instruments may provide collateral in the form of secured and unsecured guarantees and/or security interests in assets that they own, which may also be insufficient to satisfy an issuer’s obligations under a financial instrument.
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•
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Collateralized Loan Obligations and Collateralized Debt Obligations Risk
. Collateralized loan obligations (“CLOs”) bear many of the same risks as other forms of asset-backed securities, including interest rate risk, credit risk and default risk. As they are backed by pools of loans, CLOs also bear similar risks to investing in loans directly. CLOs issue classes or “tranches” that vary in risk and yield. CLOs may experience substantial losses attributable to loan defaults. Losses caused by defaults on underlying assets are borne first by the holders of subordinate tranches. The Fund’s investment in CLOs may decrease in market value when the CLO experiences loan defaults or credit impairment, the disappearance of a subordinate tranche, or market anticipation of defaults and investor aversion to CLO securities as a class.
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Collateralized debt obligations (“CDOs”) are structured similarly to CLOs and bear the same risks as CLOs including interest rate risk, credit risk and default risk. CDOs are subject to additional risks because they are backed by pools of assets other than loans including securities (such as other asset-backed securities), synthetic instruments or bonds and may be highly leveraged. Like CLOs, losses incurred by a CDO are borne first by holders of subordinate tranches. Accordingly, the risks of CDOs depend largely on the type of underlying collateral and the tranche of CDOs in which the Fund invests. For example, CDOs that obtain their exposure through synthetic investments entail the risks associated with derivative instruments.
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•
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Convertible Securities Risk
. This is the risk that the market value of convertible securities may fluctuate due to changes in, among other things, interest rates; other general economic conditions; industry fundamentals; market sentiment; the issuer’s operating results, financial statements, and credit ratings; and the market value of the underlying common or preferred stock.
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•
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. This is the risk that the High Income Alternatives Fund could lose money if the issuer or guarantor of a fixed income security, or the counterparty of a derivatives contract or other transaction, is unable or unwilling (or is perceived to be unable or unwilling) to make timely payment of principal and/or interest, or to otherwise honor its obligations.
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•
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. This is the risk that investing in foreign currencies may expose the High Income Alternatives Fund to fluctuations in currency exchange rates and that such fluctuations in the exchange rates may negatively affect an investment related to a currency or denominated in a foreign currency.
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Litman Gregory Funds Trust
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•
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. This is the risk that the value and liquidity of debt securities may be reduced under certain circumstances. The value of debt securities can fluctuate in response to issuer activity and changes in general economic and credit market conditions, including changes in interest rates. It is likely there will be less governmental action in the near future to maintain low interest rates. The negative impact on debt securities from the resulting rate increases for that and other reasons could be swift and significant. In recent years, dealer capacity in the debt and fixed income markets appears to have undergone fundamental changes, including a reduction in dealer market-making capacity. These changes have the potential to decrease substantially liquidity and increase volatility in the debt and fixed income markets.
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•
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Corporate Debt Obligations Risk
. Corporate debt obligations are subject to the risk of an issuer’s inability to meet principal and interest payments on the obligations. Therefore, the High Income Alternatives Fund may be indirectly exposed to such risks associated with corporate debt obligations.
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•
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. Use of derivatives, such as options, is a highly specialized activity that can involve investment techniques and risks different from, and in some respects greater than, those associated with investing in more traditional investments, such as stocks and bonds. Derivatives can be highly complex and highly volatile and may perform in unanticipated ways. Derivatives can create leverage, and the Fund could lose more than the amount it invests; some derivatives can have the potential for unlimited losses. Derivatives may at times be highly illiquid, and the Fund may not be able to close out or sell a derivative at a particular time or at an anticipated price. Derivatives can be difficult to value and valuation may be more difficult in times of market turmoil. There may be imperfect correlation between the behavior of a derivative and that of the reference instrument underlying the derivative. Derivatives may involve risks different from, and possibly greater than, the risks associated with investing directly in the reference instrument. Suitable derivatives may not be available in all circumstances, and there can be no assurance that the Fund will use derivatives to reduce exposure to other risks when that might have been beneficial. Derivatives involve counterparty risk, which is the risk that the other party to the derivative will fail to make required payments or otherwise comply with the terms of the derivative. When the Fund uses derivatives, it will likely be required to provide margin or collateral and/or segregate cash or other liquid assets; these practices are intended to satisfy contractual undertakings and regulatory requirements and will not prevent the Fund from incurring losses on derivatives. The need to provide margin or collateral and/or segregated assets could limit the Fund’s ability to pursue other opportunities as they arise. Ongoing changes to regulation of the derivatives markets and potential changes in the regulation of funds using derivative instruments could limit the Fund’s ability to pursue its investment strategies. New regulation of derivatives may make them more costly, or may otherwise adversely affect their liquidity, value or performance.
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. The use of options involves investment strategies and risks different from those associated with ordinary portfolio securities transactions. The prices of options are volatile and are influenced by, among other things, actual and anticipated changes in the value of the underlying instrument, or in interest or currency exchange rates, including the anticipated volatility of the underlying instrument (known as implied volatility), which in turn are affected by fiscal and monetary policies and by national and international political and economic events. As such, prior to the exercise or expiration of the option, the Fund is exposed to implied volatility risk, meaning the value, as based on implied volatility, of an option may increase due to market and economic conditions or views based on the sector or industry in which issuers of the underlying instrument participate, including company-specific factors. By writing call and put option spreads on underlying instruments, the Fund’s returns from that strategy will be determined by the performance of the underlying instrument. If the underlying instrument appreciates or depreciates sufficiently over the period to offset the net premium received, the Fund may incur losses. Changes in the volatility of the underlying stock or instrument can constrain returns from this strategy. By writing put options, the Fund takes on the risk of declines in the value of the underlying instrument, including the possibility of a loss up to the entire strike price of each option it sells, but without the corresponding opportunity to benefit from potential increases in the value of the underlying instrument. When the Fund writes a put option, it assumes the risk that it must purchase the underlying instrument at a strike price that may be higher than the market price of the instrument. If there is a broad market decline and the Fund is not able to close out its written put options, it may result in substantial losses to the Fund. By writing a call option, the Fund may be obligated to deliver instruments underlying an option at less than the market price. In the case of an uncovered call option, there is a risk of unlimited loss. When an uncovered call is exercised, the Fund must purchase the underlying instrument to meet its call obligations and the necessary instruments may be unavailable for purchase. The Fund will receive a premium from writing options, but the premium received may not be sufficient to offset any losses sustained from exercised options. If an option that the Fund has purchased is never exercised or closed out, the Fund will lose the amount of the premium it paid and the use of those funds.
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. This is the risk that an investment in futures contracts may be subject to losses that exceed the amount of the premiums paid and may subject the High Income Alternatives Fund’s net asset value to greater volatility.
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. There are no limitations on daily price movements of forward contracts. Changes in foreign exchange regulations by governmental authorities might limit the trading of forward contracts. To the extent the Fund enters into
non-U.S.
currency forward contracts with banks, the Fund is subject to the risk of bank failure or the
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PartnerSelect High Income Alternatives Fund
— (Continued)
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inability of or refusal by a bank to perform such contracts. There have been periods during which certain banks have refused to continue to quote prices for forward contracts or have quoted prices with an unusually wide spread (the difference between the price at which the bank is prepared to buy and the price at which it is prepared to sell).
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. This is the risk that the performance results of
P-Notes
will not replicate exactly the performance of the issuers or markets that the
P-Notes
seek to replicate. Investments in
P-Notes
involve risks normally associated with a direct investment in the underlying securities as well as additional risks, such as counterparty risk.
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. Risks inherent in the use of swaps include: (1) swap contracts may not be assigned without the consent of the counterparty; (2) potential default of the counterparty to the swap; (3) absence of a liquid secondary market for any particular swap at any time; and (4) possible inability of the High Income Alternatives Fund to close out the swap transaction at a time that otherwise would be favorable for it to do so.
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•
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.
This is the risk that the value of equity securities may fluctuate, sometimes rapidly and unpredictably, due to factors affecting the general market, an entire industry or sector, or particular companies. These factors include, without limitation, adverse changes in economic conditions, the general outlook for corporate earnings, interest rates or investor sentiment; increases in production costs; and significant management decisions. This risk is greater for small- and
medium-sized
companies, which tend to be more vulnerable to adverse developments than larger companies.
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•
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In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline.
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•
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.
This is the risk that an investment in foreign
(non-U.S.)
securities may cause the High Income Alternatives Fund to experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies, due to factors such as currency conversion rate fluctuations, and the political and economic climates and differences in financial reporting, accounting and auditing standards in the foreign countries where the Fund invests or has exposure.
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•
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. This is the risk that the value of the Fund’s emerging markets investments will decline due to the greater degree of economic, political and social instability of emerging or developing countries as compared to developed countries.
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•
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. This is the risk that foreign currencies will decline in value relative to the U.S. dollar and affect the Fund’s investments in foreign
(non-U.S.)
currencies or in securities that trade in, and receive revenues in, or in derivatives that provide exposure to, foreign
(non-U.S.)
currencies.
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•
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. This is the risk that debt securities will decline in value because of changes in interest rates. Generally, the value of debt securities rise when prevailing interest rates fall, and fall when prevailing interest rates rise. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.
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•
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Investment Companies Risk
. This is the risk that investing in other investment companies, including ETFs,
closed-end
funds (“CEFs”), business development companies (“BDCs”), unit investment trusts and
open-end
funds, subjects the Fund to those risks affecting the investment vehicle, including the possibility that the value of the underlying securities held by the investment vehicle could decrease or the portfolio becomes illiquid. Moreover, the Fund and its shareholders will incur its pro rata share of the underlying vehicles’ expenses, which will reduce the Fund’s performance. In addition, investments in an ETF are subject to, among other risks, the risk that the ETF’s shares may trade at a discount or premium relative to the net asset value of the shares and the listing exchange may halt trading of the ETF’s shares. BDCs may carry risks similar to those of a private equity or venture capital fund. BDC company securities are not redeemable at the option of the shareholder and they may trade in the market at a discount to their net asset value. BDCs usually trade at a discount to their net asset value because they invest in unlisted securities and have limited access to capital markets. Shares of CEFs also frequently trade at a discount to their net asset value for those and other reasons.
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•
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Investments in Loans Risk
. Investments in loans, including loan syndicates and other direct lending opportunities, involve special types of risks, including credit risk, interest rate risk, counterparty risk and prepayment risk. Loans may offer a fixed or floating interest rate. Loans are often generally below investment grade and may be unrated. The Fund’s investments in loans can also be difficult to value accurately and may be more susceptible to liquidity risk than fixed-income instruments of similar credit quality and/or maturity. The Fund is also subject to the risk that the value of the collateral for the loan may be insufficient or unavailable to cover the borrower’s obligations should the borrower fail to make payments or become insolvent. Participations in loans may subject the Fund to the credit risk of both the borrower and the issuer of the participation and may make enforcement of loan covenants, if any, more difficult for the Fund as legal action may have to go through the issuer of the participations. Transactions in loans are often subject to long settlement periods, thus potentially limiting the ability of the Fund to invest sale proceeds in other investments and to use proceeds to meet its current redemption obligations. In addition, many banks have been weakened by the recent financial crisis, and it may be difficult for the Fund to obtain an accurate picture of a lending bank’s financial condition.
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•
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Large Shareholder Purchase and Redemption Risk.
The Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund. Such large shareholder redemptions may cause the
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Litman Gregory Funds Trust
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Fund to sell its securities at times when it would not otherwise do so, which may negatively impact the Fund’s net asset value and liquidity. Similarly, large share purchases may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. In addition, a large redemption could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio.
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•
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. This is the risk that leverage may cause the effect of an increase or decrease in the value of the High Income Alternatives Fund’s portfolio securities to be magnified and the High Income Alternatives Fund to be more volatile than if leverage was not used. Leverage may result from certain transactions, including the use of derivatives and borrowing.
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•
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Liquidity and Valuation Risk
. It may be difficult for the Fund to purchase and sell particular investments within a reasonable time at a fair price, or the price at which it has been valued by Litman Gregory for purposes of the Fund’s net asset value, causing the Fund to be less liquid and unable to realize what Litman Gregory believes should be the price of the investment. Valuation of portfolio investments may be difficult, such as during periods of market turmoil or reduced liquidity, and for investments that may, for example, trade infrequently or irregularly. In these and other circumstances, an investment may be valued using fair value methodologies, which are inherently subjective, reflect good faith judgments based on available information and may not accurately estimate the price at which the Fund could sell the investment at that time. These risks may be heightened for fixed-income instruments because of the near historically low interest rate environment as of the date of this prospectus. Based on its investment strategies, a significant portion of the Fund’s investments can be difficult to value and potentially less liquid and thus particularly prone to the foregoing risks
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•
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Mortgage-Backed Securities Risk
. This is the risk of investing in mortgaged-backed securities, which includes interest rate risk, prepayment risk and the risk of defaults on the mortgage loans underlying these securities.
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•
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Multi-Style Management Risk.
This is the risk that
the High Income Alternatives Fund could experience overlapping security transactions as a result of having different portfolio managers using different strategies to manage the High Income Alternatives Fund’s assets. Certain portfolio managers may be purchasing securities at the same time other portfolio managers may be selling those same securities, which may lead to higher transaction expenses compared to a fund using a single investment strategy.
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•
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Investment Selection Risk.
The specific investments held in the Fund’s investment portfolio may underperform other funds in the same asset class or benchmarks that are representative of the general performance of the asset class because of a portfolio manager’s choice of securities.
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•
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Municipal Securities Risk
. Municipal securities can be significantly affected by litigation, political or economic events, as well as uncertainties in the municipal market related to
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taxation, legislative changes or the rights of municipal security holders. Municipal securities backed by current or anticipated revenues from specific projects or assets can be negatively affected by the inability of the issuer to collect revenues for the projects or from the assets.
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•
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This is the risk that the High Income Alternatives Fund may experience high portfolio turnover rates as a result of its investment strategies. High portfolio turnover rates may indicate higher transaction costs and may result in higher taxes when shares of the High Income Alternatives Fund are held in a taxable account as compared to shares in investment companies that hold investments for a longer period.
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•
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. This is the risk that the value of a security the High Income Alternatives Fund sells short does not go down as expected. The risk of loss is theoretically unlimited if the value of the security sold short continues to increase. In addition, short sales may cause the High Income Alternatives Fund to be compelled, at a time disadvantageous to it, to buy the security previously sold short, thus resulting in a loss. To meet current margin requirements, the High Income Alternatives Fund is required to deposit with the broker additional cash or securities so that the total deposit with the broker is maintained daily at 150% of the current market value of the securities sold short.
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•
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Unfavorable Tax Treatment Risk.
This is the risk that a material portion of the High Income Alternatives Fund’s return could be in the form of net investment income or short-term capital gains, some of which may be distributed to shareholders and taxed at ordinary income tax rates. Therefore, shareholders may have a greater need to pay regular taxes than compared to other investment strategies that hold investments longer. Due to this investment strategy, it may be preferable for certain shareholders to invest in the High Income Alternatives Fund through
pre-tax
or
tax-deferred
accounts as compared to investment through currently taxable accounts. Potential shareholders are encouraged to consult their tax advisors in this regard.
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The following performance information provides some indication of the risks of investing in the High Income Alternatives Fund. The bar chart shows changes in the performance of the High Income Alternatives Fund’s Institutional Class shares from year to year. The table below shows how the High Income Alternatives Fund’s average annual total returns of the Institutional Class for the
1-year
and since inception periods compare to those of a broad-based market index and two secondary market indexes. Past performance, before and after taxes, does not necessarily indicate how the High Income Alternatives Fund will perform in the future. Updated performance information is available on the High Income Alternatives Fund’s website at www.partnerselectfunds.com.
PartnerSelect High Income Alternatives Fund
— (Continued)
PartnerSelect High Income Alternatives Fund
Institutional Class Calendar Year Total Returns
During the period shown above, the highest and lowest quarterly returns earned by the High Income Alternatives Fund were:
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Quarter ended June 30, 2020
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Quarter ended March 31, 2020
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Average Annual Total Returns
(for the periods ended December 31, 2020)
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PartnerSelect High Income Alternatives Fund
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Return Before Taxes
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Return After Taxes on Distributions
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Return After Taxes on Distributions and Sale of Fund Shares
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Bloomberg Barclays U.S. Aggregate Bond Index
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(reflects no deduction for fees, expenses or taxes)
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ICE BofAML U.S. High Yield TR USD Index
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(reflects no deduction for fees, expenses or taxes)
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HFRX Fixed Income – Credit Index
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(reflects no deduction for fees, expenses or taxes)
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The High Income Alternatives Fund’s after-tax returns as shown in the above table are calculated using the historical highest applicable individual federal marginal income tax rates for the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your tax situation and may differ from those shown. If you own shares of the High Income Alternatives Fund in a tax-deferred account, such as a 401(k) plan or an individual retirement account, after-tax returns shown are not relevant to your investment. The after-tax returns on distributions and sale of Fund shares may be higher than returns before taxes due to the effect of a tax benefit an investor may receive from the realization of capital losses that would have been incurred on the sale of Fund shares.
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Litman Gregory Funds Trust
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Litman Gregory Fund Advisors, LLC
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Jeremy DeGroot, CFA, President of the Trust, Principal, Chief Investment Officer and
Co-Portfolio
Manager
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2018
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Jack Chee, Principal, Senior Research Analyst and
Co-Portfolio
Manager
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2018
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Jason Steuerwalt, CFA, Principal, Senior Research Analyst and
Co-Portfolio
Manager
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2018
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Brown Brothers Harriman & Co.
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Andrew P. Hofer, Managing Director, Portfolio Manager and Head of Taxable Portfolio Management
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2018
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Neil Hohmann, Managing Director, Head of Structured Products and Portfolio Manager
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2018
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Paul Kunz, CFA, Senior Vice President and Portfolio Manager
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2018
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Guggenheim Partners Investment Management, LLC
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Scott Minerd, Chairman of Investments, Global Chief Investment Officer, Managing Partner and Portfolio Manager
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2018
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Anne Walsh, CFA, Chief Investment Officer – Fixed Income, Senior Managing Director and Portfolio Manager
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2018
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Steven Brown, CFA, Senior Managing Director and Portfolio Manager
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2018
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Adam Bloch, Managing Director and Portfolio Manager
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2018
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Neuberger Berman Investment Advisers LLC
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Derek Devens, CFA, Managing Director and Senior Portfolio Manager
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2018
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Rory Ewing, Senior Vice President and Portfolio Manager
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2021
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For important information about the purchase and sale of fund shares, tax information and financial intermediary compensation, please turn to the “Summary of Other Important Information Regarding the Fund” section on page 32 of this Prospectus.
PartnerSelect SBH Focused Small Value Fund
The PartnerSelect SBH Focused Small Value Fund (the “SBH Focused Small Value Fund”) seeks long-term growth of capital; that is, the increase in the value of your investment over the long term.
Fees and Expenses of the SBH Focused Small Value Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the SBH Focused Small Value Fund.
Shareholder Fees (fees paid directly from your investment)
Annual Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
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Management Fees
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1.00%
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Distribution and or Service
(12b-1)
Fees
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None
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Other Expenses
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1.11%
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Total Annual Fund Operating Expenses
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2.11%
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Fee Waiver and/or Expense Reimbursement
(1), (2)
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(0.96)%
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Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
(1), (2)
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1.15%
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(1)
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Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the SBH Focused Small Value Fund, has contractually agreed to limit the Fund’s operating expenses (excluding any taxes, interest, brokerage commissions, borrowing costs, dividend expenses, acquired fund fees and expenses and extraordinary expenses) through April 30, 2022 to an annual rate of 1.15% for the Institutional Class (the “Operating Expense Limitation”). This agreement may be renewed for additional periods not exceeding one (1) year and may be terminated by the Board of Trustees (the “Board”) of Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory. Litman Gregory may also decline to renew this agreement by written notice to the Trust at least thirty (30) days before the renewal date. Any fee waiver or expense reimbursement made by Litman Gregory pursuant to this agreement is subject to the repayment by the Fund only within three (3) years of the date such amounts were waived or reimbursed, provided that the repayment does not cause the Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board.
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(2)
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Litman Gregory has contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the Fund’s daily net assets retained by Litman Gregory is 1.15%. This agreement may be terminated at any time by the Board of the Trust upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement at its expiration on April 30, 2022 by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. While Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement, Litman Gregory may be reimbursed for
non-advisory
related expenses.
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This example is intended to help you compare the cost of investing in the SBH Focused Small Value Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the SBH Focused Small Value Fund’s operating expenses remain the same. The cost for the SBH Focused Small Value Fund reflects the net expenses of the Fund that result from the
contractual expense limitation in the first year only. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Institutional Class
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$
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117
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$
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536
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$
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1,015
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$
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2,339
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The SBH Focused Small Value Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when shares of the SBH Focused Small Value Fund are held in a taxable account as compared to shares in investment companies that hold investments for a longer period. These costs, which are not reflected in annual fund operating expenses or in the example, affect the SBH Focused Small Value Fund’s performance. During the most recent fiscal period, the SBH Focused Small Value Fund’s portfolio turnover rate was 27.18%.
The SBH Focused Small Value Fund invests in the securities of smaller companies that the
sub-advisor
to the Fund (the “manager” or
“sub-advisor”)
believes have strong appreciation potential. Under normal market conditions, the SBH Focused Small Value Fund’s portfolio is typically composed of between 20 and 40 stocks. Under normal market conditions, the SBH Focused Small Value Fund invests at least 80% of its net assets, in securities of
small-sized
U.S. value companies, as measured by market capitalization at the time of acquisition. Concentration of investments in certain sectors – including, but not limited to, the financial, industrial, materials and technology sectors – may occur from time to time as a result of the implementation of the SBH Focused Small Value Fund’s investment strategy by the manager.
The manager may invest up to 15% of the SBH Focused Small Value Fund’s net assets in the securities of foreign companies, including those located in emerging markets. Litman Gregory defines an emerging market country as any country that is included in the MSCI Emerging Markets Index.
By executing its investment strategy, the SBH Focused Small Value Fund seeks to:
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leverage the efforts of an experienced, high quality manager;
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access the favorite stock-picking ideas of the manager at any point in time; and
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•
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deliver a portfolio that is prudently diversified in terms of stocks (typically 20 to 40) and industries while still allowing the manager to focus on only its favorite stocks.
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Litman Gregory defines a “small company” as one whose market capitalization falls below the market capitalization of the largest company in the Russell 2000
®
Index, which, as of February 28, 2021, was $23.468 billion. The Russell 2000
®
Index measures the
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Litman Gregory Funds Trust
|
performance of 2,000
small-sized
companies with market capitalizations averaging $3.766 billion as of February 28, 2021. Value stocks are those that are believed to be undervalued in comparison to their peers due to adverse business developments or other factors. Value companies include, but are not limited to, those companies in the Russell 2000
®
Value Index.
Generally, a security may be sold: (1) if the manager believes the security’s market price exceeds the manager’s estimate of intrinsic value; (2) if the manager’s view of the business fundamentals or management of the underlying company changes; (3) if a more attractive investment opportunity is found; (4) if general market conditions trigger a change in the manager’s assessment criteria; or (5) for other portfolio management reasons. The SBH Focused Small Value Fund’s investment manager may trade its portfolio frequently.
Investment in stocks exposes shareholders of the SBH Focused Small Value Fund to the risk of losing money if the value of the stocks held by the Fund declines during the period an investor owns shares in the Fund. The following risks could affect the value of your investment. Each risk summarized below is considered a “principal risk” of investing in the SBH Focused Small Value Fund, regardless of the order in which it appears. Some or all of these risks may adversely affect the SBH Focused Small Value Fund’s net asset value per share, total return and/or ability to meet its objective.
|
•
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|
The Fund may invest a portion of its assets in the securities of small- and, at times,
mid-sized
companies. Securities of
small-cap
companies are generally more volatile and less liquid than the securities of
large-cap
companies. This is because small companies may be more reliant on a few products, services or key personnel, which can make it riskier than investing in larger companies with more diverse product lines and structured management.
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•
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As with all mutual funds that invest in common stocks, the value of an individual’s investment will fluctuate daily in response to the performance of the individual stocks held in the Fund. The stock market has been subject to significant volatility recently, which has increased the risks associated with an investment in the Fund.
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•
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Public Health Emergency Risk
This is the risk that pandemics and other public health emergencies, including outbreaks of infectious diseases such as the current outbreak of the novel coronavirus
(“COVID-19”),
can result, and in the case of
COVID-19
is resulting, in market volatility and disruption, and materially and adversely impact economic conditions in ways that cannot be predicted, all of which could result in substantial investment losses. Containment efforts and related restrictive actions by governments and businesses have significantly diminished and disrupted global economic activity across many industries. Less developed countries and their health systems may be more vulnerable to these impacts. The ultimate impact of
COVID-19
or other health emergencies on global economic conditions and businesses is impossible to predict accurately.
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Ongoing and potential additional material adverse economic effects of indeterminate duration and severity are possible. The resulting adverse impact on the value of an investment in the Fund could be significant and prolonged.
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•
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|
Value stocks are stocks of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the manager, undervalued. The value of a security believed by the manager to be undervalued may never reach what is believed to be its full (intrinsic) value, or such security’s value may decrease.
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•
|
|
.
This is the risk that the value of equity securities may fluctuate, sometimes rapidly and unpredictably, due to factors affecting the general market, an entire industry or sector, or particular companies. These factors include, without limitation, adverse changes in economic conditions, the general outlook for corporate earnings, interest rates or investor sentiment; increases in production costs; and significant management decisions. This risk is greater for small- and
medium-sized
companies, which tend to be more vulnerable to adverse developments than larger companies.
|
|
•
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|
.
This is the risk that an investment in foreign
(non-U.S.)
securities may cause the Fund to experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies, due to factors such as currency conversion rate fluctuations, and the political and economic climates and differences in financial reporting, accounting and auditing standards in the foreign countries where the Fund invests or has exposure.
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•
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: This is the risk that the value of the Fund’s emerging markets investments will decline due to the greater degree of economic, political and social instability of emerging or developing countries as compared to developed countries.
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•
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|
: This is the risk that foreign currencies will decline in value relative to the U.S. dollar and affect the Fund’s investments in foreign
(non-U.S.)
currencies or in securities that trade in, and receive revenues in, or in derivatives that provide exposure to, foreign
(non-U.S.)
currencies.
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•
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|
Large Shareholder Purchase and Redemption Risk.
The Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund. Such large shareholder redemptions may cause the Fund to sell its securities at times when it would not otherwise do so, which may negatively impact the Fund’s net asset value and liquidity. Similarly, large share purchases may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. In addition, a large redemption could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio.
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•
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To the extent that the Fund emphasizes, from time to time, investments in a particular sector, the Fund will be subject to a greater degree to the risks particular to that sector. Market conditions, interest rates, and
|
PartnerSelect SBH Focused Small Value Fund
— (Continued)
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economic, regulatory, or financial developments could significantly affect a single sector. By focusing its investments in a particular sector, the Fund may face more risks than if it were diversified broadly over numerous sectors.
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The Fund may invest a portion of its assets in the financial services sector and, therefore, the performance of the Fund could be negatively impacted by events affecting this sector, including changes in interest rates, government regulation, the rate of defaults on corporate, consumer and government debt and the availability and cost of capital.
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The Fund may invest a portion of its assets in the industrial sector. Companies in the industrial sector could be affected by, among other things, government regulation, world events and global economic conditions, insurance costs, and labor relations issues.
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The Fund may invest a portion of its assets in the materials sector. Many materials companies are significantly affected by the level and volatility of commodity prices, exchange rates, import controls, worldwide competition, environmental policies and consumer demand. At times, worldwide production of industrial materials has exceeded demand as a result of over-building or economic downturns, leading to poor investment returns or losses. Other risks may include liabilities for environmental damage and general civil liabilities, depletion of resources, and mandated expenditures for safety and pollution control. The materials sector may also be affected by economic cycles,
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technical progress, labor relations, and government regulations.
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The Fund may invest a portion of its assets in the technology sector, which is a highly volatile segment of the market. The nature of technology is that it is rapidly changing. Therefore, products or services that may initially look promising may subsequently fail or become obsolete. In addition, many technology companies are younger, smaller and unseasoned companies which may not have established products, an experienced management team, or earnings history.
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•
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Investment Selection Risk.
The specific investments held in the Fund’s investment portfolio may underperform other funds in the same asset class or benchmarks that are representative of the general performance of the asset class because of a portfolio manager’s choice of securities.
|
Because the SBH Focused Small Value Fund commenced operations on July 31, 2020, no performance information is presented at this time. Once the SBH Focused Small Value Fund has a performance record of at least one calendar year, a bar chart and performance table will be included in this Prospectus. Updated performance information is available on the SBH Focused Small Value Fund’s website at www.partnerselectfunds.com.
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SBH FOCUSED SMALL
VALUE FUND SINCE:
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Litman Gregory Fund Advisors, LLC
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Jack Chee, Principal, Senior Research Analyst and
Co-Portfolio
Manager
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2020
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Jeremy DeGroot, CFA, President of the Trust, Principal, Chief Investment Officer and
Co-Portfolio
Manager
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2020
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Segall Bryant & Hamill, LLC
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Mark T. Dickherber, CFA, CPA
Shaun P. Nicholson
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2020
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|
For important information about the purchase and sale of Fund shares, tax information and financial intermediary compensation, please turn to the “Summary of Other Important Information Regarding the Fund” section on page 32 of this Prospectus.
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Litman Gregory Funds Trust
|
PartnerSelect Oldfield International Value Fund
The PartnerSelect Oldfield International Value Fund (the “Oldfield International Value Fund”) seeks long-term growth of capital; that is, the increase in the value of your investment over the long term.
Fees and Expenses of the Oldfield International Value Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the Oldfield International Value Fund.
Shareholder Fees (fees paid directly from your investment)
Annual Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
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Management Fees
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0.70%
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Distribution and or Service
(12b-1)
Fees
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None
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Other Expenses
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2.19%
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Total Annual Fund Operating Expenses
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2.89%
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Fee Waiver and/or Expense Reimbursement
(1), (2)
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(1.95
|
)%
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Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
(1), (2)
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0.94%
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(1)
|
Litman Gregory Fund Advisors, LLC (“Litman Gregory”), the advisor to the Fund, has contractually agreed to limit the Fund’s operating expenses (excluding any taxes, interest, brokerage commissions, borrowing costs, dividend expenses, acquired fund fees and expenses and extraordinary expenses) through April 30, 2022 to an annual rate of 0.94% for the Institutional Class (the “Operating Expense Limitation”). This agreement may be renewed for additional periods not exceeding one (1) year and may be terminated by the Board of Trustees (the “Board”) of Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory. Litman Gregory may also decline to renew this agreement by written notice to the Trust at least thirty (30) days before the renewal date. Any fee waiver or expense reimbursement made by Litman Gregory pursuant to this agreement is subject to the repayment by the Fund only within three (3) years of the date such amounts were waived or reimbursed, provided that the repayment does not cause the Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board.
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(2)
|
Litman Gregory has contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the Fund’s daily net assets retained by Litman Gregory is 0.35%. This agreement may be terminated at any time by the Board of the Trust upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement at its expiration on April 30, 2022 by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. While Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to this agreement, Litman Gregory may be reimbursed for
non-advisory
related expenses.
|
This example is intended to help you compare the cost of investing in the Oldfield International Value Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Oldfield International Value Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Oldfield International Value Fund’s operating expenses remain the same. The cost for the Fund reflects the net expenses of the Oldfield International Value Fund that result from the contractual expense limitation in
the first year only. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Institutional Class
|
|
$
|
96
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|
$
|
646
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|
$
|
1,291
|
|
|
$
|
3,024
|
|
The Oldfield International Value Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when shares of the Oldfield International Value Fund are held in a taxable account as compared to shares in investment companies that hold investments for a longer period. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Oldfield International Value Fund’s performance. During the most recent fiscal period, the Oldfield International Value Fund’s portfolio turnover rate was 2.51%.
The Oldfield International Value Fund invests in the securities of companies with market capitalization of $10 billion or greater that the subadvisor to the Fund (the “manager” or
“sub-advisor”)
believes have strong appreciation potential. Under normal market conditions, the Oldfield International Value Fund’s portfolio is typically composed of between 25 to 30 stocks. Under normal market conditions, the Oldfield International Value Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in securities of value companies domiciled outside the United States, or having the majority of their assets located in or deriving a majority of their operating income from countries outside the United States
mostly
mid-
to
large-sized
companies (
, companies with a market capitalization of greater than $10 billion at the time of acquisition), including companies located in emerging markets. Investments in companies located in emerging market countries are expected to be 20% or less of the Oldfield International Value Fund’s net assets. Value stocks are those that are believed to be undervalued in comparison to their peers due to temporary adverse market or industry or business developments that result in a stock trading at a discount to estimated long-term intrinsic value, which is determined by the
sub-advisor
and measured using traditional financial metrics such as low
and/or
ratios. Litman Gregory defines an emerging market country as any country that is included in the MSCI Emerging Markets Index. Concentration of investments in certain sectors may occur from time to time as a result of the implementation of the Oldfield International Value Fund’s investment strategy by the manager.
By executing its investment strategy, the Oldfield International Value Fund seeks to:
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•
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|
leverage the efforts of an experienced, high quality manager;
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•
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|
access the highest-conviction ideas of the manager at any point in time; and
|
PartnerSelect Oldfield International Value Fund
— (Continued)
|
•
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|
deliver a portfolio that is prudently diversified in terms of stocks (typically 25 to 30) and industries and countries while still allowing the manager to focus on only its favorite stocks.
|
Generally, a security may be sold: (1) if the manager believes the security’s market price exceeds the manager’s estimate of intrinsic value; (2) if the manager’s view of the business fundamentals or management of the underlying company changes; (3) if a more attractive investment opportunity is found; (4) if general market conditions trigger a change in the manager’s assessment criteria; or (5) for other portfolio management reasons. The
Oldfield
International Value Fund’s investment manager may trade its portfolio frequently.
Investment in stocks exposes shareholders of the Oldfield International Value Fund to the risk of losing money if the value of the stocks held by the Fund declines during the period an investor owns shares in the Fund. The following risks could affect the value of your investment. Each risk summarized below is considered a “
principal
risk” of investing in the Oldfield International Value Fund, regardless of the order in which it appears. Some or all of these risks may adversely affect the Oldfield International Value Fund’s net asset value per share, total return and/or ability to meet its objective.
|
•
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|
.
This is the risk that an investment in foreign
(non-U.S.)
securities may cause the Fund to experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies, due to factors such as currency conversion rate fluctuations, and the political and economic climates and differences in financial reporting, accounting and auditing standards in the foreign countries where the Fund invests or has exposure.
|
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•
|
|
.
This is the risk that world events – such as political upheaval, financial troubles, or natural disasters – will adversely affect the value of securities issued by companies in foreign countries or regions. Because the Fund may invest a large portion of its assets in securities of companies located in any one country or region, including emerging markets, the Fund’s performance may be hurt disproportionately by the poor performance of its investments in that area. Country/regional risk is heightened in emerging markets.
|
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•
|
|
Risks Associated with Europe
.
The Fund may invest a significant portion of its assets in issuers based in Western Europe and the United Kingdom (“UK”).
The economies of countries in Europe are often closely connected and interdependent, and events in one country in Europe can have an adverse impact on other European countries. Efforts by the member countries of the European Union (“EU”) to continue to unify their economic and monetary policies may increase the potential for similarities in the movements of European markets and reduce the potential investment benefits of diversification within the region. However, the substance of these policies may not address the needs of all European economies. European financial markets have in recent years experienced increased volatility due to concerns with some countries’ high levels of
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sovereign
debt, budget deficits and unemployment. Markets have also been affected by the decision by the UK to withdraw from the
EU
(an event commonly known as “Brexit”). There is uncertainty surrounding the impact of Brexit on the UK, the EU and the broader global economy. An exit by any member countries from the EU or the Economic and Monetary Union of the EU, or even the prospect of such an exit, could lead to increased volatility in European markets and negatively affect investments both in issuers in the exiting country and throughout Europe.
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•
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Risks Associated with Japan.
The Fund may invest a significant portion of its assets in issuers based in Japan. Investments in Japanese issuers may be subject to political, economic, nuclear and labor risks, among others. Any of these risks, individually or in
the
aggregate, can impact an investment made in Japan. The growth of Japan’s economy has recently lagged that of its Asian neighbors and other major developed economies. Since 2000, Japan’s economic growth rate has generally remained low relative to other advanced economies, and it may remain low in the future. The Japanese economy faces several concerns, any of which could negatively affect the value of Japanese investments.
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•
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|
.
Value stocks are stocks of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the manager, undervalued. The value of a security believed by the manager to be undervalued may never reach what is believed to be its full (intrinsic) value.
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•
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|
. This is the risk that the value of the Fund’s emerging markets investments will decline due to the greater degree of economic, political and social instability of emerging or developing countries as compared to developed countries.
|
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•
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|
. This is the risk that foreign currencies will decline in value relative to the U.S. dollar and affect the Fund’s investments in foreign
(non-U.S.)
currencies or in securities that trade in, and receive revenues in, or in derivatives that provide exposure to, foreign
(non-U.S.)
currencies.
|
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•
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|
As with all mutual funds that invest in common stocks, the value of an individual’s investment will fluctuate daily in response to the performance of the individual stocks held in the Fund. The stock market has been subject to significant volatility recently, which has increased the risks associated with an investment in the Fund.
|
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•
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|
Public Health Emergency Risk
This is the risk that pandemics and other public health emergencies, including outbreaks of infectious diseases such as the current outbreak of the novel coronavirus
(“COVID-19”),
can result, and in the case of
COVID-19
is resulting, in market volatility and disruption, and materially and adversely impact economic conditions in ways that cannot be predicted, all of which could result in substantial investment losses. Containment efforts and related restrictive actions by governments and businesses have significantly diminished and disrupted global economic activity across many industries. Less
developed
countries and their health systems may be more vulnerable
to
these impacts. The ultimate impact
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Litman Gregory Funds Trust
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of
COVID-19
or other health emergencies on global economic conditions and businesses is impossible to predict accurately. Ongoing and potential additional material adverse economic effects of indeterminate duration and severity are possible. The resulting adverse impact on the value of an investment in the Fund could be significant and prolonged.
|
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•
|
|
.
This is the risk that the value of equity securities may fluctuate, sometimes rapidly and unpredictably, due to factors affecting the general market, an entire industry or sector, or particular companies. These factors include, without limitation, adverse changes in economic conditions, the general outlook for corporate earnings, interest rates or investor sentiment; increases in production costs; and significant management decisions. This risk is greater for small- and
medium-sized
companies, which tend to be more vulnerable to adverse developments than larger companies.
|
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•
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|
Large Shareholder Purchase and Redemption Risk.
The Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund. Such large shareholder redemptions may cause the Fund to sell its securities at times when it would not otherwise do so, which may negatively impact the Fund’s net asset value and liquidity. Similarly, large share purchases may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. In addition, a large redemption could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio.
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•
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Mid-Sized
Companies Risk.
The Fund may invest a portion of its assets in
the
securities of
mid-sized
companies. Securities of these companies are generally more volatile and less liquid than
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the securities of
large-cap
companies. This is because
mid-cap
companies may be more reliant on a few products, services or key personnel than
large-cap
companies, which can make it riskier than investing in larger companies with more diverse product lines and structured management.
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•
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|
To the extent that the Fund emphasizes, from time to time, investments in a particular sector, the Fund will be subject to a greater degree to the risks particular to that sector. Market conditions, interest rates, and economic, regulatory, or financial developments could significantly affect a single sector. By focusing its investments in a particular sector, the Fund may face more risks than if it were diversified broadly over numerous sectors.
|
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•
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|
Investment Selection Risk.
The specific investments held in the Fund’s investment portfolio may underperform other funds in the same asset class or benchmarks that are representative of the general performance of the asset class because of a portfolio manager’s choice of securities.
|
Because the Oldfield International Value Fund commenced operations on November 30, 2020, no performance information is presented at this time. Once the Oldfield International Value Fund has a performance record of at least one calendar year, a bar chart and performance table will be included in this Prospectus. Updated performance information is available on the Oldfield International Value Fund’s website at www.partnerselectfunds.com.
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OLDFIELD INTERNATIONAL
VALUE FUND
SINCE:
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Litman Gregory Fund Advisors, LLC
|
|
Rajat Jain, CFA, Principal, Senior Research Analyst and
Co-Portfolio
Manager
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2020
|
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Jeremy DeGroot, CFA, President of the Trust, Principal, Chief Investment Officer and
Co-Portfolio
Manager
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2020
|
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OLDFIELD INTERNATIONAL
VALUE FUND
SINCE:
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Nigel Waller, Chief Investment Officer,
Co-Portfolio
Manager
|
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2020
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Andrew Goodwin, Partner,
Co-Portfolio
Manager
|
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2020
|
|
For important information about the purchase and sale of Fund shares, tax information and financial intermediary compensation, please turn to the “Summary of Other Important Information Regarding the Fund” section on page 32 of this Prospectus.
Summary of Other Important Information Regarding the Funds
Transaction Policies – All Funds
You may purchase, redeem or exchange Fund shares on any business day by written request via mail (Litman Gregory Funds Trust, c/o DST Asset Manager Solutions, Inc., P.O. Box 219922, Kansas City, MO 64121-9922), by wire transfer, by telephone at
or through a financial intermediary. The minimum initial and subsequent investment amounts for each Fund are shown below.
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Equity Fund, International Fund, High Income Alternatives Fund, SBH Focused Small Value Fund and Oldfield International Value Fund
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Regular
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Retirement Account
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Automatic Investment Account
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Alternative Strategies Fund
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Regular
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Retirement Account
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Automatic Investment Account
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(1)
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The minimum investment amounts may be waived or lowered for investments effected through banks and other institutions that have entered into arrangements with a Fund or the distributor of the Fund and for investments effected on a group basis by certain other entities and their employees, such as investments pursuant to a payroll deduction plan and asset-based or wrap programs. Please consult your financial intermediary for information about minimum investment requirements. Each Fund reserves the right to change or waive the minimum initial and subsequent investment requirements at any time. Each Fund reserves the right to close purchases to new investors at any time.
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Tax Information – All Funds
Depending on the character of income distributed, the Funds’ distributions will be taxed as ordinary income or capital gains, unless you are investing through a
tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Such
tax-deferred
arrangements may be taxed later upon withdrawal from those accounts.
Payments to Broker-Dealers and Other Financial Intermediaries – All Funds
If you purchase shares of a Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and/or Litman Gregory may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Litman Gregory Funds Trust
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Description of Principal Investment Risks
All mutual funds carry a certain amount of risk. The Funds’ returns will vary, and you could lose money on your investment in the Funds. An investment in a Fund is not a deposit of a bank and is not insured, endorsed or guaranteed by any financial institution, the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The principal risks for each Fund are identified in the Funds’ Summary Sections and are described in further detail below. Additional information about the principal risks is included in the Funds’ Statement of Additional Information (the “SAI”).
Investors should be aware that in light of the current uncertainty, volatility and distress in economies, financial markets, and labor and health conditions around the world, the risks described below are heightened significantly compared to normal conditions and therefore subject a Fund’s investments and a shareholder’s investment in a Fund to sudden and substantial losses.
The following table summarizes the principal risks of investing in each Fund. Your investment may be subject (in varying degrees) to these risks as well as other risks. Each Fund may be more susceptible to some of these risks than others. Risks not marked for a particular Fund may, however, still apply to some extent to that Fund at various times.
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Alternative Strategies Fund
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High Income Alternatives Fund
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Oldfield International Value Fund
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Asset-Backed Securities Risk
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✓
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✓
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Below Investment-Grade Fixed Income Securities Risk
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✓
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✓
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Capital Structure Arbitrage Risk
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✓
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Collateral Risk
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✓
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Collateralized Bond Obligations and Collateralized Debt Obligations Risk
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✓
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Communications Services Sector Risk
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✓
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✓
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Consumer Discretionary Sector Risk
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✓
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✓
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Consumer Staples Sector Risk
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✓
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Convertible Arbitrage Risk
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✓
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Convertible Securities Risk
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✓
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✓
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✓
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Country/Regional Risk
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✓
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✓
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Credit Risk
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✓
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✓
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Currency Risk
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|
✓
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|
✓
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|
✓
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|
✓
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|
✓
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✓
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Cybersecurity Risk
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✓
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|
✓
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✓
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✓
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✓
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✓
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Debt Securities Risk
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✓
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✓
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Derivatives Risk
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✓
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✓
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Emerging Markets Risk
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✓
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✓
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✓
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✓
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✓
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✓
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Equity Securities Risk
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✓
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✓
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✓
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✓
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✓
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✓
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European Investment Risk
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✓
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✓
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Event-Driven Risk
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✓
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Financial Sector Risk
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✓
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✓
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✓
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Foreign Investment Risk
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✓
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✓
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✓
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✓
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✓
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✓
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Healthcare Sector Risk
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✓
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Industrial Sector Risk
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✓
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✓
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✓
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Interest Rate Risk
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✓
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✓
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Investment in Investment Companies Risk
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✓
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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Alternative
Strategies
Fund
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High Income
Alternatives
Fund
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Oldfield
International
Value Fund
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Investment in Loans Risk
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✓
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Investment Selection Risk
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✓
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✓
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✓
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✓
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✓
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✓
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Japanese Investment Risk
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✓
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✓
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Large Shareholder Purchase and Redemption Risk
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✓
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✓
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✓
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✓
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✓
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Leverage Risk
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✓
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✓
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Liquidity and Valuation Risk
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✓
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LIBOR Risk
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✓
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✓
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Market Risk
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✓
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✓
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✓
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✓
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✓
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Materials Sector Risk
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✓
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Merger Arbitrage Risk
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✓
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Mid-Sized
Companies Risk
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✓
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Models and Data Risk
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✓
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Mortgage-Backed Securities Risk
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✓
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Municipal Securities Risk
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✓
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Multi-Style Management Risk
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✓
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✓
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✓
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Portfolio Turnover Risk
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✓
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Public Health Emergency Risk and Impact of the Coronavirus
(COVID-19)
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✓
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✓
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✓
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✓
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✓
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✓
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Sector Weightings Risk
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✓
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✓
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✓
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✓
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Short Sale Risk
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✓
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Smaller Companies Risk
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✓
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✓
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✓
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Special Situations Risk
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✓
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Technology Sector Risk
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✓
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✓
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TBAs and Dollar Rolls Risk
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✓
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Unfavorable Tax Treatment Risk
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✓
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Value Stock Risk
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✓
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✓
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✓
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Litman Gregory Funds Trust
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Asset-Backed Securities Risk
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The Alternative Strategies Fund and the High Income Alternatives Fund may invest in asset-backed securities (“ABS”), which are debt obligations or debt securities that entitle the holders thereof to receive payments that depend primarily on the cash flow from underlying financial assets, together with rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of such securities. An ABS is typically created by the sale of assets or collateral to a conduit, generally a bankruptcy-remote vehicle such as a grantor trust or other special-purpose entity, which becomes the legal issuer of the ABS. Interests in or other securities issued by the trust or special-purpose entity, which give the holder thereof the right to certain cash flows arising from the underlying assets, are then sold to investors through an investment bank or other securities underwriter.
The structure of an ABS and the terms of the investors’ interest in the collateral can vary widely depending on the type of collateral, the desires of investors and the use of credit enhancements. Although the basic elements of all ABS are similar, individual transactions can differ markedly in both structure and execution. Holders of ABS bear various risks, including credit risks, liquidity risks, interest rate risks, market risks, operations risks, structural risks and legal risks.
Credit risk is an important issue in ABS because of the significant credit risks inherent in the underlying collateral and because issuers are primarily private entities. Credit risk arises from losses due to defaults by the borrowers in the underlying collateral or the issuer’s or servicer’s failure to perform. Market risk arises from the cash-flow characteristics of the security, which for many ABS tend to be predictable. The greatest variability in cash flows comes from credit performance, including the presence of early amortization or acceleration features designed to protect the investor if credit losses in the portfolio rise well above expected levels. Interest-rate risk arises for the issuer from the relationship between the pricing terms on the underlying collateral and the terms of the rate paid to security holders. ABS are subject to the risk that a change in interest rates may influence the pace of prepayments of the underlying securities which, in turn, affects yields on an absolute basis. Liquidity risk can arise from increased perceived credit risk. For example, liquidity can also become a significant problem if concerns regarding credit quality lead investors to avoid the securities issued by the relevant special-purpose entity. Operations risk arises through the potential for misrepresentation of asset quality or terms by the originating institution, misrepresentation of the nature and current value of the assets by the servicer and inadequate controls over disbursements and receipts by the servicer. Structural risk may arise through investments in ABS with structures (for example, the establishment of various security tranches) that are intended to reallocate the risks entailed in the underlying collateral (particularly credit risk) in ways that give certain investors less credit risk protection (i.e., a lower priority claim on the cash flows from the underlying pool of assets) than others. As a result, such securities have a higher risk of loss as a result of delinquencies or losses on the underlying assets.
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Further, credit risk retention requirements for ABS may increase the costs to originators, securitizers and, in certain cases, asset managers of securitization vehicles in which the Alternative Strategies Fund and the High Income Alternatives Fund may invest. Although the impact of these requirements is uncertain, certain additional costs may be passed to the Fund and the Fund’s investments in ABS may be adversely affected. Many of the other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), or foreign regulatory developments could materially impact the value of the Fund’s assets, expose the Fund to additional costs and require changes to investment practices, thereby adversely affecting the Fund’s performance.
Additional risks relating to investments in ABS may arise because of the type of ABS in which the Alternative Strategies Fund and the High Income Alternatives Fund invest, defined by the assets collateralizing the ABS. For example, collateralized mortgage obligations may have complex or highly variable prepayment terms, such as companion classes, interest only or principal only payments, inverse floaters and residuals. These investments generally entail greater market, prepayment and liquidity risks than other mortgage-backed securities, and may be more volatile or less liquid than other mortgage-backed securities. In addition, ABS backed by aircraft loans and leases may provide the Fund with a less effective security interest in the related underlying collateral than do mortgage-related securities and, thus, it is possible that recovery on repossessed collateral might be unavailable or inadequate to support payments on these ABS. In
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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addition to the risks inherent in ABS generally, risks associated with aircraft securitizations include but are not limited to risks related to commercial aircraft, the leasing of aircraft by commercial airlines and the commercial aviation industry generally. With respect to any one aircraft, the value of such aircraft can be affected by the particular maintenance and operating history for the aircraft or its components, the model and type of aircraft, the jurisdiction of registration (including legal risks, costs and delays in attempting to repossess and export such aircraft following any default under the related loan or lease) and regulatory risk. The Alternative Strategies Fund and the High Income Alternatives Fund may invest in these and other types of ABS that may be developed in the future.
•
Residential Mortgage-Backed Securities
– Home mortgage loans are typically grouped together into pools by banks and other lending institutions, and interests in these pools are then sold to investors, allowing the bank or other lending institution to have more money available to loan to home buyers. Some of these pools are guaranteed by U.S. government agencies or by government sponsored private corporations-familiarly called “Ginnie Mae,” “Fannie Mae” and “Freddie Mac.”
Non-agency
MBS is subject to the risk that the value of such security will decline because, among other things, the security is not issued or guaranteed as to principal or interest by the U.S. government or a government sponsored enterprise. These securities are often subject to greater credit risk than agency MBS. In addition, these securities may be less readily marketable as the market for these securities is typically smaller and less liquid than the market for agency MBS, thus these securities may be subject to greater price fluctuation than agency MBS. Home mortgage loans may also be purchased and grouped together by
non-lending
institutions such as investment banks and hedge funds who will sell interests in such pools to investors. Mortgage-backed securities may be particularly sensitive to changes in interest rates given that rising interest rates tend to extend the duration of fixed-rate mortgage-backed securities. As a result, a rising interest rate environment can cause the prices of mortgage-backed securities to be increasingly volatile, which may adversely affect the Alternative Strategies Fund’s and High Income Alternatives Fund’s holdings of mortgage-backed securities. In light of the current interest rate environment, the Alternative Strategies Fund’s and High Income Alternatives Fund’s investments in these securities may be subject to heightened interest rate risk. These risks are elevated given the current distressed economic, market, health and labor conditions, notably, increased levels of unemployment, delays and delinquencies in payments of mortgage and rent obligations, and uncertainty regarding the effects and extent of government intervention with respect to mortgage payments and other economic matters.
•
Commercial Mortgage-Backed Securities
– Commercial mortgage backed securities (“CMBS”) are collateralized by one or more commercial mortgage loans. Banks and other lending institutions typically group the loans into pools and interests in these pools are then sold to investors, allowing the lender to have more money available to loan to other commercial real estate owners. Commercial mortgage loans may be secured by office properties, retail properties, hotels, mixed use properties or multi-family apartment buildings. Investments in CMBS are subject to the risks of ABS generally and particularly subject to credit risk, interest rate risk, and liquidity and valuation risk. These risks are elevated given the current distressed economic, market, health and labor conditions, notably, increased levels of unemployment, delays and delinquencies in payments of mortgage and rent obligations, and uncertainty regarding the effects and extent of government intervention with respect to mortgage payments and other economic matters.
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Litman Gregory Funds Trust
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Below Investment-Grade Fixed Income Securities Risk
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Below investment-grade fixed income securities (also known as “junk bonds”) are considered speculative. These securities are rated Ba1 through C by Moody’s Investors Service (“Moody’s”) or BB+ through D by Standard & Poor’s Rating Group (“S&P”) (or comparably rated by another nationally recognized statistical rating organization), or, if not rated by Moody’s or S&P, are considered by the
sub-advisors
to be of similar quality. These securities may be subject to greater risks than those of higher rated fixed income securities, including greater risk of default. The market value of below investment-grade fixed income securities is more sensitive to individual corporate developments and economic changes than higher rated securities. Adverse publicity and investor perceptions, whether or not accurate, regarding below investment-grade fixed income securities may depress prices and diminish liquidity for such securities. The market for below investment-grade fixed income securities may be less active than the market for higher rated securities, which can adversely affect the price at which these securities may be sold. Less active markets may diminish the Alternative Strategies Fund’s and High Income Alternatives Fund’s ability to obtain accurate market quotations when valuing the portfolio securities and thereby giving rise to valuation risk. In addition, the Alternative Strategies Fund and the High Income Alternatives Fund may incur additional expenses if a holding defaults and the Alternative Strategies Fund and High Income Alternatives Fund has to seek recovery of its principal investment. Below investment-grade fixed income securities may also present risks based on payment expectations. For example, these securities may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Alternative Strategies Fund and High Income Alternatives Fund would have to replace the security with a lower yielding security resulting in a decreased return for investors. There is no limit to the Alternative Strategies Fund’s and High Income Alternatives Fund’s ability to invest in below investment-grade fixed income securities; however, under normal market conditions, it does not expect to invest more than 50% of its total assets in below investment-grade fixed income securities as measured at time of purchase.
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Capital Structure Arbitrage Risk
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The perceived mispricing identified by the
sub-adviser
may not disappear or may even increase, in which case losses may be realized.
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If the Fund’s financial instruments are secured by collateral, the issuer may have difficulty liquidating the collateral and/or the Fund may have difficulty enforcing its rights under the terms of the securities if an issuer defaults. Collateral may be insufficient or the Fund’s right to the collateral may be set aside by a court. Collateral will generally consist of assets that may not be readily liquidated, including for example, equipment, inventory, work in the process of manufacture, real property and payments to become due under contracts or other receivable obligations. There is no assurance that the liquidation of those assets would satisfy an issuer’s obligations under a financial instrument.
Non-affiliates
and affiliates of issuers of financial instruments may provide collateral in the form of secured and unsecured guarantees and/or security interests in assets that they own, which may also be insufficient to satisfy an issuer’s obligations under a financial instrument.
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Collateralized Loan Obligations and Collateralized Debt Obligations Risk
|
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The Alternative Strategies Fund and the High Income Alternatives Fund may invest in collateralized loan obligations (“CLOs”) and collateralized debt obligations (“CDOs”). Investments in CLOs carry the same risks as investments in loans directly, such as interest rate risk, credit and liquidity and valuation risks, and the risk of default. These investments are also subject to the risks associated with a decrease of market value due to collateral defaults and disappearance of subordinate tranches, market anticipation of defaults, and investor aversion to these types of securities as a class. CLOs issue classes or “tranches” that vary in risk and yield. Losses caused by defaults on underlying assets are borne first by the holders of subordinate tranches. A CLO may experience substantial losses attributable to loan defaults. The Fund’s investment in a CLO may decrease in market value because of (i) loan defaults or credit impairment, (ii) the disappearance of subordinate tranches, (iii) market anticipation of defaults, and (iv) investor aversion to CLO securities as a class. These risks may be magnified depending on the tranche of CLO securities in which the Fund invests. For example, investments in a junior tranche of CLO securities will likely be more sensitive to loan defaults or credit impairment than investments in more senior tranches.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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CDOs are structured similarly to CLOs, but are backed by pools of assets that are debt securities rather than only loans, typically including bonds, other structured finance securities (including other ABS and other CLOs) and/or synthetic instruments. CDOs are often highly leveraged, and like CLOs, the risks of investing in CDOs may be magnified depending on the tranche of CDO securities held by the Fund. The nature of the risks of CDOs depends largely on the type and quality of the underlying collateral and the tranche of CDOs in which the Fund may invest. CDOs collateralized by pools of ABS carry the same risks as investments in ABS directly, including losses with respect to the collateral underlying those ABS. In addition, certain CDOs may not hold their underlying collateral directly, but rather, use derivatives such as swaps to create “synthetic” exposure to the collateral pool. Such CDOs entail the risks associated with derivative instruments.
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Communications Services Sector Risk
|
|
Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the communications services sector. Media and communications companies may be significantly affected by product and service obsolescence due to technological advancement or development, competitive pressures (including innovation by competitors and pricing competition), substantial capital requirements, research and development costs, fluctuating demand due to shifting demographics and changing consumer tastes, and changes in regulation. Certain companies in the communications sector may be particular targets of hacking and/or other cybersecurity breaches, which could adversely affect their businesses.
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Consumer Discretionary Sector Risk
|
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Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the consumer discretionary sector, which includes, for example, automobile, textile and retail companies. This sector can be significantly affected by, among other factors, changes in domestic and international economies; exchange and interest rates; worldwide demand; competition; consumers’ disposable income levels, propensity to spend and consumer preferences; social trends; and marketing campaigns. Companies in the consumer discretionary sector have historically been characterized as relatively cyclical and therefore more volatile in times of change.
|
Consumer Staples Sector Risk
|
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Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the consumer staples sector, which includes, for example, the food and staples retailing industry, the food, beverage and tobacco industry and the household and personal products industry. This sector can be significantly affected by, among other factors, the regulation of various product components and production methods, marketing campaigns and changes in the global economy, consumer spending and consumer demand. Tobacco companies, in particular, may be adversely affected by new laws, regulations and litigations. Companies in the consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced by unpredictable factors. These companies may be subject to severe competition, which may have an adverse impact on their profitability.
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Convertible Arbitrage Risk
|
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Arbitrage strategies involve engaging in transactions that attempt to exploit price differences of identical, related or similar securities on different markets or in different forms. A Fund may realize losses or reduced rate of return if underlying relationships among securities in which investment positions are taken change in an adverse manner or a transaction is unexpectedly terminated or delayed. Trading to seek short-term capital appreciation can be expected to cause the Fund’s portfolio turnover rate to be substantially higher than that of the average equity-oriented investment company, resulting in higher transaction costs and additional capital gains tax liabilities.
|
Convertible Securities Risk
|
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Convertible securities generally offer lower interest or dividend yields than
non-convertible
securities of similar quality. Because convertible securities are higher in an issuer’s capital structure than equity securities, convertible securities are generally not as risky as the equity securities of the same issuer. However, convertible securities may gain or lose value due to changes in, among other things, interest rates; other general economic conditions; industry fundamentals; market sentiment; and the issuer’s operating results, financial statements and credit ratings. The value of convertible securities also tends to change whenever the market value of the underlying common or preferred stock fluctuates.
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Litman Gregory Funds Trust
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World events – such as political upheaval, financial troubles, or natural disasters – may adversely affect the value of securities issued by companies in foreign countries or regions. Because each of the International Fund and Oldfield International Value Fund may invest a large portion of its assets in securities of companies located in any one country or region, including emerging markets, the Fund’s performance may be hurt disproportionately by the poor performance of its investments in that area. This risk is heightened in emerging markets – see “Emerging Markets Risk” below.
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Credit risk is the risk that the issuer or the guarantor of a fixed income security, or the counterparty to a derivatives contract or other transaction, is unable or unwilling (or is perceived to be unable or unwilling) to make timely payments of principal and/or interest, or to otherwise honor its obligations. The Alternative Strategies Fund and High Income Alternatives Fund will be subject to credit risks with respect to the counterparties of its derivative transactions. Many of the protections afforded to participants on organized exchanges, such as the performance guarantee of an exchange clearing house, are not available in connection with
(“OTC”) derivative transactions, such as foreign currency transactions. As a result, in instances where the Fund enters into OTC derivative transactions, the Fund will be subject to the risk that its direct counterparties will not perform their obligations under the transactions and that the Fund will sustain losses or be unable to realize gains.
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The Alternative Strategies Fund and High Income Alternatives Fund may invest in foreign currencies for investment and hedging purposes. All of the Funds may invest in foreign currencies for hedging purposes. Investing in foreign currencies exposes the fund to fluctuations in currency exchange rates. Fluctuations in the exchange rates between different currencies may negatively affect an investment. Each of the Alternative Strategies Fund and High Income Alternatives Fund may be subject to currency risk because it may invest a significant portion of its assets in currency-related instruments, such as forward currency exchange contracts, foreign currency futures contracts, options on foreign currencies and foreign currency futures, cross-currency instruments (such as swaps) and direct investments in foreign currencies. The Alternative Strategies Fund and High Income Alternatives Fund also are subject to currency risk because each may invest in securities or other instruments denominated in, or receive revenues in, foreign currencies. The
sub-advisors
may elect not to hedge currency risk, which may cause the Alternative Strategies Fund and the High Income Alternatives Fund to incur losses that would not have been incurred had the risk been hedged.
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Information and technology systems relied upon by the Funds, Litman Gregory, the
sub-advisors,
the Funds’ service providers (including, but not limited to, Fund accountants, custodians, transfer agents, administrators, distributors and other financial intermediaries) and/or the issuers of securities in which a Fund invests may be vulnerable to damage or interruption from computer viruses, network failures, computer and telecommunication failures, infiltration by unauthorized persons, security breaches, usage errors, power outages and catastrophic events such as fires, tornadoes, floods, hurricanes and earthquakes. Although Litman Gregory has implemented measures to manage risks relating to these types of events, if these systems are compromised, become inoperable for extended periods of time or cease to function properly, significant investment may be required to fix or replace them. The failure of these systems and/or of disaster recovery plans could cause significant interruptions in the operations of the Funds, Litman Gregory, the
sub-advisors,
the Funds’ service providers and/or issuers of securities in which a Fund invests and may result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to investors (and the beneficial owners of investors). Such a failure could also harm the reputation of the Funds, Litman Gregory, the
sub-advisors,
the Funds’ service providers and/or issuers of securities in which a Fund invests, subject such entities and their respective affiliates to legal claims or otherwise affect their business and financial performance.
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The value and liquidity of debt securities may be reduced under certain circumstances. The value of debt securities can fluctuate, sometimes rapidly, in response to issuer activity and changes in general economic and credit market conditions, including changes in interest rates. The prices of debt securities can be volatile, and there can be severe limitations in the ability to value or sell certain debt securities, including those that are of higher credit quality, during periods of reduced credit market liquidity such as the one that the market experienced in 2008 and 2009.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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Some of the instruments in which the Alternative Strategies Fund and the High Income Alternatives Fund may invest may be referred to as “derivatives,” because their value “derives” from the value of an underlying asset, reference rate or index. Use of derivatives is a highly specialized activity that can involve investment techniques and risks different from, and in some respects greater than, those associated with investing in more traditional investments, such as stocks and bonds. Derivatives can be highly complex and highly volatile and may perform in unanticipated ways. Derivatives can create leverage, which can magnify the impact of a decline in the value of the reference instrument underlying the derivative, and each of the Alternative Strategies Fund and the High Income Alternatives Fund could lose more than the amount it invests. Derivatives can have the potential for unlimited losses, for example, where the Fund may be called upon to deliver a security it does not own. Derivatives may at times be highly illiquid, and the Fund may not be able to close out or sell a derivative at a particular time or at an anticipated price. Derivatives can be difficult to value and valuation may be more difficult in times of market turmoil. There may be imperfect correlation between the behavior of a derivative and that of the reference instrument, and the reference instrument may not perform as anticipated. Suitable derivatives may not be available in all circumstances, and there can be no assurance that the Fund will use derivatives to reduce exposure to other risks when that might have been beneficial. Derivatives may involve fees, commissions, or other costs that may reduce the Fund’s gains or exacerbate losses from the derivatives. In addition, the Fund’s use of derivatives may have different tax consequences for the Fund than an investment in the reference instruments, and those differences may increase the amount and affect the timing of income recognition and character of taxable distributions payable to shareholders. Certain aspects of the regulatory treatment of derivative instruments, including federal income tax, are currently unclear and may be affected by changes in legislation, regulations, or other legally binding authority.
Derivatives involve counterparty risk, which is the risk that the other party to the derivative will fail to make required payments or otherwise comply with the terms of the derivative. Counterparty risk may arise because of market activities and developments, the counterparty’s financial condition (including financial difficulties, bankruptcy, or insolvency), or other reasons. Not all derivative transactions require a counterparty to post collateral, which may expose the Alternative Strategies Fund and the High Income Alternatives Fund to greater losses in the event of a default by a counterparty. Counterparty risk is generally thought to be greater with OTC derivatives than with derivatives that are centrally cleared. However, derivatives that are traded on organized exchanges and/or through clearing organizations involve the possibility that the futures commission merchant or clearing organization will default in the performance of its obligations.
When the Alternative Strategies Fund and the High Income Alternatives Fund use derivatives, each Fund will likely be required to provide margin or collateral and/or segregate cash or other liquid assets; these practices are intended to satisfy contractual undertakings and regulatory requirements and will not prevent the Fund from incurring losses on derivatives. The need to provide margin or collateral and/or segregate assets could limit the Fund’s ability to pursue other opportunities as they arise. Segregated assets are not available to meet redemptions. The amount of assets required to be segregated will depend on the type of derivative the Fund uses and the nature of the contractual arrangement. If the Fund is required to segregate assets equal to only the current market value of its obligation under a derivative, the Fund may be able to use derivatives to a greater extent than if it were required to segregate assets equal to the full notional value of such derivative, which would increase the degree of leverage the Fund could undertake through derivatives and otherwise. Derivatives that have margin requirements involve the risk that if the Fund has insufficient cash or eligible margin securities to meet daily variation margin requirements, it may have to sell securities or other instruments from its portfolio at a time when it may be disadvantageous to do so. The Fund may remain obligated to meet margin requirements until a derivatives position is closed.
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Litman Gregory Funds Trust
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Although the Alternative Strategies Fund and the High Income Alternatives Fund may use derivatives to attempt to hedge against certain risks, the hedging instruments may not perform as expected and could produce losses. Additional risks associated with certain types of derivatives are discussed below:
Options Risk.
The Alternative Strategies Fund and High Income Alternatives Fund may invest in options. Options trading entails risks in addition to those resulting from trading in traditional securities. Options may be more volatile than the underlying instruments, and therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves. An investment in options is subject to the risk of a complete loss of the amounts paid as premiums to purchase the options.
Forward Contracts Risk.
The Alternative Strategies Fund and High Income Alternatives Fund may invest in forward contracts. There are no limitations on daily price movements of forward contracts. Changes in foreign exchange regulations by governmental authorities might limit the trading of forward contracts. To the extent the Alternative Strategies Fund and High Income Alternatives Fund enter into
non-U.S.
currency forward contracts with banks, the Funds are subject to the risk of bank failure or the inability of or refusal by a bank to perform such contracts. There have been periods during which certain banks have refused to continue to quote prices for forward contracts or have quoted prices with an unusually wide spread (the difference between the price at which the bank is prepared to buy and the price at which it is prepared to sell).
Futures Contracts Risk
. The Alternative Strategies Fund and High Income Alternatives Fund may invest in futures contracts. The loss that may be incurred by entering into futures contracts could exceed the amount of the premiums paid and may be potentially unlimited. Futures markets are highly volatile, and the use of futures may increase the volatility of the Fund’s net asset value (“NAV”). Additionally, as a result of the low collateral deposits normally involved in futures trading, a relatively small movement in the price or value of a futures contract increases the risk of losing more than the amount initially invested by the Fund. Furthermore, exchanges may limit fluctuations in futures contract prices during a trading session by imposing a maximum permissible price movement on each futures contract. The Fund may be disadvantaged if it is prohibited from executing a trade outside the daily permissible price movement. Futures contracts executed on foreign exchanges may not be provided the same protections as provided by U.S. exchanges.
. The International Fund, the Alternative Strategies Fund and the High Income Alternatives Fund may invest in
P-Notes.
P-Notes
are a type of equity-linked derivative generally issued by banks or broker-dealers and are designed to replicate the performance of the underlying equity securities.
P-Notes
are typically utilized to obtain exposure in certain
non-U.S.
markets where direct investment in a company’s equity is not permitted or otherwise feasible. Even though a
P-Note
is intended to reflect the performance of the underlying equity securities on a
basis so that investors will not normally gain or lose more in absolute terms than they would have made or lost had they invested in the underlying securities directly, the performance results of
P-Notes
will not replicate exactly the performance of the issuers or markets that the
P-Notes
seek to replicate due to transaction costs and other expenses.
P-Notes
represent unsecured, unsubordinated contractual rights of the issuer and do not confer any right, title or interest in respect to the underlying equity securities or provide rights against the issuer of the underlying securities. For this reason, in addition to the risks normally associated with a direct investment in the underlying securities,
P-Notes
are subject to counterparty risk if the issuer of the
P-Note
is unable or refuses to perform under the terms of the
P-Note
and must rely on the creditworthiness of the counterparty for its investment returns on the
P-Notes.
While the holder of a
P-Note
is entitled to receive from the bank or broker-dealer any dividends or other distributions paid on the underlying securities, the holder is not entitled to the same rights as an owner of the underlying securities, such as voting rights.
P-Notes
are also not traded on exchanges, are privately issued, and may be illiquid. There can be no assurance that the trading price or value of
P-Notes
will equal the value of the underlying value of the equity securities they seek to replicate.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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Credit Default Swaps Risk
. The Alternative Strategies Fund and the High Income Alternatives Fund may enter into credit default swap agreements. The “buyer” in a credit default swap contract is obligated to pay the “seller” a periodic stream of payments over the term of the contract, provided no event of default has occurred. In the event of default, the seller must pay the buyer the “par value” (full notional value) of the reference obligation in exchange for the reference obligation. Each Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers nothing. However, if an event of default occurs, the buyer receives full notional value for a reference obligation that may have little or no value. As a seller, each Fund receives a fixed rate of income throughout the term of the contract, provided there is no default event. If an event of default occurs, the seller is normally obligated to pay the notional value of the reference obligation. The value of the reference obligation received by the seller, coupled with the periodic payments previously received may be less than the full notional value it pays to the buyer, resulting in a loss of value to the Fund. Credit default swaps involve greater risks than if the Fund had invested in the reference obligation directly. In addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. If the Fund writes a credit default swap, it would normally be required to segregate liquid assets equal in value to the notional value of the reference obligation.
Total Return Swaps Risk
. The Alternative Strategies Fund and the High Income Alternatives Fund may enter into total return swap agreements. Total return swap is the generic name for any
non-traditional
swap where one party agrees to pay the other the “total return” of a defined underlying asset, usually in return for receiving a stream of London Interbank Offered Rate (“LIBOR”) based cash flows. A total return swap may be applied to any underlying asset but is most commonly used with equity indices, single stocks, bonds and defined portfolios of loans and mortgages. Total return swap is a mechanism for the user to accept the economic benefits of asset ownership without utilizing the balance sheet. The other leg of the swap, usually LIBOR, is spread to reflect the
non-balance
sheet nature of the product. No notional amounts are exchanged with total return swaps. The total return receiver assumes the entire economic exposure—that is, both market and credit exposure—to the reference asset. The total return payer—often the owner of the reference obligation—gives up economic exposure to the performance of the reference asset and in return takes on counterparty credit exposure to the total return receiver in the event of a default or fall in value of the reference asset.
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Emerging market countries are those with immature economic and political structures, and investing in emerging markets entails greater risk than in developed markets. Emerging markets may be under-capitalized, have less developed legal and financial systems or have less stable currencies than markets in the developed world. Emerging market securities are securities that are issued by companies with their principal place of business or principal office in an emerging market country; or securities issued by companies for which the principal securities trading market is an emerging market country. Emerging market securities typically present even greater exposure to the risks described under “Foreign Investment Risk” and may be particularly sensitive to certain economic changes. For example, emerging market countries are more often dependent on international trade and are therefore often vulnerable to recessions in other countries. Emerging markets may have obsolete financial systems and volatile currencies, and may be more sensitive than more mature markets to a variety of economic factors. Emerging market securities also may be less liquid than securities of more developed countries and could be difficult to sell, particularly during a market downturn.
Economies in emerging market countries may also be more susceptible to natural and
man-made
disasters, such as earthquakes, tsunamis, terrorist attacks, or adverse changes in climate or weather. In addition, many developing countries with less established health care systems have experienced outbreaks of pandemic or contagious diseases from time to time, including, but not limited to,
COVID-19,
Ebola, Zika, avian flu, severe acute respiratory syndrome, and Middle East Respiratory Syndrome. The risks of such phenomena and resulting social, political, economic and environmental damage cannot be quantified. These events can exacerbate market volatility as well as impair economic activity, which can have both short- and immediate-term effects on the valuations of the companies and issuers in which the Funds invest.
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Litman Gregory Funds Trust
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Among other risks of investing in emerging market countries are the variable quality and reliability of financial information and related audits of companies. In some cases, financial information and related audits can be unreliable and not subject to verification. Auditing firms in some of these markets are not subject to independent inspection or oversight of audit quality. This can result in investment decisions being made based on flawed or misleading information. Additionally, investors may have substantial difficulties in bringing legal actions to enforce or protect investors’ rights, which can increase the risks of loss. The Funds define an emerging market country as any country that is included in the MSCI Emerging Markets Index.
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The value of equity securities may fluctuate, sometimes rapidly and unexpectedly, due to various factors, including factors affecting the general market, such as adverse changes in economic conditions, the general outlook for corporate earnings, interest rates or investor sentiment. Equity securities may also lose value because of factors affecting an entire industry or sector, such as increases in production costs, and factors directly related to a specific company, such as significant decisions made by its management. Certain equity securities may decline in value even during periods when the prices of equity securities in general are rising, or may not perform as well as the market in general. The prices of equity securities may also experience greater volatility during periods of challenging market conditions such as the one that the market recently experienced. This risk is greater for small- and
medium-sized
companies, which tend to be more vulnerable to adverse developments than larger companies.
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Each of the International Fund and Oldfield International Value Fund may invest a significant portion of its assets in issuers based in Western Europe and the United Kingdom (“UK”). The economies of countries in Europe are often closely connected and interdependent, and events in one country in Europe can have an adverse impact on other European countries. Efforts by the member countries of the European Union (“EU”) to continue to unify their economic and monetary policies may increase the potential for similarities in the movements of European markets and reduce the potential investment benefits of diversification within the region. However, the substance of these policies may not address the needs of all European economies. European financial markets have in recent years experienced increased volatility due to concerns with some countries’ high levels of sovereign debt, budget deficits and unemployment. Markets have also been affected by the withdrawal of the UK from the EU (an event commonly known as “Brexit”). On January 31, 2020, the UK officially withdrew from the EU and entered into a transition period until December 31, 2020, during which the UK effectively remained in the EU from an economic perspective. The impact of Brexit on the UK, the EU and the broader global economy may be significant. As a result of the political divisions within the UK and between the UK and the EU that the referendum vote has highlighted and the uncertain consequences of Brexit, the UK and European economies and the broader global economy could be significantly impacted, which may result in increased volatility and illiquidity and potentially lower economic growth on markets in the UK, Europe and globally, which could potentially have an adverse effect on the value of a Fund’s investments.
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The Alternative Strategies Fund may make event-driven investments. Event-driven strategies seek to profit from the market inefficiencies surrounding market events, such as mergers, acquisitions, asset sales, restructurings, refinancings, recapitalizations, reorganizations or other special situations. Event-driven investing involves attempting to predict the outcome of a particular transaction as well as the optimal time at which to commit capital to it. Event-driven opportunities involve difficult legal as well as financial analysis, as some of the principal impediments to the consummation of major corporate events are often legal or regulatory rather than economic. In addition, certain of the securities issued in the context of major corporate events include complex call, put and other features, and it is difficult to precisely evaluate the terms and embedded option characteristics of these securities. A Fund may take both long and short positions in a wide range of securities, derivatives and other instruments in implementing its event-driven strategies.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the financial sector. The financial sector can be significantly affected by changes in interest rates, government regulation, the rate of defaults on corporate, consumer and government debt, the availability and cost of capital, and the impact of more stringent capital requirements. Financial services companies are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments they can make, the interest rates and fees they can charge, the scope of their activities, the prices they can charge and the amount of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change or due to increased competition. The Funds may be adversely affected by events or developments negatively impacting the financial sector. For example, events in the financial sector may cause an unusually high degree of volatility in the financial markets, both domestic and foreign, and cause certain financial services companies, including banks, to incur losses. If the Funds focus their investments in banks or bank-related companies, the Funds will be sensitive to adverse developments in the banking industry (domestic or foreign). Banks can be particularly susceptible to, among other things, adverse legislative, regulatory and monetary policy changes, interest rate movements, the availability of capital and cost to borrow, the rate of debt defaults, and developments in the real estate market.
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Investing in foreign
(non-U.S)
securities may expose the Funds to risks not typically associated with U.S. investments. These risks include, among others, adverse fluctuations in currency conversion rate, currency blockages, and adverse political, social and economic developments affecting a foreign country. In addition, foreign securities may have less publicly available information and may be more volatile and/or less liquid. Investments in foreign securities could also be affected by factors such as differences in financial reporting, accounting and auditing standards, nationalization, expropriation or confiscatory taxation, smaller and less-strict regulation of securities markets, restrictions on receiving investment proceeds from a foreign country, and potential difficulties in enforcing contractual obligations. Economies in foreign countries may also be more susceptible to natural and
man-made
disasters, such as earthquakes, tsunamis, terrorist attacks, or adverse changes in climate or weather. In addition, many foreign countries with less established health care systems have experienced outbreaks of pandemic or contagious diseases from time to time, including, but not limited to,
COVID-19,
Ebola, Zika, avian flu, severe acute respiratory syndrome and Middle East Respiratory Syndrome. The risks of such phenomena and resulting social, political, economic and environmental damage cannot be quantified. These events can exacerbate market volatility as well as impair economic activity, which can have both short- and immediate-term effects on the valuations of the companies and issuers in which the Funds invest. These risks are greater in the emerging markets. There is no limit to the Alternative Strategies Fund’s ability to invest in emerging market securities; however, under normal market conditions, it does not expect to invest more than 50% of its total assets in emerging market securities. Additional information about the risks of emerging markets is described above under “Emerging Markets Risk.”
The International Fund invests a significant portion of its assets in issuers based in Western Europe and the United Kingdom (“UK”).
The economies of countries in Europe are often closely connected and interdependent, and events in one country in Europe can have an adverse impact on other European countries. Efforts by the member countries of the European Union (“EU”) to continue to unify their economic and monetary policies may increase the potential for similarities in the movements of European markets and reduce the potential investment benefits of diversification within the region. However, the substance of these policies may not address the needs of all European economies. European financial markets have in recent years experienced increased volatility due to concerns with some countries’ high levels of sovereign debt, budget deficits and unemployment. Markets have also been affected by the withdrawal of the UK from the EU on January 31, 2020 (an event commonly known as “Brexit”). The future relationship between the UK and the EU remains unresolved and subject to negotiation during an
11-month
transition period, and there is considerable uncertainty surrounding the impact of Brexit on the UK, the EU and the broader global economy. An exit by any member countries from the EU or the Economic and Monetary Union of the EU, or even the prospect of such an exit, could lead to increased volatility in European markets and negatively affect investments both in issuers in the exiting country and throughout Europe. Whether or not a Fund invests in securities of issuers located in Europe or with significant exposure to European issuers or countries, these events could negatively affect the value and liquidity of the Fund’s investments due to the interconnected nature of the global economy and capital markets.
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Litman Gregory Funds Trust
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Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the healthcare sector. Companies in the healthcare sector may be affected by the overall economic conditions as well as by factors particular to the healthcare sector. Those factors include extensive government regulation; restrictions on government reimbursement for medical expenses; rising costs of medical products, services and facilities; pricing pressure; an increased emphasis on outpatient services; limited number of products and product obsolescence due to industry innovation; changes in technologies and other market developments. A major source of revenue for the healthcare sector is payments from Medicare and Medicaid programs. As a result, the sector is sensitive to legislative changes and reductions in governmental spending for such programs, as well as state or local healthcare reform measures. Companies in the healthcare sector depend heavily on patent protection. The process of obtaining patent approval can be long and costly, and the expiration of patents may adversely affect the profitability of companies in this sector. Healthcare companies also are subject to extensive litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make raising prices difficult and, at times, may result in price discounting. In addition, companies in the healthcare sector may be thinly capitalized and therefore may be more susceptible to product obsolescence.
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Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the industrial sector. Stock prices for the types of companies included in the industrial sector are affected by supply and demand both for their specific product or service and for industrial sector products in general. Government regulation, world events and economic conditions, technological developments and liabilities for environmental damage and general civil liabilities will likewise affect the performance of these companies. Aerospace and defense companies, a component of the industrial sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and foreign government demand for their products and services. Thus, the financial condition of, and investor interest in, aerospace and defense companies are heavily influenced by governmental spending policies which are typically under pressure from efforts to control the U.S. (and other) government budgets. Transportation stocks, a component of the industrial sector, are cyclical and have occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance costs.
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Changes in interest rates may cause the value of debt securities to decline. Generally, the value of debt securities rise when prevailing interest rates fall, and fall when prevailing interest rates rise. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.
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Investment in Investment Companies Risk
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The High Income Alternatives Fund and its shareholders may incur the pro rata share of the expenses of the underlying investment companies or vehicles in which the Fund invests, such as investment advisory and other management expenses, and shareholders will incur the operating expenses of these investment vehicles. In addition, the Fund will be subject to those risks affecting the investment vehicle, including the effects of business and regulatory developments that affect an underlying investment company or vehicle or the investment company industry generally as well as the possibility that the value of the underlying securities held by the investment vehicle could decrease or the portfolio becomes illiquid. Shares of investment vehicles that trade on an exchange may trade at a discount or premium from their net asset value. The purchase of shares of some investment companies (such as CEFs and ETFs) may require the payment of substantial premiums above the value of such companies’ portfolio securities or net asset values.
The High Income Alternatives Fund may, from time to time, invest a portion of its assets in investment companies advised by a
sub-advisor,
or an affiliate of the
sub-advisor.
An underlying investment vehicle may buy the same securities that another underlying investment vehicle sells. If this happens, an investor in the High Income Alternatives Fund would indirectly bear the costs of these trades without accomplishing any investment purpose. In addition, certain of the underlying investment vehicles may hold common portfolio positions, thereby reducing the diversification benefits of an asset allocation style. The underlying investment vehicles may engage in investment strategies or invest in specific investments in which the Fund would not engage or invest directly.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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The performance of those underlying investment vehicles, in turn, depends upon the performance of the securities in which they invest.
The underlying investment companies or other investment vehicles in which the High Income Alternatives Fund invests are often institutional funds owned by a small number of shareholders and are thus also subject to the risk that shareholders redeem their shares rapidly, which may adversely affect the performance and liquidity of the underlying investment vehicles and the High Income Alternatives Fund.
An investment by the High Income Alternatives Fund in ETFs generally presents the same primary risks as an investment in a mutual fund. In addition, an investment in an ETF may be subject to additional risk, including: the ETF’s shares may trade at a discount or premium relative to the net asset value of the shares; an active trading market may not develop for the ETF’s shares; the listing exchange may halt trading of the ETF’s shares; the ETF may fail to correctly track the referenced asset (if any); and the ETF may hold troubled securities in the referenced index or basket of investments. Shares of CEFs frequently trade at a discount to their net asset value. Investments in CEFs that elect to be regulated as BDCs may be subject to a high degree of risk.
BDCs typically invest in and lend to small and
medium-sized
private and certain public companies that may not have access to the public equity markets or capital raising. As a result, a BDC’s portfolio typically will include a substantial amount of securities purchased in private placements, and its portfolio may carry risks similar to those of a private equity or private debt fund. Securities that are not publicly registered may be difficult to value and may be difficult to sell at a price representative of their intrinsic value. Small and
medium-sized
companies also may have fewer lines of business so that changes in any one line of business may have a greater impact on the value of their stock than is the case with a larger company. Some BDCs invest substantially, or even exclusively, in one sector or industry group and therefore carry risk of that particular sector or industry group. To the extent a BDC focuses its investments in a specific sector, the BDC will be susceptible to adverse conditions and economic or regulatory occurrences affecting the specific sector or industry group, which tends to increase volatility and result in higher risk. Investments in BDCs are subject to various other risks, including management’s ability to meet the BDC’s investment objective and to manage the BDC’s portfolio when the underlying securities are redeemed or sold, during periods of market turmoil and as investors’ perceptions regarding a BDC or its underlying investments change. BDC shares are not redeemable at the option of the BDC shareholder and, as with shares of other
closed-end
funds, they may trade in the secondary market at a discount to their NAV.
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The High Income Alternatives Fund may invest in loans, such as syndicated bank loans and other direct lending opportunities, senior floating rate loans, secured and unsecured loans, second lien or more junior loans, bridge loans, revolving credit facilities and unfunded commitments. Loans may incur some of the same risks as other debt securities, such as prepayment risk, credit risk, interest rate risk, liquidity risk and risks found with high yield securities. The terms of certain loan agreements may cause certain loans to be particularly sensitive to changes in benchmark interest rates. Although some loans are secured by collateral, the collateral may be difficult to liquidate and the value of the collateral can decline or be insufficient or unavailable to meet the obligation of the borrower. Certain loans have the benefit of restrictive covenants that limit the ability of the borrower to further encumber its assets or incur other debt obligations. To the extent a loan does not have such covenants, an investment in the loan may be particularly sensitive to the risks associated with loan investments. The Fund’s interest in a particular loan and/or in a particular collateral securing a loan may be subordinate to the interests of other creditors of the obligor. As a result, a loan may not be fully collateralized (and may be uncollateralized) and can decline significantly in value, which may result in the Fund not receiving payments to which it is entitled on a timely basis or at all. In addition, the Fund may have limited rights to exercise remedies against collateral or against an obligor when payments are delayed or missed.
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Litman Gregory Funds Trust
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Loans may offer a fixed rate or floating rate of interest. Loans may decline in value if their interest rates do not rise as much or as fast as interest rates in general. In addition, to the extent the High Income Alternatives Fund holds a loan through a financial intermediary, or relies on a financial intermediary to administer the loan, the Fund’s investment, including receipt of principal and interest relating to the loan, will be subject to the credit risk of the intermediary.
Loans are subject to the risk that the scheduled interest or principal payments will not be paid. Lower-rated loans and debt securities (those of less than investment grade quality) involve greater risk of default on interest and principal payments than higher-rated loans and securities. In the event that a
non-payment
occurs, the value of that obligation likely will decline. Loans and other debt instruments rated below “BBB” category by S&P or “Baa” category by Moody’s or unrated but assessed of similar quality are considered to have speculative characteristics and are commonly referred to as “junk bonds.” Junk bonds entail default and other risks greater than those associated with higher-rated securities.
Loans are vulnerable to market sentiment such that economic conditions or other events may reduce the demand for loans and cause their value to decline rapidly and unpredictably. Many loan interests are subject to restrictions on transfer that may limit the ability of the High Income Alternatives Fund to sell the interests at an advantageous time or price. Furthermore, while the resale, or secondary, market for loans is growing, it is currently limited. There is no organized exchange or board of trade on which loans are traded. Loans often trade in large denominations (typically $1 million and higher), and trades can be infrequent. The market has limited transparency so that information about actual trades may be difficult to obtain. Accordingly, some of the loans in which the Fund may invest will be relatively illiquid and difficult to value. Loans are often subject to restrictions on resale or assignment. The may have difficulty in disposing of loans in a favorable or timely fashion, which could result in losses to the Fund. Transactions in loans are often subject to long settlement periods (in excess of the standard T+2 days settlement cycle for most securities and often longer than seven days). As a result, sale proceeds potentially will not be available to the Fund to make additional investments or to use proceeds to meet its current redemption obligations. The Fund thus is subject to the risk of selling other investments at disadvantageous times or prices, taking other actions necessary to raise cash to meet its redemption obligations such as borrowing from a bank or holding additional cash.
Loans may be issued in connection with highly leveraged transactions, such as restructurings, leveraged buyouts, leveraged recapitalizations and acquisition financing. In such highly leveraged transactions, the borrower assumes large amounts of debt in order to have the financial resources to attempt to achieve its business objectives. Accordingly, such loans may be part of highly leveraged transactions and involve a significant risk that the borrower may default or go into bankruptcy or become insolvent. Bankruptcy or other court proceedings may delay, limit or negate the High Income Alternatives Fund’s ability to collect payments on its loan investments or otherwise adversely affect the Fund’s rights in collateral relating to the loan and the Fund may need to retain legal or similar counsel to help in seeking to enforce its rights. In addition, if the Fund holds certain loans, the Fund may be required to exercise its rights collectively with other creditors or through an agent or other intermediary acting on behalf of multiple creditors, and the value of the Fund’s investment may decline or otherwise be adversely affected by delays or other risks associated with such collective procedures.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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The High Income Alternatives Fund values its assets on each business day that the New York Stock Exchange is open. However, because the secondary market for loans is limited and trading may be irregular, they may be difficult to value. Market quotations may not be readily available for some loans or may be volatile and/or subject to large spreads between bid and ask prices, and valuation may require more research than for other securities. In addition, elements of judgment may play a greater role in valuation than for securities with a more active secondary market, because there is less reliable, objective market value data available. In certain circumstances, the
sub-advisor
or its affiliates (including on behalf of clients other than the Fund) or the Fund may be in possession of material
non-public
information about a borrower as a result of its ownership of a loan and/or corporate debt security of a borrower. Because U.S. laws and regulations generally prohibit trading in securities of issuers while in possession of material,
non-public
information, the Fund might be unable to trade securities or other instruments issued by the borrower when it would otherwise be advantageous to do so and, as such, could incur a loss. In circumstances when the
sub-advisor
or the Fund determines not to receive
non-public
information about a borrower for loan investments, the Fund may be disadvantaged relative to other investors and the Fund may not take advantage of other investment opportunities that it may otherwise have. In addition, loans and other similar instruments may not be considered “securities” and, as a result, the Fund may not be entitled to rely on the anti-fraud protections under the federal securities laws and instead may have to resort to state law and direct claims. The
sub-advisor
or its affiliates may participate in the primary and secondary market for loans or other transactions with possible borrowers. As a result, the Fund may be legally restricted from acquiring some loans and from participating in a restructuring of a loan or other similar instrument.
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Investment Selection Risk
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The specific investments held in the Fund’s investment portfolio may underperform other funds in the same asset class or benchmarks that are representative of the general performance of the asset class because of a portfolio manager’s choice of securities.
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Japan may be subject to political, economic, nuclear and labor risks, among others. Any of these risks, individually or in the aggregate, can impact an investment made in Japan. The growth of Japan’s economy has recently lagged that of its Asian neighbors and other major developed economies. Since 2000, Japan’s economic growth rate has generally remained low relative to other advanced economies, and it may remain low in the future. The Japanese economy faces several concerns, including a financial system with large levels of nonperforming loans, overleveraged corporate balance sheets, extensive cross-ownership by major corporations, a changing corporate governance structure, large government deficits, heavy dependence on international trade and oil and other commodity imports, an aging workforce and significant population decline, sometimes unpredictable national politics, political tensions with China, and natural disasters, such as earthquakes, volcanic eruptions, typhoons and tsunamis. Any of these concerns could negatively affect the value of Japanese investments.
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Large Shareholder Purchase and Redemption Risk
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The Equity Fund, the International Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund are subject to the risk of large shareholder purchases and redemptions. A Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund. Such large shareholder redemptions may cause the Fund to sell its securities at times when it would not otherwise do so, which may negatively impact the Fund’s net asset value and liquidity. Similarly, large share purchases may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. In addition, a large redemption could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio.
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Leverage may result from certain transactions, including the use of derivatives and borrowing, particularly with respect to the Alternative Strategies Fund and the High Income Alternatives Fund. Although leverage creates an opportunity for increased income and gain, it also creates certain risks. For example, the use of leverage may cause the effect of an increase or decrease in the value of the Fund’s portfolio securities to be magnified and the Fund to be more volatile than if leverage was not used. Under normal circumstances, the Alternative Strategies Fund and the High Income Alternatives Fund may each borrow amounts up to one third of the value of its total assets except that it may exceed this limit to satisfy redemption requests or for other temporary purposes.
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Litman Gregory Funds Trust
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LIBOR is used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds, bank loans, asset-backed and mortgage-related securities, interest rate swaps and other derivatives. For example, debt securities in which a Fund invests may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. A Fund’s derivative investments may also reference LIBOR. In addition, issuers of instruments in which a Fund invests may obtain financing at floating rates based on LIBOR, and a Fund may use leverage or borrowings based on LIBOR. In July 2017, the head of the United Kingdom Financial Conduct Authority announced the intention to phase out the use of LIBOR by the end of 2021. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement reference rate. Abandonment of or modifications to LIBOR could have adverse impacts on newly issued financial instruments and existing financial instruments that reference LIBOR.
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Liquidity and Valuation Risk
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It may be difficult for the High Income Alternatives Fund to purchase and sell particular investments within a reasonable time at a fair price, or the price at which it has been valued by Litman Gregory for purposes of the Fund’s net asset value, causing the Fund to be less liquid and unable to realize what Litman Gregory believes should be the price of the investment. Valuation of portfolio investments may be difficult, such as during periods of market turmoil or reduced liquidity, and for investments that may, for example, trade infrequently or irregularly. In these and other circumstances, an investment may be valued using fair value methodologies, which are inherently subjective, reflect good faith judgments based on available information and may not accurately estimate the price at which the Fund could sell the investment at that time. These risks may be heightened for fixed-income instruments because of the near historically low interest rate environment as of the date of this prospectus. Based on its investment strategies, a significant portion of the High Income Alternatives Fund’s investments can be difficult to value and potentially less liquid and thus particularly prone to the foregoing risks.
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The market prices of securities owned by a Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value or become illiquid due to factors affecting securities markets generally or particular industries represented in the securities markets. The value or liquidity of a security may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. Securities may also decline or become illiquid due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. During a general downturn in the securities markets, multiple asset classes may decline or become illiquid in value simultaneously. Natural disasters, public health emergencies (including pandemics and epidemics), terrorism and other global unforeseeable events may lead to instability in world economies and markets, may lead to increased volatility, and may have adverse long-term effects. The Funds cannot predict the effects of such unforeseeable events in the future on the economy, the markets or the Funds’ investments.
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Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the materials sector, which includes, for example, companies in the chemicals, metals and mining, paper and forest products, containers and packaging, and construction materials industries. Many companies in the materials sector are significantly affected by the level and volatility of commodity prices, the exchange value of the U.S. dollar, import controls, worldwide competition, environmental policies and consumer demand. At times, worldwide production of industrial materials has exceeded demand as a result of over-building or economic downturns, leading to poor investment returns or losses. Other risks may include liability for environmental damage and general civil liabilities, depletion of resources, and mandated expenditures for safety and pollution control. The basic industries sector may also be affected by economic cycles, technical progress, labor relations, and government regulations.
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The Alternative Strategies Fund is subject to merger arbitrage risk. Merger arbitrage seeks to profit from the successful completion of mergers, takeovers, tender offers, leveraged buyouts, spin offs, liquidations and other corporate reorganizations (each, a “deal”). The success of merger arbitrage depends on the discount between the deal price and the price of the target company’s stock after the deal is announced but before it is closed. If a proposed reorganization in which the Alternative Strategies Fund invests is renegotiated or terminated, the Fund may suffer a loss.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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Securities of companies with
mid-sized
market capitalizations are generally more volatile and less liquid than the securities of large-capitalization companies.
Mid-sized
companies may be more reliant on a few products, services or key personnel, which can make it riskier than investing in larger companies with more diverse product lines and structured management.
Mid-sized
companies may have relatively short operating histories or may be newer public companies. Some of these companies have more aggressive capital structures, including higher debt levels, than
large-cap
companies, or are involved in rapidly growing or changing industries and/or new technologies, which pose additional risks.
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The Alternative Strategies Fund uses proprietary systematic and quantitative models as part of its investment strategies. These models may fail to identify profitable opportunities at any time. Furthermore, the models may incorrectly identify opportunities and these misidentified opportunities may lead to substantial losses for the Fund. Models may be predictive in nature and such models may result in an incorrect assessment of future events. Data used in the construction of models may prove to be inaccurate or stale, which may result in losses for the Fund.
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Mortgage-Backed Securities Risk
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The Alternative Strategies Fund and the High Income Alternatives Fund may invest in mortgage-backed securities. Mortgage-backed securities represent participation interests in pools of residential mortgage loans purchased from individual lenders by a federal agency or originated and issued by private lenders. The values of some mortgage-backed securities may expose these Funds to a lower rate of return upon reinvestment of principal. When interest rates rise, the value of mortgage-related securities generally will decline; however, when interest rates are declining, the value of mortgage related-securities with prepayment features may not increase as much as other fixed income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may shorten or extend the effective maturity of the security beyond what was anticipated at the time of purchase. If unanticipated rates of prepayment on underlying mortgages increase the effective maturity of a mortgage-related security, the volatility of the security can be expected to increase. The value of these securities may fluctuate in response to the market’s perception of the creditworthiness of the issuers. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantee and/or insurance, there is no assurance that private guarantors or insurers will meet their obligations. Mortgage-backed securities that are collateralized by a portfolio of mortgages or mortgage-related securities depend on the payments of principal and interest made by or through the underlying assets, which may not be sufficient to meet the payment obligations of the mortgage-backed securities.
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Municipal Securities Risk
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The High Income Alternatives Fund may invest in municipal securities. The municipal securities market could be significantly affected by adverse political and legislative changes or litigation at the federal or state level, as well as uncertainties related to taxation or the rights of municipal security holders. Changes in the financial health of a municipality may hinder its ability to pay interest and principal. To the extent that the Fund invests a significant portion of its assets in the municipal securities of a particular state or U.S. territory or possession, there is greater risk that political, regulatory, economic or other developments within that jurisdiction may have a significant impact on the Fund’s investment performance. The amount of public information available about municipal securities is generally less than that available about corporate securities.
In the case of insured municipal securities, insurance supports the commitment that interest payments will be made on time and the principal will be repaid at maturity. Insurance does not, however, protect the Fund or its shareholders against losses caused by declines in a municipal security’s market value. The
sub-advisor
generally looks to the credit quality of the issuer of a municipal security to determine whether the security meets the Fund’s quality restrictions, even if the security is covered by insurance. However, a downgrade in the claims-paying ability of an insurer of a municipal security could have an adverse effect on the market value of the security.
Municipal issuers may be adversely affected by high labor costs and increasing unfunded pension liabilities, and by the phasing out of federal programs providing financial support. In addition, changes in the financial condition of one or more individual municipal issuers or insurers of municipal issuers can affect the overall municipal securities market. The secondary market for municipal securities may not be very liquid, which could limit the Fund’s ability to sell securities it is holding. Declines in real estate prices and general business activity may reduce the tax revenues of state and local governments. Municipal issuers have on occasion defaulted on obligations, been downgraded, or commenced insolvency proceedings. Financial difficulties of municipal issuers may continue or get worse.
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Litman Gregory Funds Trust
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Because many municipal securities are issued to finance similar types of projects, especially those related to education, health care, housing, transportation and utilities, conditions in those sectors can affect the overall municipal securities market. Interest on municipal securities paid out of current or anticipated revenues from a specific project or specific asset
(so-called
“private activity bonds”) may be adversely impacted by declines in revenue from the project or asset. Declines in general business activity could affect the economic viability of facilities that are the sole source of revenue to support private activity bonds.
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Multi-Style Management Risk
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Because portions of a Fund’s assets are managed by different portfolio managers using different styles/strategies, a Fund could experience overlapping security transactions. Certain portfolio managers may be purchasing securities at the same time that other portfolio managers may be selling those same securities, which may lead to higher transaction expenses compared to a Fund using a single investment management style. Litman Gregory’s and the
sub-advisors’
judgments about the attractiveness, value and potential appreciation of a particular asset class or individual security in which a Fund invests may prove to be incorrect, and there is no guarantee that Litman Gregory’s judgment will produce the desired results. In addition, a Fund may allocate its assets so as to under- or over-emphasize certain strategies or investments under market conditions that are not optimal, in which case the Fund’s value may be adversely affected.
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High portfolio turnover involves correspondingly greater expenses, including brokerage commissions or dealer
mark-ups
and other transaction costs on the sale of securities and reinvestments in other securities, which may result in adverse tax consequences to a Fund’s shareholders. Certain of a Fund’s investment strategies may result in it having higher portfolio turnover rates. Higher portfolio turnover may cause a Fund to experience increased transaction costs, dealer markups, brokerage expenses and other acquisition costs, and may cause shareholders to incur increased taxes on their investment in a Fund as compared to shareholders in investment companies that hold investments for longer periods. The portfolio managers do not consider portfolio turnover rate a limiting factor in making investment decisions on behalf of a Fund consistent with its investment objective and policies. Variations in portfolio turnover rates may be due to fluctuations in shareholder purchase, exchange and redemption transactions, market conditions or changes in the portfolio manager’s outlook.
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Public Health Emergency Risk and Impact of the Coronavirus
(COVID-19)
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Pandemics and other local, national, and international public health emergencies, including outbreaks of infectious diseases such as SARS, H1N1/09 Flu, the Avian Flu, Ebola and the current outbreak of the novel coronavirus
(“COVID-19”),
can result, and in the case of
COVID-19
is resulting, in market volatility and disruption, and any similar future emergencies may materially and adversely impact economic production and activity in ways that cannot be predicted, all of which could result in substantial investment losses.
The World Health Organization officially declared in March 2020 that the
COVID-19
outbreak formally constitutes a “pandemic.” This outbreak has caused a worldwide public health emergency, straining healthcare resources and resulting in extensive and growing numbers of infections, hospitalizations and deaths. In an effort to contain
COVID-19,
local, regional, and national governments, as well as private businesses and other organizations, have imposed and continue to impose severely restrictive measures, including instituting local and regional quarantines, restricting travel (including closing certain international borders), prohibiting public activity (including
and similar orders), and ordering the closure of a wide range of offices, businesses, schools, and other public venues. Consequently,
COVID-19
has significantly diminished and disrupted global economic production and activity of all kinds and has contributed to both volatility and a severe decline in financial markets. Among other things, these unprecedented developments have resulted in: (i) material reductions in demand across most categories of consumers and businesses; (ii) dislocation (or, in some cases, a complete halt) in the credit and capital markets; (iii) labor force and operational disruptions; (iv) slowing or complete idling of certain supply chains and manufacturing activity; and (v) strain and uncertainty for businesses and households, with a particularly acute impact on industries dependent on travel and public accessibility, such as transportation, hospitality, tourism, retail, sports, and entertainment.
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Description of Principal Investment Risks
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Description of Principal Investment Risks
— (Continued)
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The ultimate impact of
COVID-19
(and of the resulting precipitous decline and disruption in economic and commercial activity across many of the world’s economies) on global economic conditions, and on the operations, financial condition, and performance of any particular market, industry or business, is impossible to predict. However, ongoing and potential additional materially adverse effects, including further global, regional and local economic downturns (including recessions) of indeterminate duration and severity, are possible. The extent of
COVID-19’s
impact will depend on many factors, including the ultimate duration and scope of the public health emergency and the restrictive countermeasures being undertaken, as well as the effectiveness of other governmental, legislative, and financial and monetary policy interventions designed to mitigate the crisis and address its negative externalities, all of which are evolving rapidly and may have unpredictable results. Even if
COVID-19’s
spread is substantially contained, it will be difficult to assess what the longer-term impacts of an extended period of unprecedented economic dislocation and disruption will be on future economic developments, the health of certain markets, industries and businesses, and commercial and consumer behavior.
The ongoing
COVID-19
crisis and any other public health emergency could have a significant adverse impact on the Funds’ investments and result in significant investment losses. The extent of the impact on business operations and performance of market participants and the companies in which the Funds invest depends and will continue to depend on many factors, virtually all of which are highly uncertain and unpredictable, and this impact may include or lead to: (i) significant reductions in revenue and growth; (ii) unexpected operational losses and liabilities; (iii) impairments to credit quality; and (iv) reductions in the availability of capital. These same factors may limit the portfolio managers’ ability to source, research, and execute new investments, as well as to sell investments in the future, and governmental mitigation actions may constrain or alter existing financial, legal, and regulatory frameworks in ways that are adverse to the investment strategies the Funds intend to pursue, all of which could materially diminish the Funds’ ability to fulfill investment objectives. These factors may also impair the ability of the companies in which the Funds invest or their counterparties to perform their respective obligations under debt instruments and other commercial agreements (including their ability to pay obligations as they become due), potentially leading to defaults with uncertain consequences, including the potential for defaults by borrowers under debt instruments held in a Fund’s portfolio. In addition, an extended period of remote working by the employees of the companies in which the Funds invest subjects those companies to additional operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to cyberattacks that seek to exploit the
COVID-19
pandemic, and the operational damage of any such events could potentially disrupt the portfolio managers’ business and reduce the value of the Funds’ investments. The operations of securities markets may also be significantly impacted, or even temporarily or permanently halted, as a result of government quarantine measures, restrictions on travel and movement, remote-working requirements, and other factors related to a public health emergency, including the potential adverse impact on the health of any such entity’s personnel. These measures may also hinder normal business operations by impairing usual communication channels and methods, hampering the performance of administrative functions such as processing payments and invoices, and diminishing the ability to make accurate and timely projections of financial performance. Because the portfolio managers’ ability to execute transactions on behalf of the Funds is dependent upon the timely performance of multiple third parties, any interruptions in the business operations of those third parties could impair the portfolio managers’ ability to effectively implement a Fund’s investment strategies.
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To the extent that a Fund emphasizes, from time to time, investments in a particular sector, the Fund will be subject to a greater degree to the risks particular to that sector. Market conditions, interest rates, and economic, regulatory, or financial developments could significantly affect a single sector. By focusing its investments in a particular sector, a Fund may face more risks than if it were diversified broadly over numerous sectors.
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Litman Gregory Funds Trust
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Each Fund may sell securities short. A Fund may suffer a loss if it sells a security short and the value of the security does not go down as expected. The risk of loss is theoretically unlimited if the value of the security sold short continues to increase. Short sales expose the Fund to the risk that it may be compelled to buy the security sold short (also known as “covering” the short position) at a time when the security has appreciated in value, thus resulting in a loss to the Fund. The Fund’s investment performance may also suffer if it is required to close out a short position earlier than it had intended. In addition, the Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing. These expenses may negatively impact the performance of the Fund. To meet current margin requirements, a Fund is required to deposit with the broker additional cash or securities so that the total deposit with the broker is maintained daily at 150% of the current market value of the securities sold short.
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Securities of companies with smaller market capitalizations are generally more volatile and less liquid than the securities of large-capitalization companies. Small- and
mid-sized
companies may be more reliant on a few products, services or key personnel, which can make it riskier than investing in larger companies with more diverse product lines and structured management. Smaller companies may have no or relatively short operating histories or may be newer public companies. Some of these companies have aggressive capital structures, including high debt levels, or are involved in rapidly growing or changing industries and/or new technologies, which pose additional risks.
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Investments in special situations (undervalued equities, merger arbitrage situations, distressed companies, etc.) may involve greater risks when compared to other investments a Fund may make due to a variety of factors. For example, mergers, acquisitions, reorganizations, liquidations or recapitalizations may fail or not be completed on the terms originally contemplated, and expected developments may not occur in a timely manner, if at all.
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Certain of the Funds, through the implementation of their respective investment strategies, may from time to time invest a significant portion of their assets in the technology sector. The technology sector is a very volatile segment of the market. The nature of technology is that it is rapidly changing. Therefore, products or services that may initially look promising may subsequently fail or become obsolete. In addition, many technology companies are younger, smaller and unseasoned companies which may not have established products, an experienced management team, or earnings history.
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TBAs and Dollar Rolls Risk
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TBA and dollar roll transactions present special risks to the Alternative Strategies Fund. Although the particular TBA securities must meet industry-accepted “good delivery” standards, there can be no assurance that a security purchased on a forward commitment basis will ultimately be issued or delivered by the counterparty. During the settlement period, the Fund will still bear the risk of any decline in the value of the security to be delivered. TBAs and other forward settling securities involve leverage because they can provide investment exposure in an amount exceeding the fund’s initial investment. Leverage can magnify investment risks and cause losses to be realized more quickly. While dollar roll transactions involve the simultaneous purchase and sale of substantially similar TBA securities with different settlement dates, these transactions do not require the purchase and sale of identical securities so the characteristics of the security delivered to the Fund may be less favorable than the security delivered to the dealer.
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Unfavorable Tax Treatment Risk
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Various types of investments in which the Alternative Strategies Fund and the High Income Alternatives Fund may invest, including derivatives, mortgage related securities, and REITs, may cause the Fund’s returns to be in the form of net investment income or short-term capital gains, some of which may be distributed to shareholders and taxed at ordinary income tax rates. Therefore, shareholders may have a greater need to pay regular taxes than compared to other investment strategies that hold investments longer. Due to this investment strategy, it may be preferable for certain shareholders to invest in the Fund through
pre-tax
or
tax-deferred
accounts as compared to investment through currently taxable accounts. Potential shareholders are encouraged to consult their tax advisors in this regard.
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Value stocks are stocks of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the manager, undervalued. The value of a security believed by the manager to be undervalued may never reach what is believed to be its full (intrinsic) value, or such security’s value may decrease.
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Description of Principal Investment Risks
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Fund Management and Investment Styles
The Funds are managed by Litman Gregory Fund Advisors, LLC (“Litman Gregory”), 1676 N. California Blvd., Suite 500, Walnut Creek, California 94596. Litman Gregory has overall responsibility for assets under management, recommends the selection of managers as
sub-advisors
of the Funds (each, a “manager” or
“sub-advisor”)
to the Board of Trustees (the “Board”) of the Litman Gregory Funds Trust (the “Trust”), evaluates the performance of the managers, monitors changes at the managers’ organizations that may impact their abilities to deliver superior future performance, determines when to rebalance the managers’ assets and the amount of cash equivalents (if any) that may be held in addition to cash in each of the managers’
sub-portfolios,
coordinates with the managers with respect to diversification and tax issues and oversees the operational aspects of the Funds.
Jeremy DeGroot is Chairman of the Board of Trustees and President of the Trust, the Portfolio Manager of the Alternative Strategies Fund, and a
Co-Portfolio
Manager of the Equity Fund, High Income Alternatives Fund, International Fund, SBH Focused Small Value Fund and Oldfield International Value Fund. He is also a Principal and Member of Litman Gregory Asset Management, LLC (“LGAM”), a research-oriented money management firm that wholly owns and provides research to Litman Gregory, and serves as its Chief Investment Officer. Prior to joining LGAM in 1999, DeGroot was a Manager in KPMG Peat Marwick’s Economic Consulting Services practice in 1998. From 1989 to 1997, he was a Senior Economist with the Law & Economics Consulting Group, Inc., providing economics and financial analysis to Fortune 500 clients. He has a Master’s degree in Economics from the University of California Berkeley.
Jack Chee is an Assistant Secretary of the Trust and the
Co-Portfolio
Manager of the Equity Fund, the High Income Alternatives Fund and the SBH Focused Small Value Fund. He is also a Principal and Member of LGAM and serves as a Senior Research Analyst at the Advisor. Prior to joining LGAM in 2000, Chee was a Mutual Fund Analyst with Value Line Mutual Fund Survey. He has a BS degree in Mechanical Engineering from Drexel University.
Rajat Jain is an Assistant Secretary of the Trust and the
Co-Portfolio
Manager of the Equity Fund, the International Fund and the Oldfield International Value Fund. He is also a Principal and Member of LGAM and serves as a Senior Research Analyst at the Advisor. Prior to joining LGAM in 2003, Jain was a Vice President with Montgomery Asset Management and was an Associate Director with BARRA Rogers Casey. He has a BS degree in Physics from St. Stephens College and an MBA degree from University of South Carolina.
Jason Steuerwalt is an Assistant Secretary of the Trust and a Senior Research Analyst at the Advisor and the
Co-Portfolio
Manager of the Alternative Strategies Fund and the High Income Alternatives Fund. He is also a Principal and Member of LGAM. Prior to joining LGAM in 2013, Steuerwalt was a Vice President with Hall Capital Partners, focusing on absolute return hedge funds and opportunistic/private credit strategies.
DeGroot, Chee, Jain and Steuerwalt are the individuals at Litman Gregory primarily responsible for monitoring the
activities of the portfolio managers at the
sub-advisors
and for overseeing all aspects of Litman Gregory’s responsibilities with respect to the Funds.
Litman Gregory believes that high levels of assets under management can be detrimental to certain investment strategies. Litman Gregory also believes that relatively low levels of assets under management can provide flexibility to skilled investment managers that under certain circumstances may contribute positively to returns. It is Litman Gregory’s belief that asset levels are particularly relevant to the Funds given their concentrated investment strategy. Because of this belief, each of the Funds may be closed to new shareholders, with certain exceptions approved by the Board, at asset levels that Litman Gregory and the
sub-advisors
believe to be optimal in allowing for a high degree of flexibility on a
basis. Alternatively, additional
sub-advisors
may be added to the Funds to expand capacity in order to avoid closing to new shareholders or to avoid “hard closing” to existing shareholders. Litman Gregory will add a new
sub-advisor
only if, in its opinion, the
sub-advisor
has the exceptional stock-picking skill and other traits Litman Gregory requires of the existing managers.
Sub-Advisor
Evaluation and Selection
Litman Gregory is responsible for hiring and removing
sub-advisors.
Before hiring a
sub-advisor,
Litman Gregory performs extensive due diligence. This includes quantitative and qualitative analysis, including (but not limited to) an evaluation of: the investment process, the consistency of its execution and discipline; individual holdings; strategies employed, past mistakes, risk controls, team depth and quality; operations and compliance; and business focus and vision. Litman Gregory’s evaluation process includes review of literature and documents, quantitative historical performance evaluation, extensive discussions with members of the investment team and firm management and background checks through industry contacts. Each of the
sub-advisor’s
management fee is also an important consideration. It is Litman Gregory’s objective to hire
sub-advisors
who it believes are skilled and can deliver strong market cycle returns when taking risk into account. Litman Gregory defines a “market cycle” as the movement from a period of increasing prices and strong performance, or bull market, through a period of weak performance and falling prices, or bear market, and back again to new strength. A full market cycle is usually three to five years, but can vary considerably. The top of a cycle is called a peak and the bottom a trough. Litman Gregory generally assesses the long-term growth of an investment by considering the increase in the value of the investment over a period greater than five years. For the Alternative Strategies Fund and the High Income Alternatives Fund, Litman Gregory will favor managers who it believes focus on markets or investment strategies that are inherently low risk on an absolute basis or relative to their return
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Litman Gregory Funds Trust
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potential; and managers who have a clearly risk-sensitive mindset in executing their portfolio strategy. Generally, Litman Gregory prefers managers who it believes will be able to add value through security selection and from tactical allocations to securities, markets or strategies at times when it believes such allocations are compelling from a risk/return perspective. Litman Gregory is responsible for the general overall supervision of the
sub-advisors
along with allocating the portfolio’s assets for their investment decisions as well as rebalancing the portfolio as necessary from time to time.
More on Multi-Style Management:
The investment methods used by the managers in selecting securities for the Funds vary. The segment of each Fund’s portfolio managed by a manager will, under normal circumstances, differ from the segments managed by the other managers with respect to portfolio composition, turnover, issuer capitalization and issuer financial condition. Because security selections are made independently by each manager, it is possible that a security held by one portfolio segment may also be held by other portfolio segments of the Funds or that several managers may simultaneously favor the same industry segment. Litman Gregory monitors the overall portfolio on an ongoing basis to ensure that such overlaps do not create an unintended industry concentration or result in lack of diversification.
Litman Gregory is responsible for establishing the target allocation of Fund assets to each manager and may adjust the target allocations at its discretion. Market performance may result in allocation drift among the managers of a Fund. Litman Gregory is responsible for periodically rebalancing the portfolios, the timing and degree of which will be determined by Litman Gregory. Each manager independently selects the brokers and dealers to execute transactions for the segment of a Fund being managed by that manager. Litman Gregory may at its discretion allow a manager to hold fewer or more than the specified number of holdings in its portfolio. The number of holdings may be the result of a manager’s investment decision, an involuntary
spin-off
by one of the companies held in the portfolio, the payment of a stock dividend or split in a separate class of stock, or a timing mismatch when buying or selling a portfolio security while selling or establishing a position in an existing security.
At times, allocation adjustments in the Alternative Strategies Fund may be considered tactical with over- or under-allocations to certain managers based on Litman Gregory’s assessment of the risk and return potential of each manager’s strategy at that point in time. Manager allocations are also influenced by each manager’s historical returns and volatility, which are assessed by examining the performance of strategies run by the managers in
their private (hedge) funds or other accounts that Litman Gregory believes to be similar to those that will be used for the Alternative Strategies Fund. Litman Gregory has analyzed the individual and combined performance of the Alternative Strategies Fund’s managers in a variety of investment environments.
In the event a manager ceases to manage a segment of a Fund’s portfolio, Litman Gregory will select a replacement manager or allocate the assets among the remaining managers. The securities that were held in the departing manager’s segment of the Fund’s portfolio may be allocated to and retained by another manager of the Fund or will be liquidated in an orderly manner, taking into account various factors, which may include but are not limited to the market for the security and the potential tax consequences. Litman Gregory may also add additional managers in order to increase Fund diversification or capacity.
The SAI provides additional information about the compensation of each portfolio manager at each
sub-advisor,
other accounts managed by each portfolio manager, and each such portfolio manager’s ownership of securities of the Funds.
Temporary Defensive Positions:
Under unusual market conditions or for temporary defensive purposes, a substantial part of each Fund’s total assets may be invested in cash or short-term, high-quality debt securities. To the extent that a Fund assumes a temporary defensive position, it may not achieve its investment objective during that time. Defensive positions may be initiated by the individual portfolio managers or by Litman Gregory.
Multi-Manager Exemptive Order:
The Trust and Litman Gregory have obtained an exemptive order from the SEC that permits Litman Gregory, subject to certain conditions, to hire, terminate and replace managers with the approval of the Board only and without shareholder approval. Within 60 days of the hiring of any new manager or the implementation of any proposed material change in a
sub-advisory
agreement with an existing manager, shareholders will be furnished information about the new manager or
sub-advisory
agreement that would be included in a proxy statement. The order also permits a Fund to disclose
sub-advisory
fees only in the aggregate in its registration statement. Pursuant to the order, shareholder approval is required before Litman Gregory enters into any
sub-advisory
agreement with a manager that is affiliated with the Funds or Litman Gregory.
Portfolio Holdings Information
A description of the Funds’ policies and procedures regarding disclosure of the Funds’ portfolio holdings can be found in the SAI, which can be obtained free of charge by contacting the Funds’ transfer agent (the “Transfer Agent”) at
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Fund Management and Investment Styles
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Fund Management and Investment Styles
— (Continued)
Each Fund pays a monthly investment advisory fee to Litman Gregory based on that Fund’s average daily net assets. The table below illustrates the base fee rates payable to Litman Gregory and the reduced fee rates payable on assets in excess of certain levels (breakpoints).
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(as a percentage of net assets)
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Alternative Strategies Fund
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Between $2 and $3 billion
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Between $3 and $4 billion
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High Income Alternatives Fund
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Between $1 and $2 billion
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Between $2 and $3 billion
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Between $3 and $4 billion
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SBH Focused Small Value Fund
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Oldfield International Value Fund
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Litman Gregory, not the Funds, is responsible for payment of the
sub-advisory
fees to the managers, each of whom is compensated monthly on the basis of the assets committed to its individual discretion. As of March 31, 2021, based on the assets of each Fund and the asset allocation targets, Litman Gregory pays fees to the
sub-advisors
as follows, which may change in the future because assets and allocations will fluctuate:
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Aggregate Annual Fee Rates
Litman Gregory Pays to Sub-Advisors
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Alternative Strategies Fund
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High Income Alternatives Fund
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SBH Focused Small Value Fund
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Oldfield International Value Fund
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Through April 30, 2022, pursuant to a Restated Contractual Advisory Fee Waiver Agreement, most recently amended effective as of October 30, 2020 (the “Fee Waiver Agreement”), Litman Gregory has agreed to waive a portion of its advisory fees for each Fund as follows: for the Equity Fund, Litman Gregory has agreed to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the Equity Fund’s daily net assets retained by Litman Gregory is 0.40% on the first $750 million of the Equity Fund’s assets and 0.30% for assets over $750 million; for the International Fund, Litman Gregory has agreed to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a
percentage of the International Fund’s daily net assets retained by Litman Gregory is 0.40% on the first $1 billion of the International Fund’s assets and 0.30% for assets over $1 billion; for the Alternative Strategies Fund, Litman Gregory has agreed to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the Alternative Strategies Fund’s daily net assets retained by Litman Gregory is 0.50% on the first $2 billion of the Alternative Strategies Fund’s assets, 0.40% of the next $1 billion of the Alternative Strategies Fund’s assets, 0.35% of the next $1 billion of the Alternative Strategies Fund’s assets and 0.30% on assets over $4 billion; for the High Income Alternatives Fund, Litman Gregory has agreed to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the High Income Alternatives Fund’s daily net assets retained by Litman Gregory is 0.40% on the first $1 billion of assets, 0.375% on the next $1 billion of assets, 0.35% on the next $1 billion of assets, 0.325% on the next $1 billion of assets and 0.30% on assets in excess of $4 billion; for the SBH Focused Value Fund, Litman Gregory has agreed to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the SBH Focused Value Fund’s daily net assets retained by Litman Gregory is 0.35%; and for the Oldfield International Value Fund, Litman Gregory has agreed to waive a portion of its advisory fees so that after paying all of the
sub-advisory
fees, the net advisory fee as a percentage of the Oldfield International Value Fund’s daily net assets retained by Litman Gregory is 0.35%. This agreement may be terminated at any time by the Board of Trustees of the Litman Gregory Funds Trust (the “Trust”) upon sixty (60) days’ written notice to Litman Gregory, and Litman Gregory may decline to renew this agreement at its expiration on April 30, 2022 by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Litman Gregory has waived its right to receive reimbursement of the portion of its advisory fees waived pursuant to the Fee Waiver Agreement.
Pursuant to an Operating Expenses Limitation Agreement (the “Expenses Limitation Agreement”), Litman Gregory has agreed to limit the operating expenses of the High Income Alternatives Fund, through April 30, 2022 (unless otherwise sooner terminated), to an annual rate of 0.98%. Any fee waiver or expense reimbursement made by Litman Gregory pursuant to the Expenses Limitation Agreement is subject to the repayment by the High Income Alternatives Fund only within three (3) years, provided that the repayment does not cause the Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board. Operating expenses referred to in this and the following paragraph include management fees payable to Litman Gregory but exclude any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, borrowing costs (including commitment fees), dividend expenses, acquired fund fees and expenses and extraordinary expenses such as but not limited to litigation costs.
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Litman Gregory Funds Trust
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Pursuant to an Operating Expenses Limitation Agreement (the “Expenses Limitation Agreement”), Litman Gregory has agreed to limit the operating expenses of the SBH Focused Small Value Fund, through April 30, 2022 (unless otherwise sooner terminated), to an annual rate of 1.15% (the “SBH Expense Cap”). Any fee waiver or expense reimbursement made by Litman Gregory pursuant to the Expenses Limitation Agreement is subject to the repayment by the SBH Focused Small Value Fund only within three (3) years, provided that the repayment does not cause the Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board. Operating expenses referred to in this and the following paragraph include management fees payable to Litman Gregory but exclude any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, borrowing costs (including commitment fees), dividend expenses, acquired fund fees and expenses and extraordinary expenses such as but not limited to litigation costs.
The SBH Focused Small Value Fund’s
Sub-Advisor
has agreed to participate in the limitation of SBH Focused Small Value Fund operating expenses by waiving a portion of its
sub-advisory
fees until the second anniversary of the effective date of the Investment
Sub-Advisory
Fee Waiver Agreement. Further, the
Sub-Advisor
will have no obligation to waive fees in any month in which (i) the average net assets of the SBH Focused Small Value Fund for that month are equal to or greater than $250 million or (ii) the Fund’s actual annualized operating expenses do not exceed the annual SBH Expense Cap.
Pursuant to an Operating Expenses Limitation Agreement (the “Expenses Limitation Agreement”), Litman Gregory has agreed to limit the operating expenses of the Oldfield International Value Fund, through April 30, 2022 (unless otherwise sooner terminated), to an annual rate of 0.94% (the “Oldfield Expense Cap”). Any fee waiver or expense reimbursement made by Litman Gregory pursuant to the Expenses Limitation Agreement is subject to the repayment by the Oldfield International Value Fund only within three (3) years, provided that the repayment does not cause the Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board. Operating expenses referred to in this and the following paragraph include management fees payable to Litman Gregory but exclude any taxes, interest, brokerage commissions,
expenses incurred in connection with any merger or reorganization, borrowing costs (including commitment fees), dividend expenses, acquired fund fees and expenses and extraordinary expenses such as but not limited to litigation costs.
The Oldfield International Value Fund’s
Sub-Advisor
has agreed to participate in the limitation of Oldfield International Value Fund operating expenses by waiving a portion of its
sub-advisory
fees until the second anniversary of the effective date of the Investment
Sub-Advisory
Fee Waiver Agreement. Further, the
Sub-Advisor
will have no obligation to waive fees in any month in which (i) the average net assets of the Oldfield International Value Fund for that month are equal to or greater than $250 million or (ii) the Fund’s actual annualized operating expenses do not exceed the annual Oldfield Expense Cap.
In 2020, the advisory fees paid and net fees retained by Litman Gregory with respect to the Funds, after fee waivers, expense reimbursements and breakpoint adjustments (collectively, “Fee Adjustments”), were as follows:
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Sub-Advisory
Fees Paid by
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2020 Net Advisory Fees
Retained by
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Alternative Strategies Fund
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High Income Alternatives Fund
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SBH Focused Small Value Fund
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Oldfield International Value Fund
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A discussion regarding the Board’s basis for approving the Funds’ investment advisory agreements with Litman Gregory and each
sub-advisor
is included in the Funds’ Annual Report to Shareholders for the fiscal year ended December 31, 2020.
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Fund Management and Investment Styles
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PartnerSelect Equity Fund –
Sub-Advisors
The Equity Fund’s five
sub-advisors
(six portfolio segments) emphasize different stock-picking styles and invest in stocks spanning a range of market capitalizations. Litman Gregory believes that during any given year certain stock-picking styles will generate higher returns than comparable market indexes, while others will lag. By including a variety of stock-picking styles in this single mutual fund, Litman Gregory believes that the variability and volatility of returns can be lessened.
Litman Gregory’s strategy is to allocate the portfolio’s assets among the managers who, based on Litman Gregory’s research, are judged to be among the best in their respective style groups. There is no minimum or maximum allocation of the Fund’s portfolio assets to each portfolio segment. The portfolio managers manage their individual portfolio segments by building a focused portfolio representing their highest-confidence stocks. Under normal market conditions, the Equity Fund invests at least 80% of the Equity Fund’s net assets, plus the amount of any borrowings for investment purposes, in equity securities. This investment
policy may be changed by the Board without shareholder approval, but shareholders would be given at least 60 days’ notice if any change occurs. Under normal conditions, each portfolio segment typically includes a minimum of 5 and a maximum of 15 securities. A portfolio segment may occasionally hold more than 15 securities. Though the total number of securities the Equity Fund may hold at any point in time will vary, it is generally expected that the Equity Fund will hold between 60 and 100 securities. The target allocation of assets to the portfolio segments was designed with the specific objective of maintaining significant exposure to stocks of large- and
mid-sized
companies with a greater emphasis on U.S. domiciled companies.
The following table provides a description of the Equity Fund’s five
sub-advisors
(six portfolio segments) and their target levels of assets. Asset levels will fluctuate and it is at the discretion of Litman Gregory to
re-balance
the asset allocations. A detailed discussion of the management structure of the Equity Fund follows the table.
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PORTFOLIO MANAGER(S)/SUB-ADVISOR
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MARKET CAPITALIZATION OF
COMPANIES IN PORTFOLIO
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Davis Selected Advisers, L.P.
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15%
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Mostly large companies
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Blend
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Fiduciary Management, Inc.
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15%
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All sizes
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Blend
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Harris Associates L.P.
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15%
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All sizes, but mostly large- and
mid-sized
companies
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Value
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Harris Associates L.P.
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15%
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Mostly large and
mid-sized
companies
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Value
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Nuance Investments, LLC
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10%
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All sizes
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Value
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Sands Capital Management, LLC
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25%
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All sizes, but mostly large- and
mid-size
companies
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Growth
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Litman Gregory Funds Trust
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PartnerSelect Equity Fund Portfolio Managers
Davis Selected Advisers, L.P.
2949 East Elvira Road, Suite 101
Tucson, AZ 85756
Christopher C. Davis and Danton Goei are the portfolio managers for the segment of the Equity Fund’s assets managed by Davis Selected Advisers, L.P. (“Davis Advisors”). Davis has served as a Portfolio Manager of Davis New York Venture Fund since October 1995, and also manages other equity funds advised by Davis Advisors. Davis served as Assistant Portfolio Manager and Research Analyst working with Shelby M.C. Davis from September 1989 through September 1995
Goei has served as a Portfolio Manager of Davis New York Venture Fund since January 2014 and also manages other equity funds advised by Davis Advisors. Goei started with Davis Advisors as a Research Analyst in 1998.
Davis Advisors has been a
sub-advisor
to the Equity Fund since 1996.
Approximately 15% of the Equity Fund’s assets are managed by Davis Advisors. Davis Advisors manages equity funds using the “Davis Investment Discipline.” Davis Advisors conducts extensive research to try to identify businesses that possess characteristics that Davis Advisors believes foster the creation of long-term value, such as proven management, a durable franchise and business model, and sustainable competitive advantages. Davis Advisors aims to invest in such businesses when they are trading at discounts to their intrinsic worth. Davis Advisors emphasizes individual stock selection and believes that the ability to evaluate management is critical. Davis Advisors routinely visits managers at their places of business in order to gain insight into the relative value of different businesses. Such research, however rigorous, involves predictions and forecasts that are inherently uncertain.
Over the years, Davis Advisors has developed a list of characteristics that it believes help companies to create shareholder value over the long term and manage risk. While few companies possess all of these characteristics at any given time, Davis Advisors searches for companies that demonstrate a majority or an appropriate mix of these characteristics:
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Non-Obsolescent
products
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Dominant or growing market share
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Global presence and powerful brands
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Significant alignment of interests in business
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Intelligent allocation of capital
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High returns on invested capital
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After determining which companies Davis Advisors believes an account should own, it then turns its analysis to determining the intrinsic value of those companies’ equity securities. Davis Advisors seeks equity securities that can be purchased at attractive valuations relative to their intrinsic value. Davis Advisors’ goal is to invest in companies for the long term. Davis Advisors considers selling a company’s equity securities if the securities’ market price exceeds Davis Advisors’ estimates of intrinsic value, or if the ratio of the risks and rewards of continuing to own the company’s equity securities is no longer attractive.
Fiduciary Management, Inc.
100 E. Wisconsin Avenue
Milwaukee, WI 53202
Patrick J. English and Jonathan T. Bloom are
co-portfolio
managers for the segment of the Equity Fund’s assets managed by Fiduciary Management, Inc. (“Fiduciary” or “FMI”). English joined Fiduciary in 1986. He is the Chairman, Chief Executive Officer and Chief Investment Officer and a partner of Fiduciary and is a member of the Portfolio Management Committee. English and Bloom serve as the
co-heads
of equity research, and they work with Fiduciary’s analysts in vetting new research ideas. Prior to joining Fiduciary, English was a research analyst with Dodge & Cox from 1985 to 1986. Bloom joined Fiduciary in 2010. He is the Director of Research and a partner of Fiduciary and is a member of Fiduciary’s Portfolio Management Committee. Prior to joining Fiduciary, Bloom was in the Applied Value Investing Program at Columbia Business School from 2008 to 2009. Fiduciary has been a
sub-advisor
to the Equity Fund since 2013.
Approximately 15% of the Equity Fund’s assets are managed by Fiduciary. Fiduciary seeks to buy companies that have durable franchises (
, franchises that can survive difficult times) and whose common stock is trading below FMI’s estimated intrinsic value of the company. FMI’s investment process has always focused on evaluating three attributes of a company: the quality of the business model, the valuation, and the quality of management.
Assessing the quality of a business is a primary research focus. Fiduciary defines a good business model as one that has a defensible niche and that can survive the ups and downs of a business cycle. In a defensible niche, FMI looks for companies with a high degree of recurring revenue, a well-established customer base, and/or sustainable competitive advantage. Typically, businesses that meet these characteristics are well-established with modest growth profiles. The FMI investment team will review historical SEC filings and shareholder reports to understand a company’s business model, and, where necessary, adjust a company’s investment capital base for illegitimate write-offs (due to bad acquisitions, for example) to get a reliable picture of a company’s historical return on invested capital (“ROIC”). Then the team will conduct a deeper analysis of the drivers of a company’s ROIC such as revenue growth, margins, capital expenditure etc., going back at least 20 quarters. In addition, they will meet with and/or have conference calls with management of the company, as well as its suppliers, competitors, and customers.
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PartnerSelect Equity Fund –
Sub-Advisors
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PartnerSelect Equity Fund –
Sub-Advisors
— (Continued)
FMI’s work on a company’s business model and quality helps identify which valuation metrics (such as Price/Earnings (“P/E”), Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), Price/Sales (P/S), etc.) should be utilized for estimating a company’s intrinsic value. This work is also valuable in assessing whether or not the business model has changed significantly over time, making historical comparisons irrelevant. If that is the case, FMI will analyze the trading of a stock based on various valuation metrics over a
10-
to
20-year
time period, relative to the broad market and its peers, across different economic cycles, and with different underlying company fundamentals such as margins,
top-line
growth, competitive positioning, capital intensity of the business, etc.
This historical valuation analysis may be supplemented by other valuation techniques, such as
analysis (
, valuing different pieces of a business separately) and valuation based on private- and public-market transaction data (for example, valuation multiples used in an acquisition), which may assume greater importance when historical comparisons are less relevant, such as where business models have changed or management strategy has shifted. FMI is not looking for a specific discount to its estimate of intrinsic value, but if its valuation analysis suggests that a stock is undervalued, in absolute terms and/or in relation to its future profitability (ROIC in this case), and downside risks are limited, then the stock is a strong candidate for purchase. In general, FMI does not aim to be precise (just approximately correct) with its valuation analysis and will come up with price-target ranges over three to five years. These price targets are generally within a narrow range, and they guide FMI on when to trim or sell a stock.
FMI also focuses on areas that company management can control. Therefore, FMI will look at the backgrounds of management teams. This may involve: assessing their experience and track record; reviewing proxy statements to assess whether management compensation and incentives are in line with shareholder interests; evaluating past management decisions to assess whether or not those decisions enhanced shareholder value; and discussing with management their strategy and execution plan to assess the likelihood of meeting their stated goals and objectives.
111 S. Wacker Drive
Suite 4600
Chicago, IL 60606
Clyde S. McGregor is the portfolio manager for one of the segments of the Equity Fund’s assets managed by Harris Associates L.P. (“Harris”). McGregor is a Vice President and portfolio manager at Harris and has managed the Oakmark Equity and Income Fund since its inception in 1995 and the Oakmark Global Fund since 2003. He earned a B.A. degree from Oberlin College and an M.B.A. from the University of Wisconsin-Madison. McGregor joined Harris in 1981 as an analyst with broad industry coverage across the market capitalization spectrum. He has been in the investment business since 1983.
McGregor became a portfolio manager at Harris in 1986. Harris has been a
sub-advisor
to the Equity Fund since 2008.
Approximately 15% of the Equity Fund’s assets are managed by McGregor. McGregor and Harris’ portfolio management team employ Harris’ value investment philosophy and process. This value investment philosophy is based upon the belief that, over time, a company’s stock price converges with Harris’ estimate of the company’s intrinsic value. By “intrinsic value,” Harris means its estimate of the price a knowledgeable buyer would pay to acquire the entire business. In making its investment decisions, Harris uses a
“bottom-up”
approach focused on individual companies, rather than focusing on specific economic factors or specific industries.
The chief consideration in the selection of stocks is the size of the discount of a company’s current stock price compared to Harris’ estimate of the company’s intrinsic value. In addition, Harris looks for companies with the following characteristics, although not all companies will have all of these attributes: free cash flows and intelligent investment of excess cash, earnings that are growing and are reasonably predictable, and a high level of management ownership in the company. Once Harris identifies a stock that it believes is selling at a significant discount compared to Harris’ estimate of the company’s intrinsic value and that the company may have one or more of the additional qualities mentioned above, Harris may consider buying that stock for a strategy. Harris usually sells a stock when the price approaches its estimated intrinsic value. This means Harris sets “buy” and “sell” targets for each stock held by a portfolio. Harris monitors each holding and adjusts those price targets as warranted to reflect changes in a company’s fundamentals. Harris attempts to manage some of the risks of investing in common stocks by purchasing stocks whose prices it considers low relative to Harris’ estimate of the company’s intrinsic value. In addition, Harris seeks companies with solid finances and proven records and continuously monitors each portfolio company.
111 S. Wacker Drive
Suite 4600
Chicago, IL 60606
William C. Nygren is the portfolio manager for one of the segments of the Equity Fund’s assets managed by Harris. Nygren is a Vice President, Chief Investment Officer – U.S. Equities, portfolio manager and U.S. investment analyst at Harris and has managed the Oakmark Select Fund since its inception in 1996, the Oakmark Fund since April 2000 and the Oakmark Global Select Fund since its inception in 2006. He earned a B.S. degree in Accounting from the University of Minnesota and an M.S. degree in Finance from the University of Wisconsin-Madison. He has been in the investment business since 1981. Nygren joined Harris in 1983 as an Investment Analyst and later served as Harris’ Director of Research from 1990 through 1998. Harris has been a
sub-advisor
to the Equity Fund since 2008.
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Litman Gregory Funds Trust
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Approximately 15% of the Equity Fund’s assets are managed by Nygren. Nygren and Harris’ portfolio management team employ Harris’ value investment philosophy and process. This value investment philosophy is based upon the belief that, over time, a company’s stock price converges with Harris’ estimate of the company’s intrinsic value. By “intrinsic value,” Harris means its estimate of the price a knowledgeable buyer would pay to acquire the entire business. In making its investment decisions, Harris uses a
“bottom-up”
approach focused on individual companies, rather than focusing on specific economic factors or specific industries.
The chief consideration in the selection of stocks is the size of the discount of a company’s current stock price compared to Harris’ estimate of the company’s intrinsic value. In addition, Harris looks for companies with the following characteristics, although not all companies will have all of these attributes: free cash flows and intelligent investment of excess cash, earnings that are growing and are reasonably predictable, and a high level of management ownership in the company. Once Harris identifies a stock that it believes is selling at a significant discount compared to Harris’ estimate of the company’s intrinsic value and that the company may have one or more of the additional qualities mentioned above, Harris may consider buying that stock for a strategy. Harris usually sells a stock when the price approaches its estimated intrinsic value. This means Harris sets “buy” and “sell” targets for each stock held by a portfolio. Harris monitors each holding and adjusts those price targets as warranted to reflect changes in a company’s fundamentals. Harris attempts to manage some of the risks of investing in common stocks by purchasing stocks whose prices it considers low relative to Harris’ estimate of the company’s intrinsic value. In addition, Harris seeks companies with solid finances and proven records and continuously monitors each portfolio company.
Nuance Investments, LLC
4900 Main Street, Suite 220
Kansas City, MO 64112
Scott Moore is the lead portfolio manager for the segment of the Equity Fund’s assets managed by Nuance Investments, LLC (“Nuance”). Moore is the President and
Co-Chief
Investment officer of Nuance. He is also the Lead Portfolio Manager for the Nuance Concentrated Value and Mid Cap Value products within Nuance, and
co-manager
of the Nuance Concentrated Value Long-Short Fund. Moore has more than 30 years of value investment experience.
For the decade before
co-founding
Nuance, Moore managed more than $10 billion in institutional, intermediary and mutual fund assets for American Century Investments (“ACI”). Prior to becoming a Portfolio Manager at ACI, he spent three years as an Investment Analyst at ACI, specializing in the telecommunications, utility and industrial sectors. He also worked as a Fixed Income Investment Analyst at ACI and as an Investment Analyst at Boatmen’s Trust Company in St. Louis, Missouri.
Moore holds a BS degree in finance from Southern Illinois University, and an MBA with an emphasis in finance from the University of Missouri.
Chad Baumler, CFA is a Vice President and
Co-Chief
Investment Officer and has served as Portfolio Manager at Nuance Investments since June 2014. He is a
co-manager
for the Nuance Concentrated Value and Mid Cap Value products within Nuance, and the Lead Manager of the Nuance Concentrated Value Long-Short Fund. He has over 14 years of investment analyst experience and 9 years of portfolio management experience using a classic value approach.
Before joining Nuance, Baumler served as Portfolio Manager for American Century Investments, where he
co-managed
American Century Value fund and American Century Market Neutral Value fund. Prior to becoming a Portfolio Manager at ACI, he spent six years as an Investment Analyst specializing in the energy and finance sectors. Baumler also has experience working in the commercial real estate industry at CB Richard Ellis, Inc. in Kansas City, Missouri.
Baumler graduated from the University of Northern Iowa with a BA in finance. He has an MBA with a concentration in finance from the University of Texas, McCombs School of Business.
Approximately 10% of the Equity Fund’s assets are managed by Nuance. Nuance’s investment philosophy was formed on the belief that the ability to outperform the broad stock market is predicated on a consistent and disciplined value investing approach. The Nuance investment team’s sole focus is generating investment returns for clients by diligently reviewing one company at a time on its own investment merits. Through long-term study of each company and thorough analysis of financial statements, management strategy and competitive position, the Nuance investment team becomes familiar with each company bought and sold in the portfolios over time. This familiarity allows for consistent and prompt execution with the sole focus being the generation of excess returns over the long-term. Further, Nuance is intensely focused on ensuring that it manages the appropriate amount of assets to allow future performance the opportunity to mirror that of the historical performance.
The Nuance investment team employs a consistent investment process when narrowing its selections for investment. The team initially goes through a quantitative screening process designed to identify potential leading business franchises by grouping all domestic and developed country companies into 68
sub-industries
and reviewing returns on capital, balance sheet strength and capital spending habits. Leading business franchises with distinct traits are identified through this process, which allows the Nuance investment team to narrow the universe to those companies that statistically appear to fit Nuance’s criteria. Nuance is ultimately looking for
businesses with high and sustainable returns on capital, above-average financial strength and reasonable capital spending habits.
A major focus of Nuance’s fundamental analysis is on identifying competitive shifts, or transitions, within an industry that create significant threats to leading businesses. Nuance accepts subtle, transitory market-share shifts that occur between the number one and number two industry players, but Nuance does not invest in companies or industries that are undergoing secular competitive transitions, because Nuance is unwilling to accept the level of uncertainty that results from such transitions. The Nuance
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Sub-Advisors
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PartnerSelect Equity Fund –
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— (Continued)
investment team is intentional about keeping an eye out for threats to its universe of leading businesses, including technology advancements that can lead to product obsolescence or to secular shifts in how business is conducted. Threats can also include secular shifts in the consumer mindset. Nuance’s focus on competitive position typically leads to minimal, if any, exposure to industries if Nuance does not believe companies in such industries can achieve long-term competitive advantages.
With respect to valuation, Nuance believes good companies are periodically undervalued in the marketplace for transitory reasons. These opportunities are created by investors’ short-term focus on a period of under-earning that is not unusual in the context of the industry’s typical cycles or the specific company’s approach to the competitive landscape. Because these companies are out of favor, the periods of meaningful undervaluation often do not last much longer than a few years, providing Nuance with the opportunity to capitalize on the discount relatively quickly. The goal of this valuation work is to establish estimates of a company’s fair value and trough value, resulting in fair value and downside price targets used for portfolio construction. At the heart of Nuance’s valuation work is a focus on the normalized earnings power of a business based on the company’s current level of tangible assets.
Nuance believes it is important to know who is running the business. The focus is on whether management is going to stick with the core business and how it plans to execute over the long-term. These broader strategy-type discussions with management teams include capital-allocation plans, research and development budgets, thoughts on normal earnings and peaks and troughs (usually discussed in the context of margins) to help evaluate the sustainability of leading businesses. Nuance believes that management going outside of its core business speaks volumes about its sustainability and triggers a review of the business and an evaluation of whether the company continues to qualify as an investment candidate. The focus is on the dynamics of the business/industry, and the certainty around the competitive position of that business.
Nuance sells investments when the stock has surpassed the team’s estimate of intrinsic value, when a more attractive investment opportunity becomes available, when the team identifies a legitimate threat to the sustainability of a leading business, or when the team believes they made a misjudgment in their original analysis.
Sands Capital Management, LLC
1000 Wilson Boulevard
Suite 3000
Arlington, VA 22209
A. Michael Sramek is the portfolio manager for the segment of the Equity Fund’s assets managed by Sands Capital Management, LLC (“Sands Capital”). Sramek is a Senior Portfolio Manager, Research Analyst and Managing Director at Sands Capital. He began his investment career as a research analyst at Mastrapasqua & Associates in 2000 prior to joining Sands Capital in 2001. Sramek is
supported by a larger team of research analysts and associates. Sands Capital is independent and 100% staff owned. Sands Capital has been a
sub-advisor
to the Equity Fund since 2008.
Approximately 25% of the Equity Fund’s assets are managed by Sands Capital. Sramek believes that over time stock price appreciation follows earnings growth. The investment objective is to identify companies that can sustain above-average earnings growth relative to the broader market, typically over the next three to five years. Sramek believes great investment ideas are rare and runs a concentrated portfolio of high-quality, seasoned, growing businesses across an array of attractive and growing business spaces. Independent research –
bottom-up
and company focused – is the cornerstone of Sramek’s investment process. All research analyses and conclusions are internally generated using a variety of fundamental techniques and external data sources.
Sramek seeks to identify leading growth businesses that can withstand the continual scrutiny of following six investment criteria:
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(1)
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Sustainable above-average earnings growth.
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(2)
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Leadership position in a promising business space.
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(3)
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Significant competitive advantage/unique business franchise.
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(4)
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Clear mission and value-added focus.
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(6)
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Rational valuation relative to market and business prospects.
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In collaboration with the whole Sands Capital investment team, Sramek seeks to identify and own the companies that appear to be the strongest fits with the above criteria by doing the following: monitoring status/activity in other portfolios (
, absolute weights and weight trends); meeting regularly with the various Sands Capital portfolio manager teams, sector teams, and individual analysts/associates; reading internal and external research and participating in research activities (management meetings, field trips, etc.); holding regular team meetings and soliciting/encouraging recommendations from all Sands Capital team members.
The strongest fits are determined by
de-composing
each of the six criteria into its
sub-components
and then evaluating the universe of Sands Capital holdings versus those characteristics. For instance, “leadership in an attractive business space” can be broken into characteristics such as: large/growing market share; innovation; pricing power; strategic position in value chain; and attractive business model (high margins, high/rising ROIC, etc.). Companies are evaluated against these characteristics in a consensus-building process between the portfolio manager team and the rest of the investment team. The companies whose investment cases exhibit in great depth the qualities that Sands Capital values are regarded as the strongest fits and thus included in the Equity Fund.
The SAI provides additional information about each
sub-advisor’s
method of compensation for its portfolio managers, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the Fund.
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Litman Gregory Funds Trust
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PartnerSelect International Fund –
Sub-Advisors
The International Fund’s four
sub-advisors
pursue the International Fund’s objective primarily through investments in common stocks of issuers located outside of the United States. Under normal market conditions, the International Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in the securities of companies organized or located outside of the United States, including large-,
mid-,
and
small-cap
companies and companies located in emerging markets. This investment policy may be changed by the Board without shareholder approval, but shareholders would be given at least 60 days’ notice if any change occurs. Each manager may invest in securities traded in both developed and emerging markets. Though there is no limit on emerging market exposure, it is not expected to be a primary focus, and the majority of the International Fund’s assets is expected to be invested in stocks of companies listed and domiciled in foreign developed countries. There are no limits on the International Fund’s geographic asset distribution but, to provide adequate diversification, the International Fund ordinarily invests in the securities markets of at least five countries outside of the United States. In most periods it is expected that the International Fund will hold securities in more than five countries. Although the International Fund intends to invest substantially all of its assets in issuers located outside of the United States, it may invest in U.S. issues on a limited basis, and at times of abnormal market conditions it may invest all of its assets in fewer than five countries.
The International Fund’s managers emphasize different stock-picking styles and invest in stocks spanning a range of market capitalization. Litman Gregory believes that during any given year certain stock-picking styles will generate higher returns than comparable market indexes, while others will lag. By including a variety of stock-picking styles in this single mutual fund, Litman Gregory believes that the variability and volatility of returns can be lessened. Although each manager has the flexibility to invest on a worldwide basis in
non-U.S.
companies with market capitalization of any size, it is expected that the International Fund will have significant exposure to large- and
mid-sized
foreign companies under normal market conditions.
Litman Gregory’s strategy is to allocate the portfolio’s assets among the managers who, based on Litman Gregory’s research, are judged to be among the best relative to their respective peer
groups. There is no minimum or maximum allocation of the Fund’s portfolio assets to each
sub-advisor.
With respect to managers for the International Fund, Litman Gregory has focused exclusively on stock pickers who emphasize
bottom-up
stock-picking rather than macro-driven,
top-down
country picking.
Litman Gregory believes that
bottom-up
stock pickers have an advantage in foreign markets because:
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It is Litman Gregory’s opinion that the dynamics that influence individual countries’ markets, including currencies, inflation, economic growth, political factors, regulation and the like, are much more difficult to assess than the prospects and valuation characteristics of individual companies.
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Litman Gregory believes that some individual stocks in foreign markets are less closely analyzed (the markets are less “efficient”) than those in the United States. Litman Gregory believes that this will result in greater opportunities for skilled stock pickers to add value through pure stock selection.
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Based on Litman Gregory’s observations,
bottom-up
stock pickers in foreign markets, on average, seem to perform better than
top-down-oriented
managers.
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Though
bottom-up
stock picking is emphasized, each manager also monitors specific macro-factors that it believes are relevant in specific countries.
The
sub-advisors
manage their individual portfolio segments by building a focused portfolio representing their highest-confidence stocks. Under normal conditions, each manager’s portfolio segment typically includes a minimum of 8 and a maximum of 15 securities. A manager may occasionally hold more than 15 securities. Though the total number of securities the International Fund may hold at any point in time will vary, it is generally expected that the International Fund will hold between 32 and 60 securities.
The following table provides a description of the International Fund’s four
sub-advisors
and their target levels of assets. Asset levels will fluctuate and it is at the discretion of Litman Gregory to
re-balance
the asset allocations. A detailed discussion of the management structure of the International Fund follows the table.
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PORTFOLIO MANAGER(S)/SUB-ADVISOR
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MARKET CAPITALIZATION OF
COMPANIES IN PORTFOLIO
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Evermore Global Advisors, LLC
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25%
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All sizes
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Value
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Harris Associates L.P.
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25%
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All sizes, but mostly large- and
mid-sized
companies
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Value
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Lazard Asset Management LLC
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25%
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All sizes
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Blend
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Benjamin (Ben) Beneche, CFA
Pictet Asset Management, LTD
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25%
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All sizes
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Blend
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PartnerSelect International Fund –
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— (Continued)
PartnerSelect International Fund Portfolio Managers
Evermore Global Advisors, LLC
89 Summit Avenue
Summit, NJ 07901
David E. Marcus is the lead portfolio manager for the segment of the International Fund’s assets managed by Evermore Global Advisors, LLC (“Evermore”). Marcus is
Co-Founder,
Chief Executive Officer and Chief Investment Officer and a portfolio manager at Evermore. He has managed the Evermore Global Value Fund since its inception in 2010. Marcus has over 30 years of experience in investment management, including management of registered investment companies. For a majority of this time, Marcus has focused on investing in European and other foreign companies. Marcus graduated from Northeastern University in 1988. From 1988 to 2000, Marcus held a series of positions at Mutual Series Fund, including junior research analyst, research analyst,
co-portfolio
manager and portfolio manager. From November 1998 to January 2000, Marcus was portfolio manager of the Mutual European Fund and
co-portfolio
manager of the Mutual Shares Fund and Mutual Discovery Fund. During this time, Marcus also served as Senior Vice President and Director of European Investments for Franklin Mutual Advisers, LLC. After leaving Franklin Mutual in early 2000, Marcus founded Marcstone Capital Management, L.P., a long/short European-focused equity manager, largely funded by Jan Stenbeck, the Swedish financier. After Stenbeck’s sudden death in late 2002, Marcus closed Marcstone and returned capital to its investors. In early 2003, Marcus
co-founded
Stonebrook Partners, LLC, the Stenbeck family office, and became an adviser to the Stenbeck family, in which capacity he helped restructure a number of the public and private companies that the family controlled. In June 2004, Marcus founded and served as managing partner of MarCap Investors, L.P., the investment manager of a European
small-cap
special situations fund, which he actively managed through the end of 2008 and wound down in 2009. Over the past fifteen years, Marcus has served on the board of directors of numerous companies, including: Novestra AB, a Swedish publicly-traded private equity firm with holdings in the U.S. and Europe; Pergo AB, a Swedish publicly-traded flooring company for which Marcus was instrumental in helping negotiate the sale of the company to the German company Pfleiderer AG; Scribona AB, a Swedish publicly-traded distributor of office products with sales in excess of $1 billion, for which Marcus, as Chairman of the Board, led the complete restructuring of the company and the negotiation to sell its operating assets; Miltope, Inc., a U.S. publicly-traded and subsequently acquired maker of ruggedized electronics for the U.S. military; and Modern Times Group AB, a Swedish publicly-traded
pan-European
media conglomerate. Marcus has gained significant operating experience through his active involvement on the above mentioned boards, as well as his involvement with the restructuring of a number of companies controlled by the Stenbeck family. Evermore has been a
sub-advisor
to the International Fund since 2017.
Approximately 25% of the International Fund’s assets are managed by Marcus. Evermore employs a research and catalyst
driven, fundamental value investment strategy. With an emphasis on undervalued companies undergoing change (“special situations”), Evermore focuses on investments in areas where the most compelling opportunities exist and on situations that, in Evermore’s opinion, have the potential for growth of capital. In selecting equity investments, Evermore focuses on the market price of a company’s securities relative to Evermore’s own evaluation of the company’s asset value, including an analysis of book value, cash flow potential, long-term earnings, and multiples of earnings. Evermore also focuses on the strength of the management teams of the companies for which Evermore is evaluating an investment. Similarly, debt securities and other indebtedness, including loan participations, are generally selected based on Evermore’s own analysis of the security’s intrinsic value rather than the coupon rate or rating of the security. Evermore examines each investment separately and there are no set criteria as to specific value parameters, asset size, earnings or industry type.
A special situation arises when the securities of a company are expected to appreciate due to company-specific developments (“catalysts”) rather than general business conditions or movements of the market as a whole. Catalysts may include management changes, shareholder activism, and operational and financial restructurings (
cost-cutting, asset sales, breakups, spinoffs, mergers, acquisitions, liquidations, share buybacks, recapitalizations, etc.). Investments in special situations may include equity securities or fixed-income securities, such as corporate debt, which may be in a stressed or distressed position. Special situation investments may include high yield fixed-income securities or “junk bonds”
securities that are rated below investment grade by S&P or by another Nationally Recognized Statistical Rating Organization or similar unrated securities).
Harris Associates L.P.
111 S. Wacker Drive
Suite 4600
Chicago, IL 60606
David G. Herro is the portfolio manager for the segment of the International Fund’s assets managed by Harris Associates L.P. (“Harris”). Herro is Deputy Chairman, Chief Investment Officer – International Equities and a portfolio manager at Harris. He has managed the Oakmark International Fund, the Oakmark International Small Cap Fund and the Oakmark Global Select Fund since their inception in 1992, 1995 and 2006, respectively. Herro has also managed the Oakmark Global Fund since 2016. Herro earned a B.S. degree in Accounting from the University of Wisconsin-Platteville and an M.A. degree from the University of Wisconsin-Milwaukee. He has been in the investment business since 1986. Harris has been a
sub-advisor
to the International Fund since the International Fund’s inception in 1997.
Approximately 25% of the International Fund’s assets are managed by Herro. Herro and Harris’ portfolio management team employ Harris’ value investment philosophy and process to manage his portion of the International Fund’s assets. This value investment philosophy is based upon the belief that, over time, a
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Litman Gregory Funds Trust
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company’s stock price converges with Harris’ estimate of the company’s intrinsic value. By “intrinsic value,” Harris means its estimate of the price a knowledgeable buyer would pay to acquire the entire business. In making its investment decisions, Harris uses a
“bottom-up”
approach focused on individual companies, rather than focusing on specific economic factors or specific industries.
The chief consideration in the selection of stocks is the size of the discount of a company’s current stock price compared to Harris’ estimate of the company’s intrinsic value. In addition, Harris looks for companies with the following characteristics, although not all companies will have all of these attributes: free cash flows and intelligent investment of excess cash, earnings that are growing and are reasonably predictable, and a high level of management ownership in the company. Once Harris identifies a stock that it believes is selling at a significant discount compared to Harris’ estimate of the company’s intrinsic value and that the company may have one or more of the additional qualities mentioned above, Harris may consider buying that stock for a strategy. Harris usually sells a stock when the price approaches its estimated intrinsic value. This means Harris sets “buy” and “sell” targets for each stock held by a portfolio. Harris monitors each holding and adjusts those price targets as warranted to reflect changes in a company’s fundamentals. Harris attempts to manage some of the risks of investing in common stocks by purchasing stocks whose prices it considers low relative to Harris’ estimate of the company’s intrinsic value. In addition, Harris seeks companies with solid finances and proven records and continuously monitors each portfolio company.
Lazard Asset Management LLC
30 Rockefeller Plaza
New York, NY 10112
Mark Little is the lead portfolio manager for the segment of the International Fund’s assets managed by Lazard Asset Management LLC (“Lazard”). Little is a Portfolio Manager/Analyst on the International Strategic Equity, International Quality Growth, and Global Strategic Equity teams. He began working in the investment field in 1992. Prior to joining Lazard in 1997, he was a manager in the corporate finance practice of Coopers & Lybrand and earned his Associated Chartered Accountant (ACA) qualification with Rees Pollock Chartered Accountants. Little has an MA in Economics from Clare College, Cambridge University. Lazard has been a
sub-advisor
to the International Fund since 2013.
Approximately 25% of the International Fund’s assets are managed by Little. Little and the portfolio management team at Lazard believe that a company with the ability to improve and/or sustain its profitability at a relatively high level can compound returns at an attractive rate. At the same time, they believe in buying such companies that are trading at discounts relative to their profitability prospects.
Generally, Lazard categorizes any purchased stock into one or more of the following three categories:
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Compounders: These are companies that Little and the team think can sustain relatively high levels of profitability and companies whose management may enhance shareholder returns through share buybacks and dividend payments. Lazard will purchase these companies if Little and the team believe they can compound total return (
, earnings growth, dividends, and share buybacks) at a relatively high rate over the long term and are reasonably priced in relation to their profitability prospects.
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Mispriced Situations: These are companies that are trading inexpensively relative to what Little and the team think their assets and cash flows should be worth longer term. They may or may not be compounders.
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Restructuring: These are companies whose profitability is depressed relative to their history and companies who are taking steps – such as cutting costs, investing in an underinvested area, selling
non-core
businesses, etc. – to return to higher profitability. They may or may not become compounders.
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Lazard’s analysts are largely responsible for generating ideas. They do so by running valuation screens in their sectors and monitoring developments at companies that fall under their coverage. They do most of the fundamental analysis, though Little and the other portfolio managers at Lazard are also involved. Little and the portfolio management team review and debate the assumptions analysts use in their financial modeling, meet with company management, and lead analysis on some
small-cap
companies. The goal of the team’s fundamental company analysis is to identify Lazard’s research edge and estimate how much return can be generated from this edge. Lazard’s research edge is generally a function of its analysts having a differentiated view than the market on the profitability a company can generate, the duration of its profitability, and/or what the company should be worth.
Little and the team use several valuation metrics to gauge a company’s worth and set price targets. A company has to be priced in a way that Lazard believes is reasonably valued for the profitability it can generate. This assessment is based upon free-cash-flow yield, valuation relative to peers or relative to businesses with similar profitability and growth characteristics, discounted-cash-flow modeling, and sum of the parts (valuing different segments of a company separately). There is a fair amount of judgment involved in balancing these different approaches to assess a company’s worth and set price targets.
Benjamin (Ben) Beneche, CFA
Pictet Asset Management, LTD
120 London Wall
Moor House – Level 11
London, United Kingdom
EC2Y 5ET
Fabio Paolini and Benjamin (Ben) Beneche are the
co-portfolio
managers to the segment of the International Fund’s assets
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PartnerSelect International Fund –
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PartnerSelect International Fund –
Sub-Advisors
— (Continued)
managed by Pictet Asset Management, LTD (“Pictet”). Pictet has been a
sub-advisor
to the International Fund since 2016.
Paolini joined Pictet in 1997 and is Head of European Equities and
Co-Lead
of EAFE Equities within the Developed Equities team. Paolini began his career in Pictet & Cie’s Financial Research Department in 1994, initially in the Economics team and then in the European equities research team. Paolini graduated with a degree in Economics from the University of Siena in Italy. He obtained a CFPI/AZEK in 1996 and is a Chartered Financial Analyst (CFA) charterholder.
Beneche joined Pictet in 2008 and is
Co-Lead
of EAFE Equities team with a specific focus on Japanese Equities. Beneche began his career as a graduate within PAM Equities then as a Junior Investment Manager on the Global Equities fund with an emphasis on the energy sector. Beneche graduated with a first class honors degree in Economics and Economic History from the University of York. He is also Chartered Financial Analyst (CFA) charterholder.
Approximately 25% of the International Fund’s assets are managed by Pictet.
The team wants companies to be able to generate free cash flow in the future. (Free cash is cash a business has at hand and broadly speaking is calculated by adding depreciation and amortization to net income and subtracting capital expenditures.) In addition, the team wants a company to have good opportunities to reinvest this free cash and do so in a profitable manner,
generate high returns on capital, in order to compound investment returns for shareholders. When looking at free cash flow (FCF), the team focuses on what free cash a company can generate on a normalized basis. The period over which the team may expect normalization to happen varies by business model and is also dependent on the stage of the business and economic cycle a company may be operating in at any point in time. For example, in the event the team expects a business model to attain normal sales growth, margin, and capital expenditures over the next three years, the team’s task would be to estimate those free cash flows three years from now and discount them back to the present to assess what “normalized” FCF yield (FCF/stock price) the company’s stock is offering (we will discuss the relevance of FCF yield in buy and sell decisions further below). The discount rate used is the company’s cost of equity.
Assessing whether a company has good reinvestment opportunities in front of it is typically a function of what sales growth it can achieve and its pricing power. So the team assesses what organic and inorganic growth opportunities are available to the company and whether the company has a competitive advantage versus its peers. The combination of higher sales growth and superior pricing power helps generate higher profitability and, therefore, high returns on capital. How company management will allocate capital is also important in understanding whether a company can generate high returns on capital.
The consistency of generating high returns on capital is also important. Typically, a company that is relatively less cyclical (
less impacted by economic cycles), has good reinvestment opportunities, and is run by capable management has a higher
likelihood of consistently generating high returns. The team calls these companies compounders and they are most attractive to the team in terms of their business-model attributes because these companies compound shareholder value at a faster rate than cyclical companies. To assess valuation for compounders, in addition to normalized FCF yield assessment, the team will also look at discounted cash flow modeling as that incorporates the cash flows a company is likely to generate beyond what the team considers to be a normalized or forecastable time frame. The team says for compounders it’s essential to look at
DCF-type
metrics to capture the long-term compounding effects of their superior growth and
profile relative to more cyclical business models.
In the case of more cyclical business models, there is greater variability in free-cash generation, so balance-sheet quality assumes greater importance in the team’s overall analysis. In addition, for cyclical business models the valuation hurdle prior to purchase is typically higher than in the case of compounders. For example, the target normalized FCF yield (
the sell target yield) for a relatively high-growth and high
compounding business could be as low as around 5%, while for a riskier, cyclical business model with lower growth and return on capital this target yield could be 10%, or higher in some cases (such as in the case of
oil-
or commodity-related business models). Ultimately, the target yield at which a company’s stock would be sold is a function of Paolini’s and Beneche’s assessment of its business model. The difference between this target yield and the current yield (based on current price) indicates the potential upside there might be in a stock.
When constructing portfolios, their stock weightings are a function of the amount of upside in a stock, conviction in the business model and in the investment case, the downside risk in the business model, and liquidity. In addition, the team aims to diversify “investment drivers” or common risk factors. For example, they do not want the portfolio to be overly exposed to external factors, such as oil, economic growth in a country or region, or rising or falling interest rates. Stocks are sold when they reach their price targets or target yield, or when there are better opportunities, or when the investment pillars on which the initial purchase was based are no longer valid. In the case of the International Fund, all of these portfolio-management considerations will apply.
The SAI provides additional information about each
sub-advisor’s
method of compensation for its portfolio managers, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the Fund.
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Litman Gregory Funds Trust
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PartnerSelect Alternative Strategies Fund –
Sub-Advisors
Litman Gregory’s strategy is to allocate the portfolio’s assets among the Alternative Strategies Fund’s five
sub-advisors
to provide investors a mix of strategies that Litman Gregory believes offer risk-return characteristics that are attractive individually and even more compelling collectively. Allocations among
sub-advisors
are based on a number of factors, including Litman Gregory’s expectation for the risk-adjusted return potential of each
sub-advisor’s
strategy and the impact on overall portfolio risk, with the objective of maximizing return subject to the goals of low volatility and relatively low correlation with broad financial markets, especially the stock market. Litman Gregory may at times adjust the allocations of capital to
sub-advisors
if it believes there is a highly compelling tactical opportunity in a particular
sub-advisor’s
strategy. Portfolio assets will be tactically allocated to the
sub-advisors
in accordance with the target allocation range for each
sub-advisor
specified in the table below, as measured at the time of allocation.
Sub-advisor
strategies may seek to benefit from: opportunities to combine securities with differing risk characteristics; market inefficiencies; arbitrage opportunities; opportunities to provide liquidity; tactical opportunities in asset classes or securities; special situations such as spin offs; as well as other opportunities in areas such as real estate or managed futures. In the aggregate, the managers can invest globally in stocks of companies of any size, domicile or market capitalization, government and corporate bonds and other fixed income securities and currencies, including short positions of any of the foregoing, within their respective segments of the Alternative Strategies Fund. They may also invest in derivatives, including, without limitation, options, futures contracts, and swaps, to manage risk or enhance return and can also borrow amounts up to one third of the value of the
Alternative Strategies Fund’s total assets (except that the Alternative Strategies Fund may exceed this limit to satisfy redemption requests or for other temporary purposes). Each of the managers may invest in illiquid securities; however, the Alternative Strategies Fund as a whole may not hold more than 15% of its net assets in illiquid securities. In some cases, the
sub-advisors
may seek to replicate strategies they employ in their private (hedge) funds. In other cases, the
sub-advisors
may seek to enhance strategies they run in other public funds by focusing on their highest conviction ideas to a greater extent or by pursuing certain aspects of their strategies with greater flexibility. However, the Alternative Strategies Fund will only invest directly in portfolio securities selected by the
sub-advisors
and will not invest in any pooled investment vehicles or accounts managed by the
sub-advisors.
Each
sub-advisor
will have an investment approach that generally focuses on a particular asset class or specific strategies. Currently, the strategies the
sub-advisors
focus on are as follows: (1) an arbitrage oriented strategy, (2) an opportunistic income strategy which will often focus on mortgage related securities, (3) a contrarian opportunity strategy that allows tactical investments throughout the capital structure (stocks and bonds), asset classes, market capitalization, industries and geographies, and (4) an strategic alpha strategy that focuses on the tactical allocation of long and short global fixed income opportunities and currencies.
The following table provides a description of the Alternative Strategies Fund’s five
sub-advisors
and their current target levels of assets. Asset levels will fluctuate, and it is at the discretion of Litman Gregory to
re-balance
the asset allocations. A detailed discussion of the management structure of the Alternative Strategies Fund follows the table.
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PORTFOLIO
MANAGER(S)/SUB-ADVISOR
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CURRENT TARGET ALLOCATION AND
TARGET ASSET ALLOCATION RANGE
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Blackstone Credit Systematic Strategies LLC
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19%
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Long-Short Credit
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DoubleLine Capital LP
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25%
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Opportunistic Income
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First Pacific Advisors, LP
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18%
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Contrarian Opportunity
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Loomis, Sayles & Company, L.P.
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19%
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Strategic Alpha Fixed Income
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Roger Foltynowicz, CFA, CAIA
Water Island Capital, LLC
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19%
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Arbitrage
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PartnerSelect Alternative Strategies Fund –
Sub-Advisors
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PartnerSelect Alternative Strategies Fund –
Sub-Advisors
— (Continued)
PartnerSelect Alternative Strategies Fund Portfolio Managers
Long-Short Credit Strategy
Blackstone Credit Systematic Strategies LLC
201 Spear Street, Suite 250
San Francisco, CA 94105
Stephen Kealhofer, Paul Harrison and Adam Dwinells are the
co-portfolio
managers responsible for the long-short credit strategy (the “Long-Short Credit Strategy”), which is the segment of the Alternative Strategies Fund’s assets managed by Blackstone Credit Systematic Strategies LLC (“BXCSS”, formerly DCI, LLC). Kealhofer is the Head of Research of BXCSS. He was formerly
Co-Founder
and Managing Partner of KMV and Assistant Professor of Finance at Columbia University. Harrison is Chief Investment Officer of BXCSS. He was formerly Chief Investment Officer and Head of Research at Barclays Global Investors/BlackRock; Chief of Capital Markets at the Federal Reserve Board and a member of the finance faculty at Brandeis University. Dwinells is Head of Portfolio Management of BXCSS. He was formerly Vice President and Senior Risk Advisor of JP Morgan and its predecessor companies. BXCSS has been a
sub-advisor
to the Alternative Strategies Fund since 2017.
BXCSS’s Long-Short Credit Strategy employs a systematic portfolio construction process underpinned by a proprietary, fundamental model of credit risk and valuation. BXCSS’s investment process is designed to exploit potential information gaps between credit and equity markets and other market inefficiencies to identify and capture potential mispricing at the individual asset level. The BXCSS Long-Short Credit Strategy is expected to generate returns from idiosyncratic credit selection, as the strategy aims to systematically curtail rate duration and credit beta exposure. Correlations to systematic market risks including high yield and equity market returns are expected to be minimal, and strategy returns are not expected to be correlated to the returns of other active strategies. The BXCSS Long-Short Credit Strategy is designed to perform in both low and high volatility environments although returns are expected to be higher in higher volatility environments.
BXCSS targets superior risk-adjusted returns from portfolios of corporate credit assets through the selection of potentially mispriced individual securities. The principal driver of BXCSS’s strategies is its dynamic proprietary default probability model which incorporates fundamental balance sheet information and real-time information embedded in equity and options markets. BXCSS’s model uses this information to calculate credit spreads that, when compared to market spreads, identify possible mispricing that can potentially be exploited. Excess returns are anticipated over time as market prices converge to the actual risk levels and fair value pricing of the exposures, as indicated by BXCSS’s model. BXCSS’s technology produces timely risk measures for thousands of investments, which are monitored in real-time, providing early warning capabilities and a large
universe from which to create portfolios. BXCSS believes its approach to generating returns is unique in its integration of technology, infrastructure, ongoing research, and credit expertise.
BXCSS believes that the inability of conventional credit approaches to consider equity and other market information systematically, and their propensity to build portfolios around issue weightings, are features that create persistent inefficiencies in the market. These features are largely driven by the qualitative, discretionary style that conventional credit market participants use. While marginal information efficiencies are likely to come about as a natural part of the credit market’s maturation, as long as conventional credit investors dominate the market, exploitable inefficiencies will exist for BXCSS.
In December 2020, DCI, LLC was purchased by The Blackstone Group Inc. (NYSE: BX) and was subsequently renamed Blackstone Credit Systematic Strategies LLC. BXCSS is now a part of Blackstone Credit, a global leader in private lending, synthetic leveraged loans and collateralized loan obligations. Blackstone Credit is one of the world’s largest credit-focused asset managers, with $135 billion in assets under management and a team of over 350 professionals (as of September 30, 2020). Blackstone Credit’s strategies cover the corporate credit market, with leading positions in both liquid and private markets.
Opportunistic Income Strategy
DoubleLine Capital LP
333 South Grand Avenue, Suite 1800
Los Angeles, CA 90071
Jeffrey Gundlach and Jeffrey Sherman are the
co-portfolio
managers responsible for the opportunistic income strategy (the “Opportunistic Income Strategy”), which is the segment of the Alternative Strategies Fund’s assets managed by DoubleLine Capital LP (“DoubleLine”). Gundlach is Chief Executive Officer and Chief Investment Officer of DoubleLine, which he
co-founded
in 2009. Sherman is Deputy Chief Investment Officer and is a member of DoubleLine’s Executive Management and Fixed Income Asset Allocation Committees. Prior to joining DoubleLine, Sherman was a Senior Vice President at TCW where he worked as a portfolio manager and quantitative analyst focused on fixed income and real-asset portfolios. Prior to TCW, Sherman was a statistics and mathematics instructor at both the University of the Pacific and Florida State University. DoubleLine has been a
sub-advisor
to the Alternative Strategies Fund since the Alternative Strategies Fund’s inception in 2011.
The team at DoubleLine operates under the cardinal mandate of delivering superior risk-adjusted fixed income returns. They seek to deliver positive absolute returns in excess of an appropriate aggregate fixed income index with portfolio volatility that is similar to U.S. long-term treasury securities. Investment ideas employed by the team must offer an asymmetric, positively skewed risk-reward profile. As a result, a great deal of their analysis seeks to identify fixed income securities that they believe offer greater potential payoff than potential loss under multiple
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scenarios. Ultimately, a combination of risk management, asset allocation and security selection forms the team’s investment process. There can be no assurance that the Fund will achieve its investment objective.
Portfolios are constructed with the intent to outperform under a range of future outcomes. DoubleLine’s risk integration process seeks to combine assets that will perform differently in different scenarios so that the overall portfolio generates acceptable performance. This process includes balancing the strength of cash flows from certain asset classes against various potential economic or market risks.
When considering a specific investment in any sector, the team’s primary focus is on the predictability of the cash flow generated during an entire interest rate or credit cycle. When volatility is low, the team emphasizes securities they expect to generate the best overall return over a cycle rather than simply buying the highest yield at a given point in time.
In implementing the Opportunistic Income Strategy, the team allocates investments to fixed income instruments and other investments with no limit on the duration of the portfolio. The team may invest in, without limitation, asset-backed securities; domestic and foreign corporate bonds, including high-yield bonds; municipal bonds; bonds or other obligations issued by domestic or foreign governments, including emerging markets countries; REIT debt securities; and mortgage related securities. The team’s investments in mortgage related securities may at times represent a substantial portion (including up to 100%) of the segment allocated to him when certain market conditions exist that the team believes offer potentially attractive risk adjusted returns. The team may, to a limited extent, employ leverage within the Opportunistic Income Strategy, which also is being used for other accounts managed by DoubleLine. The team may gain investment exposure to mortgage-backed securities by entering into agreements to buy or sell securities through the TBA market. The Fund would enter into a commitment to either purchase or sell mortgage-backed securities for a fixed price, with payment and delivery at a scheduled future date beyond the customary settlement period for mortgage-backed securities. These transactions are considered to be TBA because the Fund commits to buy a pool of mortgages that have yet to be specifically identified but will meet certain standardized parameters (such as yield, duration, and credit quality) and contain similar loan characteristics. For either purchase or sale transactions, the fund may choose to extend the settlement through a “dollar roll” transaction in which it sells mortgage-backed securities to a dealer and simultaneously agrees to purchase substantially similar securities in the future at a predetermined price. These transactions have the potential to enhance the Fund’s returns and reduce its administrative burdens when compared with holding mortgage-backed securities directly, although these transactions will increase the Fund’s portfolio turnover rate. During the roll period, the Fund forgoes principal and interest paid on the securities. However, the Fund would be compensated by the difference between the current sale price and the forward price for the future purchase, as well as by the interest earned on the cash proceeds of the initial sale. The Fund
also expects to engage in short sales of TBA mortgages, including short sales on TBA mortgages the Fund does not own, to potentially enhance returns or manage risk.
When investing in mortgage related securities, the team may invest in obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government such as the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation; CMOs, including real estate mortgage investment conduits (REMICS) issued by domestic or foreign private issuers that represent an interest in or are collateralized by mortgage related securities issued by agencies or instrumentalities of the U.S. Government; CMBS; obligations issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or mortgage related securities without a government guarantee but typically with some form of private credit enhancement; “interest only” and “principal only” stripped mortgage securities; inverse floating rate securities; and debt or equity tranches of collateralized debt obligations collateralized by mortgage related securities. The team compares opportunities in other sectors of the global fixed income market to opportunities available in the mortgage sector with the aim of attempting to construct a portfolio with the most attractive return potential given his risk management objectives.
Contrarian Opportunity Strategy
First Pacific Advisors, LP
11601 Wilshire Blvd., Suite 1200
Los Angeles, CA 90025
Steven Romick, Brian Selmo and Mark Landecker are the
co-portfolio
managers responsible for the contrarian opportunity strategy (the “Contrarian Opportunity Strategy”), which is the segment of the Alternative Strategies Fund’s assets managed by First Pacific. Romick joined First Pacific in 1996 and is currently a Managing Partner of the firm. Selmo joined First Pacific in 2008 and has been a Partner since 2013. He was briefly a Managing Director of First Pacific in 2013 before being named a Partner, and was a Vice President of First Pacific from 2008 to 2012. Landecker joined First Pacific in 2009 and has been a Partner since 2013. He was briefly a Managing Director of First Pacific in 2013 before being named a Partner, and was a Vice President of First Pacific from 2009 to 2012. Romick, Selmo and Landecker manage the FPA Crescent Fund (Romick has been a portfolio manager since its inception in 1993), the equity sleeve of Source Capital, Inc. and separate accounts, including unregistered funds managed by First Pacific (commonly known as hedge funds), in First Pacific’s Contrarian Value style. First Pacific has been a
sub-advisor
to the Alternative Strategies Fund since the Alternative Strategies Fund’s inception in 2011.
This segment is managed, to the degree practical, with the intent to replicate elements of mutual funds, private funds and separate accounts also run by First Pacific. The elements replicated include
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PartnerSelect Alternative Strategies Fund –
Sub-Advisors
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PartnerSelect Alternative Strategies Fund –
Sub-Advisors
— (Continued)
investment strategies such as hedging, illiquid and restricted securities, international investments, coupled with the potential for maintaining high levels of liquidity. First Pacific implements these strategies through investing opportunistically in a wide variety of securities as discussed below.
The Contrarian Opportunity Strategy looks for investments that trade at a substantial discount to the portfolio managers’ determination of the company’s value (absolute value) rather than those that might appear inexpensive based on a discount to their peer groups or the market average (relative value), with an objective of above average risk-adjusted returns. As absolute return investors, the First Pacific team seeks genuine bargains rather than relatively attractive securities. The goal is to provide equity-like returns over longer periods (
, five to seven years) while protecting against the permanent loss of capital. Attention is directed toward those companies offering the best combination of quality criteria such as strong market share, good management, and high normalized return on capital. A company purchased might not look inexpensive, considering current earnings and return on capital; however, its valuation may reflect such conditions as a weak economy, an increase in raw material costs, a management misstep, or any number of other temporary conditions. The First Pacific team believes that price drops caused by such developments can, and often do, provide buying opportunities. There can be no assurance that the Contrarian Opportunity Strategy will achieve its objective.
The First Pacific team employs the broad mandate of the First Pacific contrarian strategy to invest across the capital structure, asset classes, market capitalization, industries and geographies using a wide variety of instruments. The First Pacific team invests in an opportunistic manner, based on its view of the world and the businesses/situations that it understands. It looks for what is out of favor, taking into account the current landscape and how it might change over time, both organically and through exogenous events. The First Pacific team emphasizes independent research and spends little time with Wall Street analysts because it prefers to focus its research on interactions with business operators and industry leaders.
The First Pacific team narrows the universe of potential investments by establishing five categories: Long Equity, Short Equity, Credit (Long Credit and Short Credit), Cash and Equivalents and a smaller “Other” category.
The First Pacific team seeks to invest in companies with solid balance sheets, competitive strength, and shareholder-centric management; companies of lesser quality but with what they believe to be strong long-term upside potential; companies with shorter term upside potential driven by identified catalysts that are expected to have a positive impact on the value of the underlying business such as balance sheet optimization, operational turnarounds or corporate actions; and companies whose disparate parts have greater aggregate value than the current stock price and may engage in intra-company arbitrage of such companies by either holding long positions in one share class of such a company and shorting another share class of the same company or longing a parent or holding company and shorting one or several of its underlying companies to create a stub equity position that is valued at a deep discount to intrinsic value.
The First Pacific team will seek opportunities in deteriorating companies with declining business metrics that are not reflected in the stock price; companies with balance sheet issues such as overstated asset accounts that may result in operational cash flows that fall significantly short of net income; paired trades that involve shorting a company in the same industry as one of the long positions the First Pacific team holds to serve as a partial hedge against industry specific risk; and intra-company arbitrage as discussed above.
The First Pacific team will consider performing credits that have a yield to maturity reasonably in excess of U.S. Treasuries of comparable maturity and that they believe the holder has a high likelihood of receiving principal and interest payments. The First Pacific team will also consider the bonds of corporations that they believe have some chance but a low likelihood of needing to restructure their debt. These bonds may have higher yields than those of performing credits. The First Pacific team may also purchase distressed debt, which they define as corporate debt that has either defaulted or which has a high likelihood of being restructured, either voluntarily or by default.
Other investments may typically include illiquid securities that the First Pacific team believes allow them to take advantage of situations that are not available in the public markets. These investments may include private equity, derivatives, debt and real estate investments. Investment in illiquid securities is typically limited to no more than 15% of the First Pacific team’s portfolio.
Investments in cash and cash equivalents are a residual of the First Pacific team’s investment process rather than a macro-driven rationale. The First Pacific team believes that liquidity is an important risk management tool and also believes that it provides the ability to take advantage of future opportunities.
The goal of gaining comfort with a given investment is based on determining what the First Pacific teams needs to know in order to prove – or disprove – the original thesis that drew its interest and triggered further research. This research process is supported by reading current and historic SEC filings and conference call transcripts, reviewing pertinent periodicals, studying the competition, and establishing a valuation model. The First Pacific team works to gain a knowledge edge and an understanding of the business or industry that may not be universal. Such due diligence may take the form of conversations with
ex-employees,
vendors, suppliers, competitors and industry consultants. As a result of the process, the First Pacific team invests only in positions that it believes offer a compelling economic risk/reward proposition. If prospective investments do not meet that requirement, then the First Pacific team waits until it can purchase a security at a substantial discount to that company’s worth or estimated intrinsic value. The First Pacific team also factors a macro-economic view into its security analysis and portfolio construction, which may cause it to be over-weighted in certain asset classes or sectors at times while completely avoiding others. There can be no assurance that the Contrarian Opportunity Strategy will achieve its objective.
The First Pacific team distinguishes between the risk of permanent loss of capital and volatility, and seeks to distinguish their strategy
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Litman Gregory Funds Trust
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by using volatility to its advantage rather than its detriment. Instead of composing a portfolio designed to mimic the performance of a benchmark or index, the First Pacific team utilizes the deeply-held contrarian philosophy oriented toward pushing back on a rising market by reducing exposure (thus allowing cash to increase), and conversely, leaning into a falling market and spending that cash to opportunistically buy inexpensive securities. The goal is to invest in securities that have what they believe to be advantageous upside/downside characteristics; that is, the First Pacific team seeks to make a multiple of what it could potentially lose.
Strategic Alpha Fixed Income Strategy
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, MA 02111
Matthew J. Eagan, CFA, Brian P. Kennedy, Elaine M. Stokes and Todd P. Vandam, CFA are the
co-portfolio
managers responsible for the strategic alpha strategy (the “Strategic Alpha Strategy”), which is the segment of the Alternative Strategies Fund’s assets managed by Loomis, Sayles & Company, L.P. (“Loomis”). Eagan joined Loomis in 1997 and is an Executive Vice President, Director and Portfolio Manager for the fixed income group. He has 30 years of investment industry experience as a Portfolio Manager and fixed income analyst. He is also a
Co-Portfolio
Manager for the Loomis Sayles Strategic Alpha Fund and other fixed income funds managed by Loomis. He earned a BA from Northeastern University and an MBA from Boston University. Kennedy joined Loomis in 1994 and is a Vice President and
Co-Portfolio
Manager of Loomis’ multisector institutional strategies and mutual funds. He began his career as a structured finance and government bond trader. He moved over to credit trading in 2001, where he traded high yield bonds and initiated Loomis’ trading of bank loans. He was promoted to product manager in 2009. He is a
Co-Portfolio
Manager for the Loomis Sayles Strategic Alpha Fund as well as other fixed income funds managed by Loomis. He earned a BS from Providence College and an MBA from Babson. Stokes joined Loomis in 1988 and is an Executive Vice President, Director, Portfolio Manager and
Co-Head
of the full discretion team. She has 33 years of investment industry experience. She is also a
Co-Portfolio
Manager of the Loomis Sayles Strategic Alpha Fund and other fixed income funds managed by Loomis. Prior to becoming a Portfolio Manager in 2000, she had experience working in high yield, global and emerging markets. She has served as a senior fixed income trader and portfolio specialist. She earned a BS from St. Michael’s College. Vandam joined Loomis in 1994 and is a Vice President of Loomis and
Co-Portfolio
Manager of the Loomis Sayles Strategic Alpha Fund and High Income Funds as well as several US High Yield and Global High Yield institutional strategies. He also heads up Loomis’ high yield sector team. He has 26 years of investment industry experience. He began his career at Loomis on the high yield trading desk and was later promoted to high yield credit strategist for the full discretion team
and held that position until 2016. He earned a BA in business and economics from Brown University. Loomis has been a
sub-advisor
to the Alternative Strategies Fund since the Alternative Strategies Fund’s inception in 2011.
The Strategic Alpha Strategy has an absolute return investment objective, which means that it is not managed relative to an index and that it attempts to achieve positive total returns over a full market cycle with relatively low volatility. The Loomis team intends to pursue its objective by utilizing a flexible investment approach that allocates investments across a global range of investment opportunities related to credit, currencies and interest rates, while employing risk management strategies designed to mitigate downside risk. There can be no assurance that the Strategic Alpha Strategy will achieve its investment objective.
The Loomis team may invest up to 75% of the total assets of the segment allocated to it in below investment-grade fixed income securities (also known as “junk bonds”) and derivatives that have returns related to the returns on below investment-grade fixed income securities. Under normal market conditions, the Loomis team also may invest up to 75% of the total assets of the segment allocated to it in investments denominated in
non-U.S.
currencies and related derivatives, including up to 50% in investments denominated in emerging market currencies and related derivatives. Under normal conditions, the Loomis team may invest up to 20% of the total assets of the segment allocated to it in equity-related securities and derivatives. There is no limit on the amount of preferred securities. A “related derivative” of a financial instrument means any derivative whose value is based upon or derived from that financial instrument or a related derivative of that financial instrument. The Loomis team expects that exposure to these asset classes will often be obtained substantially through the use of derivative instruments. Currency positions that are intended to hedge the Loomis team’s
non-U.S.
currency exposure (
, currency positions that are not made for investment purposes) will offset positions in the same currency that are made for investment purposes when calculating the limitation on investments in
non-U.S.
and emerging market currency investments because the Loomis team believes that hedging a currency position is likely to negate some or all of the currency risk associated with the original currency position. Restrictions will apply at the time of purchase.
The Loomis team’s investment process employs both
top-down
(macro themes) and
bottom-up
(security selection) components and uses the resources of the entire Loomis Sayles infrastructure. The Loomis team identifies key macro themes over a
3-
and
12-month
horizon and assesses
top-down
risk/return opportunities across the interest rate curve, credit markets and currencies. The Loomis team draws on the strength and depth of the entire Loomis research team as it evaluates these themes. Fourteen Macro and Market Sector teams support the Loomis team by sharing their sector’s risk/return characteristics and uncovering specific credits that they believe may offer the best return potential.
In selecting investments for the Strategic Alpha Strategy, the Loomis team develops long-term portfolio themes driven by macro-economic indicators. These include secular global
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PartnerSelect Alternative Strategies Fund –
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— (Continued)
economic trends, demographic trends and labor supply, analysis of global capital flows and assessments of geopolitical factors. The Loomis team then develops shorter-term portfolio strategies based on factors including, but not limited to, economic, credit and Federal Reserve cycles,
top-down
sector valuations and
bottom-up
security valuations. The Loomis team employs active risk management, with a focus on credit, interest rate and currency risks. Additionally, the Loomis team will use risk management tools in constructing and optimizing the portfolio and seek to manage risk on an ongoing basis. The Loomis team expects to actively evaluate each investment idea based upon its return potential, its level of risk and its fit within the team’s overall macro strategy when deciding whether to buy or sell investments, with the goal of continually optimizing the portfolio.
The Loomis team seeks to gain a performance edge by integrating the global macro themes with Loomis’ best
bottom-up
security selection, risk analysis and trading capabilities to create the best expected risk/return portfolio. The Loomis team will pursue its investment goal by obtaining long investment exposures through direct cash investments and derivatives and short investment exposures substantially through derivatives. A “long” investment exposure is an investment that rises in value with a rise in the value of an asset, asset class or index and declines in value with a decline in the value of that asset, asset class or index. A “short” investment exposure is an investment that rises in value with a decline in the value of an asset, asset class or index and declines in value with a rise in the value of that asset, asset class or index. The Loomis team’s long and short investment exposures may, at times, each reach 150% of the assets invested in this segment of the Alternative Strategies Fund (excluding instruments primarily used for duration management and short-term investments (such as cash and money market instruments)), although these exposures may be higher or lower at any given time.
In connection with its principal investment strategies, the Loomis team may invest in a broad range of U.S. and
non-U.S.
fixed income securities, including, but not limited to, corporate bonds, municipal securities, U.S. and
non-U.S.
government securities (including their agencies, instrumentalities and sponsored entities), securities of supranational entities, emerging market securities, commercial and residential mortgage-backed securities, CMOs, other mortgage-related securities (such as adjustable rate mortgage securities), asset backed securities, bank loans, collateralized loan obligations (“CLOs”), convertible bonds, Rule 144A securities, REITs,
zero-coupon
securities, step coupon securities,
securities, inflation-linked bonds, variable and floating rate securities, private placements and commercial paper and preferred securities. Additionally, the Strategic Alpha Strategy involves limited investments in equities and exchange–traded funds.
Non-U.S.
Currency Investments:
Under normal market conditions, the Loomis team may engage in a broad range of transactions involving
non-U.S.
and emerging market currencies, including, but not limited to, purchasing and selling forward currency exchange contracts in
non-U.S.
or emerging market currencies, investing in
non-U.S.
currency futures contracts, investing in options on
non-U.S.
currencies and
non-U.S.
currency futures, investing in
cross currency instruments (such as swaps), investing directly in
non-U.S.
currencies and investing in securities denominated in
non-U.S.
currencies. The Loomis team may also engage in
non-U.S.
currency transactions for investment or for hedging purposes.
For investment and hedging purposes, the Loomis team may invest substantially in a broad range of derivatives instruments, particularly credit default swaps and futures contracts, and sometimes the majority of its investment returns will derive from its derivative investments. These derivative instruments include, but are not limited to, futures contracts (such as treasury futures and index futures), forward contracts, options (such as options on futures contracts, options on securities, interest rate/bond options, currency options, options on swaps and OTC options), warrants (such as
non-U.S.
currency warrants) and swap transactions (such as interest rate swaps, total return swaps and index swaps). In addition, the Loomis team may invest in credit derivative products that may be used to manage default risk and credit exposure. Examples of such products include, but are not limited to, credit default swap index products (such as LCDX, CMBX and ABX index products), single name credit default swaps, loan credit default swaps and asset-backed credit default swaps. Derivative instruments (such as those listed above) can be used to acquire or to transfer the risk and returns of a security without buying or selling the security. The Loomis team’s strategy may be highly dependent on the use of derivatives, and to the extent that they become unavailable or unattractive the Loomis team may be unable to fully implement its investment strategy. For a detailed discussion of various types of derivatives in which the Alternative Strategies Fund may invest, including the risks of investing in such derivatives, please refer to the Description of Principal Investment Risks section in the Prospectus and the SAI.
The Loomis team is not limited as to the duration of its portfolio, which will change over time but is likely to be within a range of
-5
years to +10 years.
Roger Foltynowicz, CFA, CAIA
Water Island Capital, LLC
41 Madison Avenue, 42
nd
Floor
New York, NY 10010
John Orrico, Todd Munn, Roger Foltynowicz, and Gregg Loprete are the
co-portfolio
managers responsible for the arbitrage strategy (the “Arbitrage Strategy”), which is the segment of the Alternative Strategies Fund’s assets managed by Water Island Capital, LLC (“Water Island”). Orrico founded Water Island in 2000 and serves as its Chief Investment Officer. He also serves as the president and a trustee of The Arbitrage Funds trust. He is a portfolio manager on the firm’s merger arbitrage and special situations strategies. Prior to founding Water Island, Orrico worked at Gruss & Co., focusing on merger arbitrage and special
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Litman Gregory Funds Trust
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situations. He has worked in the financial services industry since 1982, when he started his career in the Corporate Finance group at Morgan Stanley & Co. Munn joined Water Island in 2003 and is a portfolio manager on the firm’s merger arbitrage strategy. Foltynowicz joined Water Island in 2003 and is a portfolio manager on the firm’s merger arbitrage strategy. Loprete joined Water Island in 2009 and is a portfolio manager specializing in credit opportunities. Water Island has been a
sub-advisor
to the Alternative Strategies Fund since the Alternative Strategies Fund’s inception in 2011.
Water Island invests its sleeve in equity and debt securities of companies whose prices Water Island believes are or will be impacted by a corporate event. Specifically, Water Island employs investment strategies designed to capture price movements generated by publicly announced or anticipated corporate events such as mergers, acquisitions, asset sales, restructurings, refinancings, recapitalizations, reorganizations, or other special situations.
Water Island
seeks to profit from the various events by employing a specific strategy based on each event. In the case of mergers & acquisitions (M&A), the most common arbitrage activity, Water Island’s investment approach generally involves purchasing the shares of an announced acquisition target at a discount to their expected value upon completion of the acquisition. Water Island may engage in short sales when the terms of a proposed acquisition call for the exchange of common stock and/or other securities. In such a case, the securities of the company to be acquired may be purchased and, at approximately the same time, an amount of the acquiring company’s common stock and/or other securities as per the terms of the transaction may be sold short. In other instances, Water Island
will match a long position in a convertible security with a short position in the underlying common stock. Water Island seeks to purchase convertible securities at discounts to their expected future values and sell shares of the underlying common stock short to hedge against equity market movements. The positions are typically designed to earn income from coupon or dividend payments. In another scenario, Water Island may purchase a senior secured security of an issuer and sell short an unsecured security of the same issuer. In this example, the trade would be profitable if credit quality spreads widened or if the issuer went bankrupt and the recovery rate for the senior debt was higher than anticipated. It is expected that positions will be liquidated when pricing discrepancies disappear. Water Island may also invest in securities of companies whose stock price trades significantly higher or lower from where Water Island believes it should trade, as the result of an ongoing or anticipated corporate catalyst.
Water Island classifies events with more definitive outcomes and shorter timelines as “hard” catalysts and those with less definitive outcomes and/or longer timelines as “soft” catalysts. Hard catalysts can include definitive M&A, M&A reversals, liquidations, Dutch tenders, special purpose acquisition companies (SPACs), IPOs, yield to call, and spin-offs
(pre-event).
Soft catalysts can include speculative M&A, credit refinancings, turnaround plans, management changes, public investments in private equity (PIPEs), transformational
re-ratings,
and spin-offs (post-event).
In constructing the portfolio, Water Island favors high conviction, hard and soft catalyst investments that meet or exceed its desired return threshold, with a preference for those investment opportunities with superior
profiles. The team considers various position sizing constraints, including each position’s risk impact assessment, which is a measure of the loss to assets under management if the position were to trade to its estimated downside price. Water Island also monitors macro, structural, and idiosyncratic risks across its sleeve of the portfolio and seeks to mitigate undesired risk exposures through appropriate hedges.
Water Island continuously monitors its investments and evaluates each investment’s risk/return profile, taking into account each investment’s risk versus its anticipated reward relative to its predetermined exit strategy and the availability of other event-driven opportunities. Water Island may sell or close out an investment when the securities of the companies involved in the transaction no longer meet the expected return threshold considering prevailing market prices and the relative risks of the opportunity or when Water Island believes there are better risk-adjusted opportunities available.
The SAI provides additional information about each
sub-advisor’s
method of compensation for its portfolio managers, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the Fund.
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PartnerSelect Alternative Strategies Fund –
Sub-Advisors
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PartnerSelect High Income Alternatives Fund –
Sub-Advisors
Litman Gregory’s strategy is to allocate the portfolio’s assets among the High Income Alternatives Fund’s three
sub-advisors
to provide investors a mix of strategies that Litman Gregory believes offer risk-return characteristics that are attractive individually and even more compelling collectively. Allocations among
sub-advisors
are based on several factors, including Litman Gregory’s expectation for the risk-adjusted return potential of each
sub-advisor’s
strategy and the impact on overall portfolio risk, with the objective of maximizing return subject to the goal of high income relative to investment-grade, fixed income portfolios without taking undue risk. Litman Gregory may at times adjust the allocations of capital to
sub-advisors
if it believes there is a highly compelling tactical opportunity in a particular
sub-advisor’s
strategy. Portfolio assets will be tactically allocated to the
sub-advisors
in accordance with the target allocation range for each
sub-advisor
specified in the table below, as measured at the time of allocation.
Sub-advisor
strategies may seek to benefit from: opportunities to combine securities with differing risk characteristics; market inefficiencies; opportunities to provide liquidity; tactical opportunities in asset classes or securities; special situations such as spin-offs; as well as other opportunities in other areas. In the aggregate, the managers can invest globally in debt and equity securities of companies of any size, domicile or market capitalization, government and corporate bonds, loans, loan participation interests, mortgage or other asset-backed securities and other fixed income securities and currencies, including short
positions of any of the foregoing, within their respective segments of the High Income Alternatives Fund. They may also write options, invest in derivatives, including, without limitation, options, futures contracts, participatory notes
(“P-Notes”)
and swaps, to manage risk or enhance return and can also borrow amounts up to one third of the value of the High Income Alternatives Fund’s total assets (except that the High Income Alternatives Fund may exceed this limit to satisfy redemption requests or for other temporary purposes). Each of the managers may invest in illiquid securities; however, the High Income Alternatives Fund as a whole may not hold more than 15% of its net assets in illiquid securities.
Each
sub-advisor
will have an investment approach that generally focuses on a particular asset class or specific strategies. Currently, the strategies the
sub-advisors
focus on are as follows: (1) a credit value strategy, (2) a multi credit strategy, and (3) an option income strategy. Other appropriate strategies may also be considered and added to (or removed from) the High Income Alternatives Fund.
The following table provides a description of the High Income Alternatives Fund’s strategies and their target levels of assets. Asset levels will fluctuate, and it is at the discretion of Litman Gregory to
re-balance
the asset allocations. A detailed discussion of the management structure of the High Income Alternatives Fund follows the table.
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CURRENT TARGET ALLOCATION AND
TARGET ASSET ALLOCATION RANGE
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Brown Brothers Harriman & Co.
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40%
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Credit Value
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Guggenheim Partners Investment Management, LLC
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40%
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Multi Credit
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Neuberger Berman Investment Advisers LLC
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20%
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Option Income
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Litman Gregory Funds Trust
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PartnerSelect High Income Alternatives Fund Portfolio Managers
Brown Brothers Harriman & Co.
140 Broadway
New York, NY 10005
Andrew Hofer, Neil Hohmann and Paul Kunz are the portfolio managers primarily responsible for the credit value strategy (the “Credit Value Strategy”), which is the segment of the High Income Alternatives Fund’s assets managed by Brown Brothers Harriman & Co. (“BBH”) through its separately identifiable department known as the BBH Mutual Fund Advisory Department. Hofer is a Managing Director of BBH with 30 years of combined industry and investment experience. He joined BBH in 1988. Hofer has served as a Managing Director since 2000. Hohmann is a Managing Director of BBH with over 20 years of investment experience. Hohmann served as a Senior Vice President from 2010-2017. Kunz is a Senior Vice President of BBH with over 20 years of investment experience. He is also a CFA
®
charterholder.
The
sub-advisor
seeks to achieve the fund’s investment objective by investing its segment of the fund in fixed-income securities it believes to have the potential for excess return. The
sub-advisor’s
investment strategy will be to invest in fixed income securities from a wide variety of sectors, including asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), corporate bonds, floating-rate loans and municipal bonds. The
sub-advisor
expects to invest in structured and corporate securities. The
sub-advisor’s
emphasis is expected to be on
A/BBB-rated
asset backed securities and
BBB/BB-rated
corporate securities, as these ratings segments have historically offered attractive risk-adjusted returns, along with low default rates. The
sub-advisor
will also invest in U.S. Treasury futures to manage duration of the portfolio, which allows individual security selection to be managed without regard to portfolio duration. The
sub-advisor
will not typically own CCC rated or distressed securities.
The
sub-advisor
will consider investments based on a
bottom-up
assessment of opportunities and the risk/return potential of the yield curve. The investment strategy’s duration is flexible and the
sub-advisor
seeks to maintain a duration that is consistent with positive returns over longer time periods. The
sub-advisor
will consider the macroeconomic environment from the perspective of risk-management through economic cycles. The
sub-advisor’s
valuation process starts with the concept that credit spreads revert to the mean and that spread deviations relative to a long-term average indicate potential spread compression or spread widening. The
sub-advisor
applies this valuation framework to all economic sectors by credit rating and maturity.
The
sub-advisor’s
investment process is based on fundamental credit research. The
sub-advisor
identifies fixed income securities for potential purchase for the portfolio based on four fundamental criteria: a durable operating model, effective management,
attractive/appropriate structure, and transparency. A durable credit is one where the
sub-advisor
believes an issuer’s revenue stream and its financial structure can withstand a wide range of economic and regulatory scenarios. When assessing management, the
sub-advisor
looks for issuers with a long, proven track record of execution (especially through a downturn), commitment to capital markets access, and incentives that are aligned with creditors’ interests. With regard to appropriate bond structures, the
sub-advisor
requires the level and variability of an issuer’s revenues to comfortably support ongoing operations and the capital structure.
The
sub-advisor’s
assumption of credit risk is valuation driven. When valuing securities/credits, and assessing an attractive margin of safety, the
sub-advisor
applies the same valuation approach across all sectors (ABS, CMBS, corporate credit, and municipal bonds). The
sub-advisor
seeks to buy securities at discounted valuations, inclusive of a sufficient margin of safety, that are created by excess short-term price volatility. The
sub-advisor
will make investments when it believes a security’s potential excess return more than compensates the fund for default risk, liquidity risk, and the embedded optionality of a bond. The
sub-advisor
may sell securities for several reasons including to adjust the portfolio’s average maturity, move into more attractively valued securities, take gains, the investment thesis changed, or to meet redemption requests.
Guggenheim Partners Investment Management, LLC
100 Wilshire Boulevard, 5th Floor
Santa Monica, CA 90401
Scott Minerd, Anne Walsh, Steven Brown and Adam Bloch are the
co-portfolio
managers responsible for the multi credit strategy (the “Multi Credit Strategy”), which is the segment of the High Income Alternatives Fund’s assets managed by Guggenheim Partners Investment Management, LLC (“Guggenheim”). Minerd is Chairman of Guggenheim Investments and Global Chief Investment Officer of Guggenheim Partners. Minerd leads Guggenheim’s research on global macroeconomics and guides the firm’s investment strategies. Previously, Minerd was a Managing Director with Credit Suisse First Boston in charge of trading and risk management for the Fixed Income Credit Trading Group. He was responsible for the corporate bond, preferred stock, money markets, U.S. government agency and sovereign debt, derivatives securities, structured debt and interest rate swaps trading business units. Minerd is a member of the Federal Reserve Bank of New York’s Investor Advisory Committee on Financial Markets, helping advise the NY Fed President about financial market developments, risks to the financial system and steps that can be taken to understand and mitigate these risks. He is an advisor to the Organization for Economic Cooperation and Development (OECD) on long-term investments and is a contributing member of the World Economic Forum (WEF) and their Global Agenda Council
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PartnerSelect High Income Alternatives Fund – Sub-Advisors
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PartnerSelect High Income Alternatives Fund – Sub-Advisors
— (Continued)
on the Arctic. Walsh joined Guggenheim in 2007, and is Chief Investment Officer – Fixed Income, and head of the Portfolio Construction Group and Portfolio Management. She oversees more than $185 billion in fixed-income investments including Agencies, Credit, Municipals, and Structured Securities. She is responsible for portfolio design, strategy, sector allocation and risk management, as well as conveying Guggenheim’s macroeconomic outlook to Portfolio Managers and fixed income Sector Specialists. Walsh specializes in liability-driven portfolio management. Prior to joining Guggenheim, she served as Chief Investment Officer at Reinsurance Group of America, and also held roles at Zurich Scudder Investments, Lincoln Investment Management and American Bankers Insurance Group. She is also a CFA
®
charterholder and a member of the CFA Institute. Brown joined Guggenheim in 2010 and is a Portfolio Manager for Guggenheim’s Active Fixed Income and Total Return mandates. He works with the Chief Investment Officers and other members of the Portfolio Management team to develop and execute portfolio strategy. Additionally, he works closely with the Sector Teams and Portfolio Construction Group. Prior to joining Portfolio Management in 2012, Brown worked in the Asset Backed Securities group. His responsibilities on that team included trading and evaluating investment opportunities and monitoring credit performance. Prior to joining Guggenheim, Brown held roles within structured products at ABN AMRO and Bank of America in Chicago and London. He is also a CFA
®
charterholder and a member of the CFA Institute. Bloch joined Guggenheim in 2012 and is a Portfolio Manager for Guggenheim’s Active Fixed Income and Total Return mandates. Bloch works with the Chief Investment Officers and other Portfolio Managers to develop portfolio strategy that is in line with the firm’s views. He oversees strategy implementation, working with research analysts and traders to generate trade ideas, hedge portfolios, and manage
risk. Prior to joining Guggenheim, he worked in Leveraged Finance at Bank of America Merrill Lynch in New York where he structured high-yield bonds and leveraged loans for leveraged buyouts, restructurings, and corporate refinancings across multiple industries.
The managers of the Multi Credit Strategy seek to maximize total return through a combination of current income and capital appreciation. The team seeks to achieve its investment objective by investing in a wide range of fixed-income assets selected from a variety of credit sectors including, but not limited to, corporates, structured credit, U.S. government and agency, municipals, and other credit sectors. The investments can be across the capital structure including but not limited to senior secured, unsecured, second lien, other mezzanine including preferred, and equity. The strategy seeks opportunities across fixed-income market sectors, especially in
non-index-eligible
securities. In addition, the team may invest in derivatives or other asset classes to meet its investment objective. The strategy is flexible and is not constrained by duration, sector, issuer, or credit quality. As such, the strategy does not target any specific benchmark exposure to sectors, security weightings, and credit quality.
Guggenheim believes that an emphasis on capital preservation, while capturing attractive yields and a sustainable income component, is the surest path to superior long-term investment
results. The firm strongly believes that fixed-income markets are inefficient, and as a result Guggenheim focuses on
bottom-up,
fundamental research to identify securities with attractive relative value, where prices do not accurately reflect a security’s intrinsic value for a given risk profile.
In-house
macroeconomic views serve as a “roadmap” to inform and guide portfolio construction considerations such as duration and credit quality, as well as sector weightings.
Credit selection is conducted by a deep team of sector and security analysts. The focus is on understanding the underlying business, issuer financial strength, risks pertaining to cash flows, the capital structure (seniority of payments), debt covenants, among other considerations. This analysis involves comprehensive industry analysis that incorporates inputs from industry experts, competitors, suppliers, servicers, and customers. It also integrates a thorough analysis of creditworthiness under a variety of downside stress-test scenarios and leverages a dedicated legal team to assist in examining and assessing pertinent covenants and terms that may affect issues.
Risk management plays a prominent role in the investment process. At a high-level, the team studies a wide range of economic and market scenarios, and assesses the possible impact these scenarios could have on the portfolio. Scenarios can include those driven by macroeconomic risks, changes in regulation, broad sector trends, or an assessment of liquidity at the sector, security, and industry levels. Moreover, the team seeks to understand how specific changes in portfolio composition would lessen the downside, such as upgrading credit quality or including different types of security structures. Scenario analysis at the portfolio level also includes the impact of various interest-rate changes along different tenors of the curve.
At the portfolio level, the team might examine the effect of sudden
shocks on the portfolio by assuming widening yield spreads for specific portfolio exposures. The team will also examine risks to specific sectors under a given stress-test scenario to quantify the potential downside risk. Risk management is also expressed through portfolio diversification, both across and within fixed-income sectors, position size limits, prudent yield-curve positioning, loss thresholds, and other measures.
Securities may be sold for several reasons including to adjust the portfolio’s average maturity, shift assets into or out of higher-quality securities, move into more attractively valued securities, take gains, or to meet redemption requests.
Neuberger Berman Investment Advisers LLC
1290 Avenue of the Americas
New York, NY 10104
Derek Devens and Rory Ewing are the portfolio managers responsible for the option income strategy (the “Option Income Strategy”), which is the segment of the High Income Alternatives Fund’s assets managed by Neuberger Berman Investment
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Litman Gregory Funds Trust
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Advisers LLC
(“Neuberger Berman”). Devens has managed the Option Income Strategy since inception. Devens joined Neuberger Berman in 2016 and is a Managing Director and Senior Portfolio Manager of the Option Group. Prior to Neuberger Berman, he was responsible for both Research and Portfolio Management at Horizon Kinetics. Devens was a member of the Investment Committee and responsible for
co-managing
the Kinetics Alternative Income Fund and various separate account strategies. Prior to Horizon Kinetics, he was a Vice President with Goldman Sachs’ Global Manager Strategies Group where he was responsible for conducting investment manager research. He is also a CFA
®
charterholder. Ewing is a Senior Vice President and Portfolio Manager for the Option Group at Neuberger Berman. He joined Neuberger Berman in 2016 and has been a Portfolio Manager of the Option Income Strategy since February 28, 2021. Prior to joining Neuberger Berman, he was most recently a research analyst at another investment adviser since 2013. Ewing has held several investment positions at different investment advisers.
In executing the Option Income Strategy, Devens and Ewing write put options on U.S. equity indexes, a strategy conceptually similar to that utilized by the Chicago Board Options Exchange (CBOE) S&P 500 PutWrite Index (the “Put Index”). However, by utilizing thoughtful active management, they seek to reduce the path dependence of the Put Index, as well as manage risk and seek attractive returns relative to the Put Index. While the Put Index writes one
(ATM) put option on the S&P 500 Index each month, Devens and Ewing seek to diversify the underlying options held by the strategy by strike price and expiration date by writing a series of short dated put options on diversified U.S. equity indexes, laddered across expiration dates, intending for option exposures to be relatively consistent across options tenors (i.e., the time left until an option contract expires). Options are rolled in a manner that seeks to preserve this laddered structure. This diversification is intended to seek to reduce the likelihood of a series of negative short-term outcomes in a row that could result from selling only one put per month.
Another critically important difference between the Put Index and the strategy Devens and Ewing manage for the Fund is the selection of the level of ‘moneyness’ of the options sold (ATM versus
money, or “OTM”). The fund’s options will primarily be OTM, vs the Put Index selling ATM options. The Fund attempts to generate returns through the receipt of option premiums from selling puts, as well as through investments in fixed income instruments, which collectively are intended to reduce volatility relative to what it would be if the fund held the underlying equity index on which the options are written. The Fund’s investments in fixed income instruments will typically be in short duration U.S. Treasuries and are intended to provide liquidity and preserve capital and will serve as collateral for the Fund’s investments in options.
Risk management is a function of a number of factors, one being the overall sizing of the allocation at the fund level, since the strategy can have significant equity correlation (but has historically exhibited lower beta than broad-based U.S. equity indices as demonstrated by the PUT Index compared to the S&P 500 Index). Secondly, the selection of ATM or OTM, and how far
OTM, influences the level of risk materially. Lastly, Devens and Ewing seek to actively reduce downside exposures to mitigate equity risk by buying back a portion of the put options that are underwater and selling new put options at higher premiums. Put writing is not a strategy built on a philosophy of explicit risk avoidance; rather, it is rooted in seeking receipt of option premiums in exchange for taking on the risk of a decline in U.S. broad based equity indices. As such, investors in the strategy accept limited upside returns relative to U.S. broad-based equity indices in exchange for the potential for option premiums to mitigate equity risk.
In a put writing strategy, a fund (as the seller of the option) receives premiums from the purchaser of the option in exchange for providing the purchaser with the right to sell the underlying instrument to the fund at a specific price (i.e., the strike price). If the market price of the instrument underlying the option exceeds the strike price, it is anticipated that the option would go unexercised and the fund would earn the full premium upon the option’s expiration or a portion of the premium upon the option’s early termination. If the market price of the instrument underlying the option drops below the strike price, it is anticipated that the option would be exercised and the fund would pay the option buyer the difference between the market value of the underlying instrument and the strike price. The amount of premium varies according to a number of factors, including the market perception of risk, the length of the option, and whether the option is ATM when written (riskier for the seller, which necessitates a higher premium) or OTM and by how much. The further OTM the option is, the less likely the index is to decline below the strike price, and thus the less likely the option seller is to be required to make a payment to the option buyer, thus the premium collected by the seller necessarily is lower.
The potential returns to equity index put writing come from two risk premia plus the return on collateral, which is typically invested in relatively conservative, short-duration fixed income. The first is the
, or the return investors earn for holding equity risk. Devens and Ewing believe that investors should also acknowledge the natural corollary related to options on stock indexes. Devens believes that for equity markets to be efficient, investors who assume exposure to the downside risk of an equity index should seek to earn a portion of the long-term equity risk premium over longer investment periods. Essentially, in Devens’ and Ewing’s view, the underwriters of equity risk should earn the equity risk premium over the long term regardless of how the risk is assumed, whether through direct ownership of the index, or seeking to offset its downside. If this was not the case, then in Devens’ and Ewing’s view, equity markets would demonstrate a massive inefficiency, as investors could own the equity index and buy puts to protect the full value of their investment from any loss while still earning positive returns. Therefore, Devens and Ewing believe that for markets to be efficient, a portion of put option premium collected from writing put options must therefore compensate the put seller for the equity sensitivity of the option. The portion of the equity risk premium earned through put writing is a function of the moneyness of the put option written.
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PartnerSelect High Income Alternatives Fund – Sub-Advisors
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PartnerSelect High Income Alternatives Fund – Sub-Advisors
— (Continued)
The second risk premium is the
. In addition to earning premiums on the put options written, Devens and Ewing believe the option seller must be compensated further for the added risk associated with a decline in the broad-based U.S. equity markets for some period in the future in an unpredictable world. Investors do not generally assume risk with the intention of losing money over time, and option markets are not an exception. Because of the high degree of uncertainty, and the negatively skewed risk/return profile to which they are exposed, sellers of put options generally build in a cushion (or expected profit margin) to the premiums they collect from option buyers. Over time, Devens and Ewing believe this concept has the potential to allow sellers of ATM puts to generate returns similar to owning the index over long-term investment horizons.
The return profile of selling ATM U.S. equity index puts has historically tended to be more stable than owning the underlying equity index outright as demonstrated by the PUT Index compared to the S&P 500 Index. In converting traditional equity investment return potential (capital appreciation and dividends) into
up-front
cash flows via the consistent collection of option premiums and interest income, put writing strategies make an explicit
trade-off
between
up-market
participation and down-market participation, while still seeking reasonable returns in flat markets. As such, it is anticipated that the strategy will not participate in the full upside of the index, but it also has the potential to mitigate a portion of losses when the index suffers negative performance, due to the offsetting effect of the premium cash flows. The premiums the strategy collects may decrease during up markets, however, Devens and Ewing would expect premiums to materially ratchet up during periods of market losses, a feature which may help the strategy recover from drawdowns more quickly than the underlying equity index.
The SAI provides additional information about each
sub-advisor’s
method of compensation for its portfolio managers, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the Fund.
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Litman Gregory Funds Trust
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PartnerSelect SBH Focused Small Value Fund – The
Sub-Advisor
Litman Gregory’s strategy is to allocate the portfolio’s assets to the Fund’s
sub-advisor
who, based on Litman Gregory’s research, is judged to be among the best in its style group. The
sub-advisor
manages the portfolio by building a select portfolio representing its highest-confidence stocks. Under normal market conditions, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in securities of
small-sized
U.S. value companies. This investment policy may be changed by the Board without shareholder approval, but shareholders would be given at least 60 days’ notice if any change occurs. Though the total number of securities the Fund may hold at any point in time will vary, it is generally expected that the Fund will hold between 20 and 40 equity securities.
As used in this Prospectus, Litman Gregory defines a
“Small-Cap
Company” as one whose market capitalization falls within the range of market capitalizations of any company in the Russell 2000
®
Index, as of the most recent reconstitution. Though the primary capitalization focus of the Fund is in the
small-cap
sector, Litman Gregory does not believe that
small-cap
investors should be forced to sell a stock that appreciates beyond the upper thresholds of the
small-cap
range if the manager continues to maintain a high level of conviction with respect to the holding. This has been a problem with many
small-cap
funds, as they have, at times, been forced to sell some of their most compelling holdings. Overall, Litman Gregory expects the majority of the Fund’s holdings at any point in time to meet the definition of a
Small-Cap
Company; however, the Fund will not be required to sell any company if its market capitalization grows and exceeds the market capitalization of the largest company in the Russell 2000
®
Index.
PartnerSelect SBH Focused Small Value Fund Portfolio Managers
Mark T. Dickherber, CFA, CPA
Segall Bryant & Hamill, LLC
540 West Madison Street, Suite 1900
Chicago, IL 60661
Mark T. Dickherber and Shaun P. Nicholson of Segall Bryant & Hamill, LLC (“SBH”) are the portfolio managers for the Fund. Dickherber joined SBH in 2007 and is a principal, senior portfolio manager and head of SBH’s Small Cap strategies. He is the lead portfolio manager for SBH’s Small Cap Value strategy and the
co-portfolio
manager of SBH’s Small Cap Core and Small Cap Value Concentrated strategies. Dickherber is also responsible for equity research in the Small Cap and Small/Mid Core equity portfolios and is a specialist in the healthcare, utilities and REIT sectors within the respective portfolios. Prior to joining SBH, Dickherber served as director of research for Kennedy Capital Management, where he had worked since 1996. Nicholson joined SBH in 2011 and is a senior portfolio manager for SBH’s Small Cap strategies. He is the lead portfolio manager for SBH’s Small Cap Value Concentrated strategy and the
co-portfolio
manager for SBH’s Small Cap Value strategy. He is responsible for research related to materials, autos/transports, industrials and regional
banks within the respective portfolios. Prior to joining SBH, Nicholson spent six years at Kennedy Capital Management.
Dickherber and Nicholson are
small-cap
value-oriented investors who seek to identify companies that have the potential for significant improvement in return on invested capital (“ROIC”), with the idea being that, as ROIC improves, each dollar invested in the business earns an incrementally higher return. Importantly, Dickherber and Nicholson disaggregate a company’s ROIC down to the business segment level to understand the drivers (and detractors) of a company’s profitability. Armed with segment-level return data, the team seeks to identify companies with low embedded expectations that have company-specific, returns-improving catalysts. The team does not buy stocks simply because they are “cheap.” Dickherber and Nicholson require that management is ROIC-focused, financially incentivized to improve returns through appropriate capital allocation, and able to articulate an appropriate returns-based strategy to improve profitability. The team tracks management’s progress via quarterly financials and quarterly management contact. The team believes that management’s commitment and ability to appropriately improve returns results in the largest portfolio weightings.
Dickherber and Nicholson seek to identify the building blocks of improved (and diminishing) profitability before it is recognized by the market. The team is willing to be early in a particular stock and will stay invested provided the investment team sees continuing evidence that management is taking the appropriate steps to improve returns. Dickherber and Nicholson will sell stocks for a number of reasons. Examples include management making a capital-allocation decision that will likely diminish returns, such as an acquisition of a lower-returning business; management failing to demonstrate a strategy that improves returns; a change in management that negatively impacts a returns-based culture; the diminishing effectiveness of certain company-specific catalysts for improved returns; or an estimation by the
co-portfolio
managers that the risk-reward ratio has become unattractive.
The SAI provides additional information about the
sub-advisor’s
method of compensation for its portfolio managers, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the Fund.
Prior Performance for Similar Accounts Managed by the
Sub-Advisor
The following tables set forth performance data relating to the historical performance of all private accounts and limited partnerships managed by the
Sub-Advisor
for the periods indicated that have investment objectives, policies, strategies and risks substantially similar to those of the Fund. The data is provided to illustrate the past performance of the
Sub-Advisor
in managing substantially similar accounts as measured against a market index and does not represent the performance of the Fund. You should not consider this performance data as an indication of future performance of the Fund.
The private accounts and limited partnerships that are included in the performance data set forth below are not subject to the same
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PartnerSelect SBH Focused Small Value Fund – The
Sub-Advisor
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PartnerSelect SBH Focused Small Value Fund – The
Sub-Advisor
— (Continued)
types of expenses to which the Fund is subject, or to the diversification requirements, specific tax restrictions and investment limitations imposed on the Fund by the Investment Company Act of 1940, as amended, or Subchapter M of the Internal Revenue Code of 1986, as amended. Consequently, the performance results for these private accounts or limited partnerships could have been adversely affected if the private accounts and limited partnerships had been regulated as investment companies under the federal securities laws.
SBH Small Cap Value Select Composite
Average Annual Total Returns
For the Periods Ended December 31, 2020
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Since
Inception
(July 31, 2014)
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SBH Small Cap Value Select Composite Returns
(1)
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Net of fees / expenses*
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Gross of fees / expenses
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Russell 2000
®
Value Index
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(1)
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The composite performance does not represent the historical performance of the Fund and should not be interpreted as being indicative of the future performance of the Fund.
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*
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The net returns for the composite are shown net of all actual fees and expenses, including sales loads. The fees and expenses of accounts included in the composite are lower than the anticipated operating expenses of the Fund and, accordingly, the Fund would have lower performance results than those shown for the composite.
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Segall Bryant & Hamill, LLC (“SBH”) is an independent registered investment advisor established in 1994. SBH manages a variety of equity and fixed income assets for primarily U.S. clients.
has prepared and presented the foregoing reports in compliance with the Global Investment Performance Standards (GIPS
), which differs from the SEC method of calculating performance. The GIPS are a set of standardized, industry wide principles that provide investment firms with guidance on how to calculate and report their investment results.
The GIPS total return is calculated by using a methodology that incorporates the time-weighted rate of return concept for all assets, which removes the effects of cash flows. The SEC standardized total return is calculated using a standard formula that uses the average annual total return assuming reinvestment of dividends and distributions and deduction of sales loads or charges.
The net of fees composite returns are net of management fees, trading commissions, and transaction costs and reflect the reinvestment of all income. Actual fees may vary depending on, among other things, the applicable management fee schedule and portfolio size. The Standard Institutional Investment Fee Schedules are as follows:
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SBH Small Cap Value Select Strategy:
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A complete list of SBH composites and performance results is available upon request.
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Litman Gregory Funds Trust
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PartnerSelect Oldfield International Value Fund – The
Sub-Advisor
Litman Gregory’s strategy is to allocate the portfolio’s assets to the Fund’s
sub-advisor
who, based on Litman Gregory’s research, is judged to be among the best in its style group. The
sub-advisor
manages the portfolio by building a select portfolio representing its highest-confidence stocks. Under normal market conditions, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in securities of value companies organized or located outside of the United States. This investment policy may be changed by the Board without shareholder approval, but shareholders would be given at least 60 days’ notice if any change occurs. Though the total number of securities the Fund may hold at any point in time will vary, it is generally expected that the Fund will hold between 25 and 30 equity securities.
PartnerSelect Oldfield International Value Fund Portfolio Managers
Oldfield Partners LLP
11 Grosvenor Place
London SW1X 7HH
United Kingdom
Nigel Waller and Andrew Goodwin of Oldfield Partners LLP (“Oldfield”) are the portfolio managers for the Fund. Waller is one of the founding partners of Oldfield, which was established in 2005, and is Chief Investment Officer and Chief Executive Officer. Waller
co-manages
Oldfield’s global and Europe, Australasia, Far East (EAFE) equity portfolios and contributes to the overall investment selection. Prior to joining Oldfield, Waller was at Merrill Lynch Investment Managers for 13 years and was a director and portfolio manager on the global team and was also a member of the emerging markets and European teams in London and, from 1997 to 1999, the Asia team in Singapore. Goodwin joined Oldfield in 2013. He
co-manages
Oldfield’s global and EAFE equity portfolios and contributes to the overall investment selection. Prior to joining Oldfield, Goodwin was at SVG Capital in London for seven years managing mainly European equity portfolios. Before joining SVG Capital, he held portfolio management positions at Sovereign Asset Management, American Express Asset Management and Phillips & Drew Fund Management.
The firm was established and started in March 2005 by Richard Oldfield. He started his career at SG Warburg-Mercury Asset Management in 1977 and ultimately headed the global equity team there. After approximately 20 years at Mercury, he left to lead the Rausing Family investment office, Alta Advisors. Alta was and is among the largest family offices in Europe. At Alta, he ran the global equity strategy that we see in its current form at Oldfield Partners. He became Chairman of the Oxford University investment committee and Oxford University Endowment Management Ltd in January 2007.
The investment team at Oldfield shares a contrarian value philosophy and the chairman, Richard Oldfield, and Nigel Waller have cultivated a patient and supportive culture needed to execute a contrarian approach successfully. The culture is one
that encourages independent thinking, calmness when things are not going as expected, and intellectual honesty.
Oldfield believes most investors focus too much on the short term, which leads to compelling opportunities for contrarian long-term investors. The team is drawn to companies that have a “cloud” over them, which often leads their stocks to trade at unusually cheap valuations. Oldfield believes in concentrating in only its highest-conviction ideas and does not invest based on what is held in an index.
Oldfield looks for investments that appear to be a bargain and for which thorough analysis supports that determination. The firm does not have a prescribed type of business model or quality definition for its investment opportunity set. The team seeks to invest in high-quality businesses within any given sector or industry and looks at factors such as whether a company is a
low-cost
operator, invests counter-cyclically to emerge stronger, has high Returns on Equity and high margins, etc. Oldfield will invest across a wide gamut of sectors provided companies underlying that sector are trading at attractive prices.
Oldfield builds its own financial models and scenarios two to three years out, and does the necessary due diligence so that it can support its assumptions and views in front of the team. Oldfield often uses
valuation analysis to find “hidden values.” The firm triangulates using multiple valuation metrics—Price/Earnings (“P/E”), Price/Sales, Price/Book, Price/Free Cash Flow (“P/CF”), Enterprise Value/Sales, Enterprise Value/EBITDA. Oldfield relies on conservative valuation assumptions in both absolute and relative terms. The team seeks to build a margin of safety or cushion at the valuation level and in the fundamental “variable” (that is, the Earnings in P/E, and the Cash Flow in P/CF).
Oldfield analyzes industry trends, how a company makes money, and what its future growth prospects are. The team discusses disruption trends impacting companies, such as those stemming from technology, the rise of China, and other factors. Oldfield is wary of taking on financial leverage in companies, especially if they are operationally geared. The team limits exposure to such companies at the overall portfolio level, as a risk-control measure. The firm regularly updates the “variable” as it naturally compounds. There must be a strong justification in order to increase the valuation multiple decided at the time of purchase, and it can happen only after a healthy debate among the team.
Meeting management is not critical nor required but is an important part of the team’s discussion and debate. Over time, Oldfield believes that it gets less value from talking to managements and it views the importance of management as varying by company. More important to Oldfield is management’s past track record, with a focus on what management has done, what Oldfield believes needs to happen in the business to realize the intrinsic value Oldfield sees and to what extent that rests on management, whether management and shareholder interests are aligned, whether the business is stable, and whether management may harm the business with its capital allocation. All of these considerations are factored when deciding how much weight to give to management in the overall analysis of a potential investment.
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PartnerSelect Oldfield International Value Fund – The
Sub-Advisor
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PartnerSelect Oldfield International Value Fund – The
Sub-Advisor
— (Continued)
Oldfield is expected to concentrate the Fund’s portfolio in 25 to 30 stocks. In such a concentrated portfolio the key risk management comes from buying
cheap companies in relation to their normalized fundamentals. Oldfield will seek to avoid value traps by limiting their impact through a conservative approach to estimating intrinsic value. That valuation is the first line of defense. The second is Oldfield’s culture, which encourages debates and gives the team freedom to change its mind when facts change and/or its views evolve. The third defense is to limit purchases to no more than three times (three “bites of the apple”), with the second purchase or “bite” requiring increasing levels of due diligence and the third an independent review by another analyst not close to the story. A stock may typically have an initial weighting range from 3% to 5% at the time of purchase, and Oldfield will not own more than 10% at cost. The team aims to achieve broad diversification in terms of sectors, countries, and types of ideas. Stock weightings are a function of upside potential and the team’s level of conviction in achieving that upside. So, a stock with more perceived upside but for which the team believes the range of potential outcomes can be wide could have a lower weighting than a stock with less perceived upside but a narrower range of projected outcomes. Portfolio turnover is typically relatively low.
The SAI provides additional information about the
sub-advisor’s
method of compensation for its portfolio managers, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the Fund.
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Litman Gregory Funds Trust
|
Each Fund is a
no-load
fund,
which means that you pay no sales commissions of any kind. Each business day that the New York Stock Exchange (“NYSE”) is open, each Fund calculates its share price, which is also called the Fund’s NAV per share. Shares are purchased at the next share price calculated after your accepted investment is received. Share price is calculated as of the close of the NYSE, normally 4:00 p.m. Eastern Time.
The Funds are not registered for sale outside of the United States and are available for purchase only by residents of the United States of America, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands.
The Trust has adopted a multiple class plan. The Equity Fund, International Fund, High Income Alternatives Fund, SBH Focused Small Value Fund and Oldfield International Value Fund each offer a single class of shares – Institutional Class shares – in this Prospectus. The Alternative Strategies Fund offers two classes of shares – Institutional Class shares and Investor Class shares – in this Prospectus. The two different classes of shares represent investments in the same portfolio of securities, but the classes are subject to different expenses and may have different share prices as outlined below:
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shares are not charged a Rule
12b-1
distribution and servicing fee, and are sold with no sales load.
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•
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shares are charged a 0.25% Rule
12b-1
distribution and servicing fee, and are sold with no sales load.
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The first step is to determine the type of account you wish to open. The following types of accounts are available to investors:
Individual or Joint Accounts
For your general investment needs:
Individual accounts are owned by one person. Joint accounts can have two or more owners (tenants).
Retirement accounts allow individuals to shelter investment income and capital gains from current taxes. In addition, contributions to these accounts may be tax deductible. Retirement accounts (such as individual retirement accounts (“IRAs”), rollover IRAs, Simplified Employee Pension (SEP) plans and Roth IRAs) require specific applications and typically have lower minimums.
Other retirement plans, such as Keogh or corporate profit-sharing plans, 403(b) plans and 401(k) plans, may invest in the Funds. All of these accounts need to be established by the plan’s trustee. The Funds do not offer versions of these plans.
If you are investing through a
tax-sheltered
retirement plan, such as an IRA, for the first time, you will need an IRA Application and Adoption Agreement. Retirement investing also involves separate investment procedures.
Gifts or Transfers to Minors (UGMA and UTMA)
To invest for a child’s education or other future needs:
These custodial accounts provide a way to give money to a child and obtain tax benefits. An individual can give up to a statutorily-defined amount per year per child without paying a federal gift tax. Such amount is subject to change each year. For 2021, the amount is $15,000. Depending on state laws, you can set up a custodial account under the Uniform Gifts to Minors Act (“UGMA”) or the Uniform Transfers to Minors Act (“UTMA”).
For money being invested by a trust:
The trust must be established before an account can be opened. The Funds may require additional documentation regarding the formation of the trust prior to establishing an account.
For investment needs of corporations, associations, partnerships or other groups:
The Funds do not require a special application. However, the Funds may require additional information prior to establishing an account.
How to Choose a Share Class
Before you buy shares in any Fund, you need to decide which class of shares best suits your needs. The Equity Fund, International Fund, High Income Alternatives Fund, SBH Focused Small Value Fund and Oldfield International Value Fund each offer a single class of shares – Institutional Class shares – in this Prospectus. The Alternative Strategies Fund offers two classes of shares – Institutional Class shares and Investor Class shares – in this Prospectus. Each class is essentially identical in legal rights and invests in the same portfolio of securities. The difference in the fee structures between the classes for a Fund is primarily the result of their separate arrangements for shareholder and distribution services and is not the result of any difference in the amounts charged by Litman Gregory for investment advisory services. Accordingly, the investment advisory expenses do not vary by class for a Fund.
Subject to Litman Gregory’s approval and based on current Internal Revenue Service (“IRS”) guidance, if investors currently holding Investor Class shares meet the criteria for eligible investors and would like to convert to Institutional Class shares, there should be no tax consequences to the converting investor and investors are not subject to the redemption/exchange fees. To inquire about converting your Investor Class shares to Institutional Class shares, please call
Investor Class shares may be appropriate if you intend to retain the services of a financial adviser, mutual fund supermarket, retirement plan or other financial intermediary. Investor Class shares cannot be purchased directly from the Funds that offer such class. Investor Class shares have adopted a Distribution and Shareholder Servicing Plan (the “Distribution Plan”), pursuant to which each Investor Class may pay up to 0.25% of its average annual net assets to financial planners, mutual fund supermarkets, or any other persons that render assistance in distributing or promoting the sale of shares or that provide certain shareholder services.
Institutional Class Shares
Institutional Class shares may be appropriate if you intend to make your own investment decisions and will invest directly with the Funds. The Distribution Plan does not apply to the Institutional Class shares, and as a result, the Institutional Class of a Fund has a lower expense ratio than the Investor Class of the same Fund, which will result in higher investment returns for the Institutional Class over time.
The third step involves determining the amount of your investment. The Funds have established the following minimum investment levels for your initial investment, additional investments and ongoing account balances for Institutional Class shares (all Funds) and Investor Class shares (Alternative Strategies Fund only):
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Equity Fund, International Fund, High Income Alternatives Fund, SBH Focused Small Value Fund and Oldfield International Value Fund
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- Institutional Class
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$
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10,000
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$
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250
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$
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2,500
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- Institutional Class
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$
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1,000
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$
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100
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$
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250
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Automatic Investment Account
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- Institutional Class
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$
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2,500
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$
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250
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$
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2,500
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Alternative Strategies Fund
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- Institutional Class
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$
|
100,000
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$
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250
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$
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2,500
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- Investor Class
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$
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1,000
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$
|
100
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$
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250
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- Institutional Class
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$
|
5,000
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$
|
100
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$
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250
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- Investor Class
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$
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500
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$
|
100
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$
|
250
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Automatic Investment Account
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- Institutional Class
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$
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2,500
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$
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250
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$
|
2,500
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- Investor Class
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$
|
2,500
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$
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250
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$
|
2,500
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Litman Gregory may waive the minimum investment from time to time in its discretion.
The fourth step involves completing your application to open your account. All shareholders must complete and sign an application in order to establish their account. The type of application depends on the type of account you chose to open. Regular investment accounts, including individual, joint tenant, UGMA, UTMA, business, or trust accounts, must complete the Funds’ standard account application. Shareholders who wish to establish retirement accounts must complete the IRA application and adoption agreement. Shareholders who wish to transfer retirement holdings from another custodian must also complete the IRA Transfer of Assets Form. Be sure to complete the section of the account application indicating the amount you are investing in each Fund.
The final step in opening your account is to mail the completed account application, along with your check payable to the PartnerSelect Funds.
The Funds do not accept third-party checks, money orders,
checks, starter checks, official bank checks, credit cards, cash or checks or wires from foreign financial institutions.
If you send any of these instruments, your purchase order will be rejected, and your investment in the Funds will be delayed.
The mailing addresses for the Funds are:
Litman Gregory Funds Trust
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c/o
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DST Asset Manager Solutions, Inc.
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P.O. Box 219922
Kansas City, MO 64121-9922
Litman Gregory Funds Trust
|
c/o
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DST Asset Manager Solutions, Inc.
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330 West Ninth Street
Kansas City, MO 64105
In compliance with the USA PATRIOT Act of 2001, please note that the Transfer Agent will verify certain information on your account application as part of the Funds’ Anti-Money Laundering Compliance Program. Until such verification is made, the Funds may temporarily limit share purchases. As requested on the application, you should supply your full name, date of birth, social security number and permanent street address. If you are opening an account in the name of a legal entity (e.g., a partnership, limited liability company, business trust, corporation, etc.), you must also supply the identity of the beneficial owners. Mailing addresses containing only a P.O. Box will not be accepted. Your information will be handled by us as discussed in our privacy notice. Please contact the Transfer Agent at
if you need additional assistance when completing your application.
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Litman Gregory Funds Trust
|
If you wish to open or add to your account by wire, please call
for instructions.
After your account is open,
you may increase the amount of your investment by:
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Mailing a check to the above addresses along with a letter or the form at the bottom of your account statement. Be sure to put your account number on your check and in your letter, and please refer to Step 4 above for a list of instruments that will not be accepted for investment.
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Wiring money from your bank. Call
for instructions.
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Making automatic investments if you signed up for the Automatic Investment Plan when you opened your account.
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You can arrange to take money out of your account at any time by selling (redeeming) some or all of your shares. Your shares will be sold at the next NAV per share (share price) calculated after your order is received.
To sell shares in a
non-retirement
account,
you may use any of the methods described in this section. To sell shares in a retirement account, your request must be made in writing.
Certain requests must include a medallion guarantee.
This is designed to protect you and each Fund from fraud. Your request must be made in writing and include a medallion guarantee if any of the following situations apply:
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You wish to redeem more than $25,000 worth of shares.
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Your account registration information has changed within the past 30 days.
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The redemption check is being mailed to a different address from the one on your account (address of record).
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The check is being made payable to someone other than the account owner.
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Please note that there may be other special cases in which a Medallion Guarantee may be required. Each signature must be guaranteed by an eligible signature guarantor, which must participate in the Securities Transfer Agents Medallion Program (STAMP), the leading signature guarantee program recognized by all major financial service associations throughout the United States and Canada. You should be able to obtain a medallion guarantee from a bank, broker-dealer, credit union (if authorized under state law), securities exchange or association, clearing agency or savings association. A notary public cannot provide a medallion guarantee.
Write and sign a “letter of instruction” with:
Your Fund’s account number
The dollar amount or number of shares to be redeemed
Please note the following special requirements for redeeming shares for different types of accounts:
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Individual, Joint Tenant, Sole Proprietorship, UGMA or UTMA Accounts:
The letter of instruction must be signed by all persons required to sign for transactions, exactly as their names appear on the account.
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•
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The account owner should complete a Retirement Distribution Form. Call
to request one.
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The trustee must sign the letter indicating capacity as trustee. If a trustee’s name is not in the account registration, provide a copy of the trust document certified within the past 60 days.
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Business or Organization:
At least one person authorized by corporate resolutions to act on the account must sign the letter. Include a corporate resolution (certified within the past 6 months) with corporate seal or medallion guarantee.
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Executor, Administrator, Conservator or Guardian:
Call
for instructions.
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Unless otherwise instructed, the Funds will send a check to the address of record.
Litman Gregory Funds Trust
|
c/o
|
DST Asset Manager Solutions, Inc.
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P.O. Box 219922
Kansas City, MO 64121-9922
Litman Gregory Funds Trust
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c/o
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DST Asset Manager Solutions, Inc.
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330 West Ninth Street
Kansas City, MO 64105
Selling Shares by Telephone
You must select this option on your account application if you wish to use telephone redemption; it is not automatically available.
If you selected the telephone redemption option on your account application, you can sell shares simply by calling
If you wish to add this feature to your account, you must do so in writing at least 30 days in advance of any telephonic redemption. The amount you wish to redeem (up to $25,000) will be sent by check to the address of record.
This option is not available for retirement accounts.
You must sign up for the wire feature before using it. To verify that it is in place, please call
Wire redemptions may be processed for amounts between $5,000 and $25,000. Your wire redemption request must be received by the Funds before 4:00 p.m., Eastern Time for money to be wired the next business day.
This option is not available for retirement accounts.
Shareholder and Account Policies
Statements, Reports, and Inquiries
Statements and reports that each Fund sends you include the following:
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Confirmation statements (after every transaction that affects your account balance or your account registration)
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Financial reports (every six months)
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Account statements (every six months)
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DST Asset Manager Solutions, Inc., the Funds’ transfer agent, is located at 330 West Ninth Street, Kansas City, Missouri, 64105. You may call the Transfer Agent at
if you have questions about your account.
ALPS Distributors, Inc., the Funds’ principal underwriter, is located at 1290 Broadway, Suite 1100, Denver, Colorado 80203.
Exchanges of shares between classes are permitted only as follows: (i) a class of shares of a Fund may be exchanged for the same class of shares of another Fund; and (ii) the Investor Class shares of a Fund may be exchanged for the Institutional Class shares of the same Fund, if the investor is eligible to invest in the Institutional Class shares of that Fund. Shareholders may exchange shares by mailing or delivering written instructions to the Transfer Agent. Such exchange will be treated as a sale of shares and may result in taxable gains. Please specify the names and class of the applicable Fund(s), the number of shares or dollar amount to be exchanged, and your name and account number. You may not utilize an exchange to establish an account into a closed fund.
Exchanging Shares by Telephone
You must select this option on your account application if you wish to use telephone exchange; it is not automatically available.
If you selected the telephone exchange option on your account application, you may also exchange shares (maximum $25,000 worth) by calling the Transfer Agent at
between 9:00 a.m. and 4:00 p.m. Eastern Time on a day that the NYSE is open for normal trading. A Fund will suspend, without notice, the exchange privilege on any accounts it reasonably believes are being used by “market timers.”
Automatic Investment/Withdrawal Plans
One easy way to pursue your financial goals is to invest money regularly. The Funds offer a convenient service that lets you transfer money into your Fund account automatically. Although Automatic Investment Plans do not guarantee a profit and will not protect you against loss in a declining market, they can be an excellent way to invest for retirement, a home, educational expenses and other long-term financial goals. The investment will automatically be processed through the Automated Clearing House (ACH) system. Shares will be issued at the NAV per share after the Fund accepts your order, which will typically be the day after you provide proper instructions to the Transfer Agent (assuming you do so prior to the close of the NYSE).
A systematic withdrawal plan permits you to receive a fixed sum on a monthly, quarterly or annual basis from accounts with a
value of $5,000 or more. Payments may be sent electronically to your bank of record or to you in check form. Certain restrictions apply for retirement accounts. Call
for more information.
Each Fund is open for business each day the NYSE is open. Each Fund calculates its NAV per share as of the close of business of the NYSE, normally 4:00 p.m., Eastern Time.
Each Fund’s NAV per share is the value of a single share. The NAV per share is computed by adding the value of each Fund’s investments, cash and other assets, subtracting its liabilities and then dividing the result by the number of shares outstanding. The NAV per share is also the redemption price (price to sell one share).
Each Fund’s assets are valued primarily on the basis of market quotations. Securities and other assets for which reliable market quotations are not readily available will be valued at their fair value as determined under the guidelines established by, and under the general supervision and responsibility of, the Board. Fair value pricing is intended to be used as necessary in order to accurately value the Funds’ portfolio securities and their respective NAVs. The SAI further describes the Funds’ valuation procedures. Since securities that are primarily listed on foreign exchanges may trade on weekends or other days when a Fund does not price its shares, the value of a Fund’s securities (and thereby its NAV) may change on days when shareholders will not be able to purchase or redeem the Fund’s shares.
General Purchase Information
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All of your purchases must be made in U.S. dollars, and checks must be drawn on U.S. banks.
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The Funds do not accept cash, money orders, cashier’s checks, starter checks, official bank checks, credit cards or third-party checks. If you send any of these instruments, your purchase order will be rejected, and your investment in the Funds will be delayed.
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If your check does not clear, your purchase will be canceled and you will be liable for any losses or fees the Funds or the Transfer Agent incur.
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Your ability to make automatic investments may be immediately terminated if any item is unpaid by your financial institution.
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Each Fund reserves the right to reject any purchase order. For example, a purchase order may be refused if, in Litman Gregory’s opinion, it is so large that it would disrupt management of the Funds. Orders will also be rejected from persons believed by the Fund to be “market timers.”
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The Trust has adopted the “Distribution Plan” under the Investment Company Act of 1940, as amended, on behalf of the Alternative Strategies Fund. Under the Distribution Plan, the Alternative Strategies Fund is authorized to pay the Fund’s distributor a fee for the sale and distribution of the Investor Class shares of the Alternative Strategies Fund and for related
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Litman Gregory Funds Trust
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services the Fund’s distributor provides to shareholders of the Investor Class shares. The maximum amount of the fee authorized under the Distribution Plan is 0.25% of average daily net assets attributable to Investor Class shares for the Alternative Strategies Fund. Because this fee is paid out of the assets of the Investor Class of the Alternative Strategies Fund on an
on-going
basis, over time these fees will increase the cost of your investment in the Alternative Strategies Fund shares and may cost you more than paying other types of sales charges. Institutional Class shares are not subject to the Distribution Plan.
Buying and Selling Shares through Financial Intermediaries
You may buy and sell shares of the Funds through certain financial intermediaries (and their agents) that have made arrangements with the Funds to sell their shares. When you place your order with such a financial intermediary or its authorized agent, your order is treated as if you had placed it directly with the Transfer Agent, and you will pay or receive the next price calculated by the Funds. The financial intermediary (or agent) may hold your shares in an omnibus account in the financial intermediary’s (or agent’s) name, and the financial intermediary (or agent) maintains your individual ownership records. The Funds may pay the financial intermediary (or agent) a fee for performing this account maintenance service. The financial intermediary (or agent) may charge you a fee for handling your order, which may be in addition to the fees described in this Prospectus. The financial intermediary (or agent) is responsible for processing your order correctly and promptly, keeping you advised regarding the status of your individual account, confirming your transactions and ensuring that you receive copies of the Funds’ Prospectus.
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After the Trust has received your redemption request and all proper documents, payment for shares tendered will generally be made within (i) one to three business days for redemptions made by wire, and (ii) three to five business days for ACH redemptions. Normally, redemption payments by check will be mailed to you on the next business day, but your actual receipt of the check will be subject to postal delivery schedules and timing. If making immediate payment could adversely affect the Funds, it may take up to seven days to pay you. The Funds may also delay payment if there have been changes in your mailing address or account registration within 30 days of the date of the redemption.
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A Fund typically expects to meet redemptions with positive cash flows. When that cash is not available, the Fund will seek to maintain its portfolio weightings by selling a cross-section of the Fund’s holdings to meet redemptions.
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During conditions that make the payment of cash unwise and/or in order to protect the interests of a Fund’s remaining shareholders, you could receive your redemption proceeds in the form of readily marketable securities. Receiving securities instead of cash is called “redemption in kind.” The Funds may redeem shares in kind during both normal and stressed market conditions, including when the amount you are redeeming from a Fund exceeds 1% of the Fund’s net assets or $250,000 during any
90-day
period. Generally,
in-kind
redemptions will be effected through a pro rata distribution of the Fund’s portfolio
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securities. You may incur brokerage and other costs in converting to cash any securities distributed. It may take up to several weeks for the initial portion of the
in-kind
securities to be delivered to you, and substantially longer periods for the remainder of the
in-kind
securities to be delivered to you, in payment of your redemption in kind.
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Under certain circumstances, including stressed market conditions, a Fund may also borrow money (subject to certain regulatory conditions) through a bank line of credit, including from a joint credit facility, in order to meet redemption requests.
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Redemptions may be suspended or payment dates postponed when the NYSE is closed (other than weekends or holidays), when trading on the NYSE is restricted or as permitted by the SEC.
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Policy Regarding Excessive Trading and Market Timing
The Board has adopted policies and procedures with respect to frequent purchases and redemptions of Fund shares by Fund shareholders. These policies are summarized below.
Purchases and exchanges of shares of the Funds should be made for long-term investment purposes only. The Funds, as a matter of policy, actively discourage market timing and excessive short term trading and may block accounts or take other action to prevent this type of activity.
Investors seeking to engage in excessive trading or market timing practices may deploy a variety of strategies to avoid detection and, despite the efforts of the Funds to prevent such trading, there is no guarantee that the Funds or their agents will be able to identify such investors or curtail their practices. The ability of the Funds and their agents to detect and curtail excessive trading or short term trading practices may also be limited by operational systems and technological limitations. In addition, the Funds receive purchase, exchange and redemption orders through financial intermediaries and cannot always know or reasonably detect excessive trading that may be facilitated by these intermediaries or by the use of omnibus account arrangements. Omnibus accounts are common forms of holding Fund shares. Entities utilizing omnibus account arrangements may not identify customers’ trading activity in shares of a Fund on an individual basis (although in order for financial intermediaries to purchase Fund shares in nominee name on behalf of other persons, the Funds are required to enter into shareholder information agreements with the financial intermediaries, which may result in the disclosure of certain identifying information about shareholders to the Funds). Consequently, the Funds may not be able to detect frequent or excessive trading in Fund shares attributable to a particular investor who effects purchase and/or exchange activity in Fund shares through a broker, dealer or other financial intermediary acting in an omnibus capacity. Also, there may be multiple tiers of these entities, each utilizing an omnibus account arrangement, which may further compound the difficulty to the Funds of detecting excessive or short duration trading activity in Fund shares. In seeking to prevent disruptive trading practices in the Funds, the Funds and their agents consider the information actually available to them at the time.
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Shareholder and Account Policies
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Shareholder and Account Policies
— (Continued)
Each Fund reserves the right in its discretion to reject any purchase, in whole or in part (including, without limitation, purchases by persons whose trading activity in Fund shares Litman Gregory believes could be harmful to a Fund). The Funds may decide to restrict purchase and sale activity in its shares based on various factors, including whether frequent purchase and sale activity will disrupt portfolio management strategies and adversely affect Fund performance.
Frequent purchases and redemptions of a Fund’s shares may present certain risks for the Fund and its shareholders. These risks may include, among other things, dilution in the value of Fund shares held by long-term shareholders, interference with the efficient management of the Fund’s portfolios and increased brokerage and administrative costs. A Fund may have difficulty implementing long-term investment strategies if it is unable to anticipate what portion of its assets it should retain in cash to provide liquidity to its shareholders. The Funds may, and the International Fund will, invest in
non-U.S.
securities; accordingly, there is an additional risk of undetected frequent trading in Fund shares by investors who attempt to engage in time zone arbitrage. There can be no assurance that the Funds or Litman Gregory will identify all frequent purchase and sale activity affecting a Fund.
Each Fund May Close Small Accounts.
Due to the relatively high cost of maintaining smaller accounts, the shares in your account (unless it is a retirement plan or custodial account) may be redeemed by a Fund if, due to redemptions you have made, the total value of your account is reduced to less than $2,500 (unless you invest in Investor Class shares only, in which case less than $250). If a Fund decides to make such an involuntary redemption, you will first be notified that the value of your account is less than $2,500 (or $250, as applicable), and you will be allowed 30 days to make an additional investment to bring the value of your account to at least $2,500 (or $250, as applicable) before a Fund takes any action. Unless you are a
tax-exempt
investor or investing through a
tax-deferred
retirement plan or other
tax-advantaged
arrangement, a redemption of shares is generally a taxable event, and you may realize a gain or a loss for U.S. federal income tax purposes (see “Taxes on Transactions” below).
Your mutual fund account may be transferred to your state of residence if no activity occurs within your account during the “inactivity period” specified in your state’s abandoned property laws.
Dividends, Capital Gains and Taxes
Dividends of net investment income, if any, for the Alternative Strategies Fund are generally declared and paid quarterly. Dividends of net investment income, if any, for the High Income Alternatives Fund are generally declared and paid monthly. Dividends of net investment income, if any, for the Equity Fund, the International Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund are generally declared and paid annually. Distributions of capital gains, if any, for the High Income Alternatives Fund are generally declared and paid to shareholders quarterly. Distributions of capital gains, if any, for the Equity Fund, the International Fund, the Alternative
Strategies Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund are generally declared and paid to shareholders annually.
When you open an account, specify on your application how you want to receive your distributions. If the option you prefer is not listed on the application, call
for instructions. The Funds offer three options:
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. Your dividend and capital gains distributions will be reinvested automatically in additional shares of the Funds. If you do not indicate a choice on your application, you will be assigned this option.
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. Your capital gains distributions will be reinvested automatically, but you will be sent a check for each dividend distribution.
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. You will be sent a check for your dividend and capital gains distributions ($10 minimum check amount). The Funds will automatically reinvest all distributions under $10 in additional shares of the Funds, even if you have elected the cash option. If the U.S. Postal Service cannot deliver your check or if your check remains uncashed for six months, the Fund reserves the right to reinvest the distribution check in your account at the Fund’s then current NAV and to reinvest all subsequent distributions.
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For retirement accounts, all distributions are automatically reinvested. When you are over 59
1
⁄
2
years old, you can receive distributions in cash.
When a Fund deducts a distribution from its NAV, the reinvestment price is the Fund’s NAV per share at the close of business that day. Cash distribution checks will be mailed within seven days.
Understanding Distributions
As a Fund shareholder, you are entitled to your share of the Fund’s net income and gains on its investments. The Funds pass their earnings along to investors as distributions. Each Fund earns dividends from stocks and interest from short-term investments. These are passed along as dividend distributions. Each Fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These are passed along as capital gains distributions.
As with any investment, you should consider how your investment in each Fund will be taxed. If your account is not a
tax-deferred
retirement account, you should be aware of these tax implications.
. Distributions are subject to federal income tax and may also be subject to state and local taxes. If you live outside of the United States, your distributions could also be taxed by the country in which you reside, as well as potentially subject to U.S. withholding taxes. Your distributions are taxable when they are paid, whether you take them in cash or reinvest them. Distributions declared in December and paid in January, however, are taxable as if they were paid on December 31.
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Litman Gregory Funds Trust
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For federal income tax purposes, each Fund’s income and short-term capital gains distributions are taxed as regular or “qualified” dividends; long-term capital gains distributions are taxed as long-term capital gains. Every January, each Fund will send you and the IRS a statement showing the taxable distributions.
. Your redemptions, including transfers between PartnerSelect Funds, are subject to capital gains tax. A capital gain or loss is the difference between the cost of your shares and the price you receive when you sell them. Whenever you sell shares of a Fund, the Fund will send you a confirmation statement showing how many shares you sold and at what price. You will also receive a consolidated transaction statement every January. It is up to you or your tax preparer, however, to determine whether the sales resulted in a capital gain and, if so, the amount of the tax to be paid. Be sure to keep your regular account statements; the information they contain will be essential in calculating the amount of your capital gains.
If you buy shares just before a Fund deducts a distribution from its NAV, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable distribution.
There are tax requirements that all funds must follow in order to avoid federal income taxation. In their efforts to adhere to these requirements, the Funds may have to limit their investment activity in some types of instruments.
When you sign your account application, you will be asked to certify that your Social Security or Taxpayer Identification number is correct and that you are not subject to 24% withholding for failing to report income to the IRS. If you violate IRS regulations, the IRS can require a Fund to withhold 24% of your taxable distributions and redemptions.
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Shareholder and Account Policies
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The
3-Month
LIBOR represents the average interest rate at which a selection of banks in London are prepared to lend to one another in American dollars with a maturity of 3 months.
The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index consisting of U.S. dollar-denominated, fixed-rate, taxable bonds.
The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry.
The Morningstar Foreign Large Value Category measures the performance of foreign large-value funds which invest in a variety of big international stocks. Most of these funds divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. They tend to invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia
ex-Japan).
Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow). These funds typically will have less than 20% of assets invested in U.S. stocks.
The Morningstar Foreign Large Blend Category measures the performance of foreign large-blend funds which invest in a variety of big international stocks. Most of these funds divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. They tend to invest the rest in emerging markets such as Hong Kong, Brazil, Mexico and Thailand. These funds typically will have less than 20% of assets invested in U.S. stocks.
The Morningstar Large Blend Category measures the performance of large-blend funds which have portfolios that are fairly representative of the overall stock market in size, growth rates, and price. They tend to invest across the spectrum of U.S. industries and owing to their broad exposure, the funds returns are often similar to those of the S&P 500 Index.
The Morningstar Small Blend Category measures the performance of small-blend funds which favor firms at the smaller end of the market-capitalization range, and are flexible in the types of small caps they buy. Some aim to own an array of value and growth stocks while others employ a discipline that leads to holdings with valuations and growth rates close to the
small-cap
averages.
The Morningstar Multialternative Category measures the performance of funds that use a combination of alternative strategies such as taking long and short positions in equity and debt, trading futures, or using convertible arbitrage, among others. Funds in this category have a majority of their assets exposed to alternative strategies and include both funds with static allocations to alternative strategies and funds tactically allocating among alternative strategies and asset classes.
The MSCI ACWI
ex-U.S.
Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States.
The MSCI EAFE Index comprises the MSCI country indices that represent developed markets outside of North America: Europe, Australasia and the Far East and is used to measure international equity performance.
The Russell 2000
®
Index measures the performance of the 2,000 smallest U.S. companies of the Russell 3000
®
Index.
The Russell 2000
®
Value Index measures the performance of the small-capitalization value sector of the U.S. equity market. It is a subset of the Russell 2000
®
Index. It is a style factor weighted index consisting of those issuers within the Russell 2000 Index that have lower
ratios and lower forecasted growth, and represents approximately 48% of the total market value of the Russell 2000
®
Index.
The Russell 3000
®
Index is a broad-based index that measures the performance of the 3,000 largest U.S. companies as measured by market capitalization, and represents about 98% of the U.S. stock market.
The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index that measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable bond market and includes Treasuries, government-related and corporate securities, mortgage-backed securities (MBS) (agency fixed-rate and hybrid adjustable rate mortgage (ARM) pass-throughs), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS) (agency and
non-agency).
The HFRX Fixed Income – Credit Index is an unmanaged index that includes strategies with exposure to credit across a broad continuum of credit
sub-strategies,
including Corporate, Sovereign, Distressed, Convertible, Asset Backed, Capital Structure Arbitrage, Multi-Strategy and other Relative Value and Event Driven
sub-strategies.
The investment thesis across all strategies is predicated on realization of a valuation discrepancy between the related credit instruments. Strategies may also include and utilize equity securities, credit derivatives, government fixed income, commodities, currencies or other hybrid securities. Constituent funds are selected from an eligible pool of the more than 7,500 funds worldwide that report to the Hedge Fund Research (HFR) Database. Constituent funds must meet all of the following criteria: report monthly; report performance net of all fees; be U.S. dollar denominated; be active and accepting new investments; have a minimum 24 months track record; and the fund’s manager must have at least $50 million in assets under management. Constituents are weighted by a representative optimization methodology. The index is rebalanced quarterly.
The ICE BofAML U.S. High Yield TR USD Index is an unmanaged index that measures the performance of short-term U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have at least 18 months to final maturity at the time of issuance,
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Litman Gregory Funds Trust
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at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $100 million. It is capitalization weighted.
Direct investment in an index is not possible.
Neither MSCI nor any other party involved in or related to compiling, computing, or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability, or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates, or any third party involved in or related to compiling, computing, or creating the data have any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) even if notified of the possibility of such damages.
No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
The financial highlights tables are intended to help you understand the Funds’ financial performance for the fiscal years or periods indicated. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned or lost on an investment in a Fund (assuming reinvestment of all dividends and distributions). This financial information has been audited by Cohen & Company, Ltd., the Funds’ independent registered public accounting firm, whose report, along with the Funds’ financial statements, is included in the Funds’ Annual Report to Shareholders, which is available upon request.
PartnerSelect Equity Fund – Institutional Class
For a capital share outstanding throughout each year
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Year Ended December 31,
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2020
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2019
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2018
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2017
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2016
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Net asset value, beginning of year
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$
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17.54
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$
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15.02
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$
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19.10
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$
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17.02
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$
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16.08
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Income from investment operations:
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Net investment income (loss)
1
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(0.05
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)
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0.08
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2
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(0.01
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)
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(0.01
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0.13
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Net realized gain (loss) and net change in unrealized appreciation/depreciation on investments and foreign currency
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3.45
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4.03
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(1.90
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)
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3.61
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1.81
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Total income (loss) from investment operations
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3.40
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4.11
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(1.91
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)
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3.60
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1.94
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From net investment income
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—
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(0.08
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)
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—
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—
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(0.14
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)
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From net realized gains
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(2.32
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)
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(1.51
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)
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(2.17
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)
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(1.52
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)
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(0.86
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Total distributions
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(2.32
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)
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(1.59
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)
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(2.17
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)
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(1.52
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)
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(1.00
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)
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Net asset value, end of year
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$
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18.62
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$
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17.54
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$
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15.02
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$
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19.10
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$
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17.02
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Total return
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19.52
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%
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27.55
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%
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(9.91
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)%
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21.15
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%
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11.98
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%
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|
|
|
|
Ratios/supplemental data:
|
|
|
Net assets, end of year (millions)
|
|
$
|
254.9
|
|
|
$
|
286.3
|
|
|
$
|
259.8
|
|
|
$
|
339.5
|
|
|
$
|
313.5
|
|
|
|
|
|
|
|
|
Ratios of total expenses to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before fees waived
|
|
|
1.35
|
%
5
|
|
|
1.35
|
%
4
|
|
|
1.29
|
%
3
|
|
|
1.27
|
%
3
|
|
|
1.27
|
%
3
|
|
|
|
|
|
|
|
After fees waived
|
|
|
1.23
|
%
5
,6
|
|
|
1.24
|
%
4,6
|
|
|
1.17
|
%
3,
6
|
|
|
1.15
|
%
3,
6
|
|
|
1.17
|
%
3,
6
|
|
|
|
|
|
|
|
Ratio of net investment income (loss) to average net assets
|
|
|
(0.29
|
)%
5
|
|
|
0.44
|
%
2,4
|
|
|
(0.08
|
)%
3
|
|
|
(0.07
|
)%
3
|
|
|
0.78
|
%
3
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
56.91
|
%
|
|
|
25.02
|
%
7
|
|
|
41.68
|
%
7
|
|
|
33.49
|
%
7
|
|
|
26.98
|
%
7
|
|
|
|
|
|
|
|
1
|
|
Calculated based on the average shares outstanding methodology.
|
|
2
|
|
Include
non-cash
distributions amounting to $0.06 per share and 0.33% of average daily net assets.
|
|
3
|
|
Includes Interest & Dividend expense of 0.00% of average net assets.
|
|
4
|
|
Includes Interest & Dividend expense of 0.03% of average net assets.
|
|
5
|
|
Includes Interest & Dividend expense of 0.01% of average net assets.
|
|
6
|
|
Includes the impact of the voluntary waiver of less than 0.01% of average net assets.
|
|
7
|
|
Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litman Gregory Funds Trust
|
PartnerSelect International Fund – Institutional Class
For a capital share outstanding throughout each year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Net asset value, beginning of year
|
|
$
|
17.65
|
|
|
$
|
13.94
|
|
|
$
|
17.73
|
|
|
$
|
14.77
|
|
|
$
|
16.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.07
|
|
|
|
0.27
|
4
|
|
|
0.30
|
3
|
|
|
0.20
|
2
|
|
|
0.23
|
|
|
Net realized gain (loss) and net change in unrealized appreciation/depreciation on investments and foreign currency
|
|
|
0.80
|
|
|
|
3.97
|
|
|
|
(3.99
|
)
|
|
|
3.28
|
|
|
|
(0.98
|
)
|
|
|
|
|
|
|
|
Total income (loss) from investment operations
|
|
|
0.87
|
|
|
|
4.24
|
|
|
|
(3.69
|
)
|
|
|
3.48
|
|
|
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.40
|
)
|
|
|
(0.53
|
)
|
|
|
(0.10
|
)
|
|
|
(0.52
|
)
|
|
|
(0.61
|
)
|
|
From net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.40
|
)
|
|
|
(0.53
|
)
|
|
|
(0.10
|
)
|
|
|
(0.52
|
)
|
|
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
18.12
|
|
|
$
|
17.65
|
|
|
$
|
13.94
|
|
|
$
|
17.73
|
|
|
$
|
14.77
|
|
|
|
|
|
|
|
|
Total return
|
|
|
5.02
|
%
|
|
|
30.45
|
%
|
|
|
(20.80
|
)%
|
|
|
23.61
|
%
|
|
|
(4.61
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios/supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (millions)
|
|
$
|
326.7
|
|
|
$
|
401.5
|
|
|
$
|
368.6
|
|
|
$
|
681.1
|
|
|
$
|
621.3
|
|
|
|
|
|
|
|
|
Ratios of total expenses to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before fees waived
|
|
|
1.39
|
%
5
|
|
|
1.36
|
%
5
|
|
|
1.33
|
%
5
|
|
|
1.26
|
%
6
|
|
|
1.28
|
%
5
|
|
|
|
|
|
|
|
After fees waived
|
|
|
1.15
|
%
5,7
|
|
|
1.12
|
%
5,7
|
|
|
1.09
|
%
5,7
|
|
|
0.98
|
%
6,7
|
|
|
1.00
|
%
5,7
|
|
|
|
|
|
|
|
Ratio of net investment income to average net assets
|
|
|
0.49
|
%
5
|
|
|
1.65
|
%
4,5
|
|
|
1.74
|
%
3,5
|
|
|
1.18
|
%
2,6
|
|
|
1.51
|
%
5
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
59.61
|
%
|
|
|
45.48
|
%
8
|
|
|
35.15
|
%
8
|
|
|
41.90
|
%
8
|
|
|
43.84
|
%
8
|
|
|
|
|
|
|
|
1
|
|
Calculated based on the average shares outstanding methodology.
|
|
2
|
|
Include
non-cash
distributions amounting to $0.06 per share and 0.35% of average daily net assets.
|
|
3
|
|
Include
non-cash
distributions amounting to $0.05 per share and 0.29% of average daily net assets.
|
|
4
|
|
Include
non-cash
distributions amounting to $0.10 per share and 0.60% of average daily net assets.
|
|
5
|
|
Includes Interest & Dividend expense of 0.01% of average net assets.
|
|
6
|
|
Includes Interest & Dividend expense of 0.00% of average net assets.
|
|
7
|
|
Includes the impact of the voluntary waiver of less than 0.01% of average net assets.
|
|
8
|
|
Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued.
|
PartnerSelect Alternative Strategies Fund – Institutional Class
For a capital share outstanding throughout each year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Net asset value, beginning of year
|
|
$
|
11.70
|
|
|
$
|
11.08
|
|
|
$
|
11.69
|
|
|
$
|
11.45
|
|
|
$
|
10.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.30
|
|
|
|
0.31
|
2
|
|
|
0.26
|
|
|
|
0.26
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
Net realized gain (loss) and net change in unrealized appreciation/depreciation on investments, foreign currency, short sales, options, futures and swap contracts
|
|
|
0.41
|
|
|
|
0.64
|
|
|
|
(0.51
|
)
|
|
|
0.25
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from investment operations
|
|
|
0.71
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
0.51
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.38
|
)
|
|
|
(0.33
|
)
|
|
|
(0.36
|
)
|
|
|
(0.27
|
)
|
|
|
(0.29
|
)
|
|
From net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.38
|
)
|
|
|
(0.33
|
)
|
|
|
(0.36
|
)
|
|
|
(0.27
|
)
|
|
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
12.03
|
|
|
$
|
11.70
|
|
|
$
|
11.08
|
|
|
$
|
11.69
|
|
|
$
|
11.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return
|
|
|
6.30
|
%
|
|
|
8.52
|
%
|
|
|
(2.08
|
)%
|
|
|
4.51
|
%
|
|
|
6.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios/supplemental data:
|
|
|
Net assets, end of year (millions)
|
|
$
|
1,417.1
|
|
|
$
|
1,724.2
|
|
|
$
|
1,663.7
|
|
|
$
|
1,828.1
|
|
|
$
|
1,368.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios of total expenses to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before fees waived
|
|
|
1.75
|
%
7
|
|
|
1.63
|
%
6
|
|
|
1.63
|
%
5
|
|
|
1.75
|
%
4
|
|
|
1.83
|
%
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After fees waived
|
|
|
1.47
|
%
7,8
|
|
|
1.51
|
%
6,8
|
|
|
1.53
|
%
5,8
|
|
|
1.66
|
%
4,8
|
|
|
1.75
|
%
3,8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment income to average net assets
|
|
|
2.60
|
%
7
|
|
|
2.70
|
%
2,
6
|
|
|
2.26
|
%
5
|
|
|
2.25
|
%
4
|
|
|
2.78
|
%
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
9
|
|
|
193.98
|
%
|
|
|
190.21
|
%
|
|
|
197.04
|
%
|
|
|
169.34
|
%
|
|
|
142.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Calculated based on the average shares outstanding methodology.
|
|
2
|
|
Include
non-cash
distributions amounting to $0.02 per share and 0.20% of average daily net assets.
|
|
3
|
|
Includes Interest & Dividend expense of 0.28% of average net assets.
|
|
4
|
|
Includes Interest & Dividend expense of 0.20% of average net assets.
|
|
5
|
|
Includes Interest & Dividend expense of 0.07% of average net assets.
|
|
6
|
|
Includes Interest & Dividend expense of 0.05% of average net assets.
|
|
7
|
|
Includes Interest & Dividend expense of 0.14% of average net assets.
|
|
8
|
|
Includes the impact of the voluntary waiver of less than 0.01% of average net assets.
|
|
9
|
|
Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litman Gregory Funds Trust
|
PartnerSelect Alternative Strategies Fund – Investor Class
For a capital share outstanding throughout each year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Net asset value, beginning of year
|
|
$
|
11.71
|
|
|
$
|
11.10
|
|
|
$
|
11.70
|
|
|
$
|
11.46
|
|
|
$
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
0.27
|
|
|
|
0.28
|
2
|
|
|
0.23
|
|
|
|
0.23
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
Net realized gain (loss) and net change in unrealized appreciation/depreciation on investments, foreign currency, short sales, options, futures and swap contracts
|
|
|
0.42
|
|
|
|
0.63
|
|
|
|
(0.50
|
)
|
|
|
0.25
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from investment operations
|
|
|
0.69
|
|
|
|
0.91
|
|
|
|
(0.27
|
)
|
|
|
0.48
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.34
|
)
|
|
|
(0.30
|
)
|
|
|
(0.33
|
)
|
|
|
(0.24
|
)
|
|
|
(0.26
|
)
|
|
From net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.34
|
)
|
|
|
(0.30
|
)
|
|
|
(0.33
|
)
|
|
|
(0.24
|
)
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
12.06
|
|
|
$
|
11.71
|
|
|
$
|
11.10
|
|
|
$
|
11.70
|
|
|
$
|
11.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return
|
|
|
6.06
|
%
|
|
|
8.22
|
%
|
|
|
(2.32
|
)%
|
|
|
4.14
|
%
|
|
|
6.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios/supplemental data:
|
|
|
Net assets, end of year (millions)
|
|
$
|
74.2
|
|
|
$
|
144.1
|
|
|
$
|
175.3
|
|
|
$
|
206.0
|
|
|
$
|
179.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios of total expenses to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before fees waived
|
|
|
1.99
|
%
7
|
|
|
1.88
|
%
6
|
|
|
1.88
|
%
5
|
|
|
2.00
|
%
4
|
|
|
2.08
|
%
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After fees waived
|
|
|
1.71
|
%
7,8
|
|
|
1.76
|
%
6,8
|
|
|
1.78
|
%
5,8
|
|
|
1.90
|
%
4,8
|
|
|
2.00
|
%
3,8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment income to average net assets
|
|
|
2.36
|
%
7
|
|
|
2.44
|
%
2,
6
|
|
|
2.01
|
%
5
|
|
|
2.01
|
%
4
|
|
|
2.54
|
%
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
9
|
|
|
193.98
|
%
|
|
|
190.21
|
%
|
|
|
197.04
|
%
|
|
|
169.34
|
%
|
|
|
142.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Calculated based on the average shares outstanding methodology.
|
|
2
|
|
Include
non-cash
distributions amounting to $0.02 per share and 0.20% of average daily net assets.
|
|
3
|
|
Includes Interest & Dividend expense of 0.28% of average net assets.
|
|
4
|
|
Includes Interest & Dividend expense of 0.20% of average net assets.
|
|
5
|
|
Includes Interest & Dividend expense of 0.07% of average net assets.
|
|
6
|
|
Includes Interest & Dividend expense of 0.05% of average net assets.
|
|
7
|
|
Includes Interest & Dividend expense of 0.14% of average net assets.
|
|
8
|
|
Includes the impact of the voluntary waiver of less than 0.01% of average net assets.
|
|
9
|
|
Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued.
|
PartnerSelect High Income Alternatives Fund – Institutional Class
For a capital share outstanding throughout each year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2020
|
|
|
Year Ended
December 31, 2019
|
|
|
Period Ended
December 31, 2018**
|
|
|
Net asset value, beginning of year
|
|
$
|
10.06
|
|
|
$
|
9.63
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
0.37
|
|
|
|
0.36
|
|
|
|
0.07
|
|
|
Net realized gain (loss) and net change in unrealized
appreciation/depreciation on investments, foreign currency, futures, options and swap contracts
|
|
|
0.16
|
|
|
|
0.44
|
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from investment operations
|
|
|
0.53
|
|
|
|
0.80
|
|
|
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.37
|
)
|
|
|
(0.33
|
)
|
|
|
(0.06
|
)
|
|
From net realized gains
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.38
|
)
|
|
|
(0.37
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
10.21
|
|
|
$
|
10.06
|
|
|
$
|
9.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return
|
|
|
5.62
|
%
|
|
|
8.37
|
%
|
|
|
(3.08
|
)%
+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios/supplemental data:
|
|
|
Net assets, end of year (millions)
|
|
$
|
87.9
|
|
|
$
|
93.8
|
|
|
$
|
77.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios of total expenses to average net assets:
|
|
|
Before fees waived
|
|
|
1.72
|
%
3
|
|
|
1.39
|
%
2
|
|
|
1.34
|
%
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After fees waived
|
|
|
1.00
|
%
3
,4
|
|
|
0.98
|
%
2,4
|
|
|
0.98
|
%
*,4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment income to average net assets
|
|
|
3.83
|
%
3
|
|
|
3.56
|
%
2
|
|
|
2.89
|
%
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
87.63
|
%
|
|
|
90.51
|
%
5
|
|
|
125.92
|
%
+,5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
|
|
Commenced operations on September 28, 2018.
|
|
1
|
|
Calculated based on the average shares outstanding methodology.
|
|
2
|
|
Includes Interest & Dividend expense of 0.00% of average net assets.
|
|
3
|
|
Includes Interest & Dividend expense of 0.02% of average net assets.
|
|
4
|
|
Includes the impact of the voluntary waiver of less than 0.01% of average net assets.
|
|
5
|
|
Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litman Gregory Funds Trust
|
PartnerSelect SBH Focused Small Value Fund – Institutional Class
For a capital share outstanding throughout the period
|
|
|
|
|
|
|
|
|
Period Ended
December 31, 2020**
|
|
|
Net asset value, beginning of period
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
0.01
|
|
|
Net realized gain (loss) and net change in unrealized
appreciation/depreciation on investments
|
|
|
2.70
|
|
|
|
|
|
|
|
|
Total income from investment operations
|
|
|
2.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
—
|
|
|
From net realized gains
|
|
|
—
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
—
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
12.71
|
|
|
|
|
|
|
|
|
Total return
|
|
|
27.10
|
%
+
|
|
|
|
|
|
|
|
|
Ratios/supplemental data:
|
|
|
Net assets, end of year (millions)
|
|
$
|
36.8
|
|
|
|
|
|
|
|
|
Ratios of total expenses to average net assets:
|
|
|
Before fees waived
|
|
|
2.11
|
%
*
|
|
|
|
|
|
|
|
After fees waived
|
|
|
1.15
|
%
*
|
|
|
|
|
|
|
|
Ratio of net investment income to average net assets
|
|
|
0.23
|
%
*
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
27.18
|
%
+
|
|
|
|
|
|
|
|
**
|
|
Commenced operations on July 31, 2020.
|
|
1
|
|
Calculated based on the average shares outstanding methodology.
|
PartnerSelect Oldfield International Value Fund – Institutional Class
For a capital share outstanding throughout the period
|
|
|
|
|
|
|
|
|
Period Ended
December 31, 2020**
|
|
|
Net asset value, beginning of period
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
(0.01
|
)
|
|
Net realized gain (loss) and net change in unrealized appreciation/depreciation on investments and foreign currency
|
|
|
0.61
|
|
|
|
|
|
|
|
|
Total income from investment operations
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
—
|
|
|
From net realized gains
|
|
|
—
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
—
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
10.60
|
|
|
|
|
|
|
|
|
Total return
|
|
|
6.00
|
%
+
|
|
|
|
|
|
|
|
|
Ratios/supplemental data:
|
|
|
Net assets, end of year (millions)
|
|
$
|
11.2
|
|
|
|
|
|
|
|
|
Ratios of total expenses to average net assets:
|
|
|
Before fees waived
|
|
|
5.38
|
%
*
|
|
|
|
|
|
|
|
After fees waived
|
|
|
0.94
|
%
*
|
|
|
|
|
|
|
|
Ratio of net investment loss to average net assets
|
|
|
(0.94
|
)%
*
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
2.51
|
%
+
|
|
|
|
|
|
|
|
**
|
|
Commenced operations on November 30, 2020.
|
|
1
|
|
Calculated based on the average shares outstanding methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litman Gregory Funds Trust
|
Statement of Additional Information:
The SAI contains additional information about the Funds.
Annual and Semi-Annual Reports:
Additional information about the Funds’ investments is available in the Funds’ Annual and Semi-Annual Reports to Shareholders. In the Funds’ Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds’ performance during the last fiscal year.
The SAI and the Funds’ Annual and Semi-Annual Reports to Shareholders are available, without charge, upon request. To request an SAI or the Funds’ Annual or Semi-Annual Reports to Shareholders, or to make shareholder inquiries or to obtain other information about the Funds, please call
You may also obtain a copy of the SAI or Annual or Semi-Annual Reports, free of charge, by accessing the Funds’ website (http://www.partnerselectfunds.com), or by writing to the Funds.
If you have access to the Internet, you can view the SAI, the Funds’ Annual or Semi-Annual Reports to Shareholders and other information about the Funds on the EDGAR Database at the Securities and Exchange Commission’s (“SEC”) internet site at www.sec.gov. You may request copies of information available on the EDGAR Database by an electronic request at the following
E-mail
address: publicinfo@sec.gov. The SEC charges a duplicating fee for this service.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Fund
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
|
MSEFX
|
|
|
53700T108
|
|
|
|
305
|
|
|
International Fund
|
|
Intl
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
|
MSILX
|
|
|
53700T207
|
|
|
|
306
|
|
|
Alternative Strategies Fund
|
|
Alternative
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
|
MASFX
|
|
|
53700T801
|
|
|
|
421
|
|
|
Investor Class
|
|
|
|
MASNX
|
|
|
53700T884
|
|
|
|
447
|
|
|
High Income Alternatives Fund
|
|
High Income
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
|
MAHIX
|
|
|
53700T876
|
|
|
|
1478
|
|
|
SBH Focused Small Value Fund
|
|
Small Value
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
|
PFSVX
|
|
|
53700T850
|
|
|
|
2965
|
|
|
Oldfield International Value Fund
|
|
International Value
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
|
POIVX
|
|
|
53700T843
|
|
|
|
2966
|
|
www.partnerselectfunds.com
|
|
|
|
Litman Gregory Funds Trust
P.O. Box 219922
Kansas City, MO 64121-9922
|
|
ALPS Distributors, Inc. Denver, Colorado 80203
© 2021 Litman Gregory Fund Advisors, LLC. All rights reserved.
|
Investment Company Act File No: 811-07763
LITMAN GREGORY FUNDS TRUST
PartnerSelect Equity Fund (formerly, Litman Gregory Masters Equity Fund)
Institutional Class – MSEFX
PartnerSelect International Fund (formerly, Litman Gregory Masters International Fund)
Institutional Class – MSILX
PartnerSelect Alternative Strategies Fund (formerly, Litman Gregory Masters Alternative Strategies Fund)
Institutional Class – MASFX
Investor Class – MASNX
PartnerSelect High Income Alternatives Fund (formerly, Litman Gregory Masters High Income Alternatives Fund)
Institutional Class – MAHIX
PartnerSelect SBH Focused Small Value Fund
Institutional Class – PFSVX
PartnerSelect Oldfield International Value Fund
Institutional Class – POIVX
STATEMENT OF ADDITIONAL INFORMATION
Dated April 30, 2021
This Statement of Additional Information (“SAI”) is not a prospectus, and it should be read in conjunction with the prospectus dated April 30, 2021, as it may be amended from time to time, of PartnerSelect Equity Fund (the “Equity Fund”), PartnerSelect International Fund (the “International Fund”), PartnerSelect Alternative Strategies Fund (the “Alternative Strategies Fund”), PartnerSelect High Income Alternatives Fund (the “High Income Alternatives Fund”), PartnerSelect SBH Focused Small Value Fund (the “SBH Focused Small Value Fund”), and PartnerSelect Oldfield International Value Fund (the “Oldfield International Value Fund,” and collectively with the Equity Fund, the International Fund, the Alternative Strategies Fund, the High Income Alternatives Fund and the SBH Focused Small Value Fund, the “Funds”), each a series of the Litman Gregory Funds Trust (the “Trust”), formerly known as the Masters’ Select Funds Trust until August 2011 and the Masters’ Select Investment Trust until December 1997. Litman Gregory Fund Advisors, LLC (the “Advisor” or “Litman Gregory”) is the investment advisor of the Funds. The Advisor has retained certain investment managers as sub-advisors (each, a “Sub-Advisor,” and collectively, the “Sub-Advisors”), responsible for portfolio management of either a segment of a Fund’s total assets or the Fund’s total assets. A copy of the Trust’s prospectus and most recent annual report may be obtained from the Trust without charge at 1676 N. California Blvd., Suite 500, Walnut Creek, California 94596, telephone 1-800-960-0188.
The Trust’s audited financial statements for the fiscal year ended December 31, 2020 are incorporated by reference to the Trust’s Annual Report for the fiscal year ended December 31, 2020.
1
TABLE OF CONTENTS
2
FUND HISTORY
The Trust was organized as a Delaware statutory trust on August 1, 1996 and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Trust consists of six separate series: the Equity Fund, the International Fund, the Alternative Strategies Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund.
The Equity Fund commenced operations on December 31, 1996. On April 30, 2009, the existing unnamed class of shares was redesignated as the Institutional Class.
The International Fund commenced operations on December 1, 1997. On April 30, 2009, the existing unnamed class of shares was redesignated as the Institutional Class.
The Alternative Strategies Fund commenced operations on September 30, 2011. Both the Institutional Class and the Investor Class commenced operations on that date.
The High Income Alternatives Fund commenced operations on September 28, 2018. The Institutional Class commenced operations on that date.
The SBH Focused Small Value Fund commenced operations on July 31, 2020. The Institutional Class commenced operations on that date.
The Oldfield International Value Fund commenced operations on November 30, 2020. The Institutional Class commenced operations on that date.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The investment objective of each Fund is fundamental and therefore may be changed only with the favorable vote of the holders of a majority of the outstanding voting securities (as defined in the 1940 Act) of such Fund. Each Fund’s investment objective is set forth in the Funds’ prospectus. There is no assurance that each Fund will achieve its investment objective. The discussion below supplements information contained in the prospectus as to the investment policies of each Fund.
Investment policies or descriptions that are described as percentages of “the Fund’s net assets” are measured as percentages of the Fund’s net assets plus borrowings for investment purposes. The investment policies of the Equity Fund, International Fund, SBH Focused Small Value Fund and Oldfield International Value Fund with respect to “80% of the Fund’s net assets” may be changed by the Board of Trustees of the Trust (the “Board”) without shareholder approval, but shareholders would be given at least 60 days’ notice if any change occurs.
Investors should be aware that in light of the current uncertainty, volatility and distress in economies, financial markets, and labor and health conditions across the world, the risks discussed below are heightened significantly compared to normal conditions and therefore subject a Fund’s investments and a shareholder’s investment in a Fund to sudden and substantial losses.
Cash Position
When a Fund’s Sub-Advisor believes that market conditions are unfavorable for profitable investing, or when the Sub-Advisor is otherwise unable to locate attractive investment opportunities, a Fund’s cash or similar investments may increase. In other words, the Funds do not always stay fully invested in stocks and bonds. Cash or similar investments generally are a residual - they represent the assets that remain after a portfolio manager has committed available assets to desirable investment opportunities. However, the Advisor or a Fund’s Sub-Advisor may also temporarily increase a Fund’s cash position to protect its assets or maintain liquidity. Partly because the Sub-Advisors act independently of each other, the cash positions of the Funds may vary significantly.
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When a Fund’s investments in cash or similar investments increase, it may not participate in market advances or declines to the same extent that it would if the Fund remained more fully invested in stocks or bonds.
Equity Securities
The Funds may invest in equity securities consistent with its investment objective and strategies. Common stocks, preferred stocks and convertible securities are examples of equity securities.
All investments in equity securities are subject to market risks that may cause their prices to fluctuate over time. Historically, the equity markets have moved in cycles and the value of the securities in a Fund’s portfolio may fluctuate substantially from day to day. Owning an equity security can also subject a Fund to the risk that the issuer may discontinue paying dividends.
To the extent a Fund invests in the equity securities of small- or medium-size companies, it will be exposed to the risks of small- and medium-size companies. Such companies often have limited product lines or services, have narrower markets for their goods and/or services, and more limited managerial and financial resources than larger, more established companies. In addition, because these companies are not well-known to the investing public, they may not have significant institutional ownership and may be followed by relatively few security analysts, and there will normally be less publicly available information when compared to larger companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the price and liquidity of securities held by the Fund. As a result, as compared to larger-sized companies, the performance of smaller-sized companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Common Stock. A common stock represents a proportionate share of the ownership of a company and its value is based on the success of the company’s business, the cash a company generates, and the value of a company’s assets. However, over short periods of time, the price of any company, whether successful or not, may increase or decrease in price by a meaningful percentage. In addition to the general risks set forth above, investments in common stocks are subject to the risk that in the event a company in which a Fund invests is liquidated, the holders of preferred stock and creditors of that company will be paid in full before any payments are made to the Fund as a holder of that company’s common stock. It is possible that all assets of that company will be exhausted before any payments are made to the Fund.
Preferred Stock. Preferred stocks are equity securities that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. A preferred stock has a blend of the characteristics of a bond and common stock. It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and, unlike common stock, its participation in the issuer’s growth may be limited. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer.
Convertible Securities and Warrants
Each Fund may invest in convertible securities and warrants. A convertible security is a fixed-income security (a debt instrument or a preferred stock) which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stock in an issuer’s capital structure, but are usually subordinated to similar non-convertible securities. While providing a fixed-income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation upon a market price advance in the convertible security’s underlying common stock.
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A warrant gives the holder the right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of a Fund’s entire investment therein).
Other Corporate Debt Securities
Each Fund may invest in non-convertible debt securities of foreign and domestic companies over a cross-section of industries. The debt securities in which each Fund may invest will be of varying maturities and may include corporate bonds, debentures, notes and other similar corporate debt instruments. The value of a longer-term debt security fluctuates more widely in response to changes in interest rates than do shorter-term debt securities.
Risks of Investing in Debt Securities
There are a number of risks generally associated with an investment in debt securities (including convertible securities). Yields on short-, intermediate-, and long-term securities depend on a variety of factors, including the general condition of the money and bond markets, the size of a particular offering, the maturity of the obligation, and the rating of the issue.
Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with short maturities and lower yields. The market prices of debt securities usually vary, depending upon available yields. An increase in interest rates will generally reduce the value of such portfolio investments, and a decline in interest rates will generally increase the value of such portfolio investments. The ability of each Fund to achieve its investment objective also depends on the continuing ability of the issuers of the debt securities in which each Fund invests to meet their obligations for the payment of interest and principal when due.
Risks of Investing in Lower-Rated Debt Securities
Each Fund may invest a portion of its net assets in debt securities rated below “Ba1” by Moody’s, below “BB+” by Standard & Poor’s (“S&P”) or below investment grade by other recognized rating agencies, or in unrated securities of comparable quality under certain circumstances. Securities with ratings below “Baa” by Moody’s and/or “BBB” by S&P are commonly referred to as “junk bonds.” Such bonds are subject to greater market fluctuations and risk of loss of income and principal than higher rated bonds for a variety of reasons, including the following:
Sensitivity to Interest Rate and Economic Changes. The economy and interest rates affect high yield securities differently from other securities. For example, the prices of high yield bonds have been found to be less sensitive to interest rate changes than higher-rated investments, but more sensitive to adverse economic changes or individual corporate developments. Also, during an economic downturn or substantial period of rising interest rates, highly leveraged issuers may experience financial stress which would adversely affect their ability to service their principal and interest obligations, to meet projected business goals, and to obtain additional financing. If the issuer of a bond defaults, each Fund may incur additional expenses to seek recovery. In addition, periods of economic uncertainty and changes can be expected to result in increased volatility of market prices of high yield bonds and a Fund’s asset values.
Payment Expectations. High yield bonds present certain risks based on payment expectations. For example, high yield bonds may contain redemption and call provisions. If an issuer exercises these provisions in a
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declining interest rate market, a Fund would have to replace the security with a lower yielding security, resulting in a decreased return for investors. Conversely, a high yield bond’s value will decrease in a rising interest rate market, as will the value of a Fund’s assets. If a Fund experiences unexpected net redemptions, it may be forced to sell its high yield bonds without regard to their investment merits, thereby decreasing the asset base upon which a Fund’s expenses can be spread and possibly reducing a Fund’s rate of return.
Liquidity and Valuation. To the extent that there is no established retail secondary market, there may be thin trading of high yield bonds, and this may impact a Sub-Advisor’s ability to accurately value high yield bonds and a Fund’s assets and hinder a Fund’s ability to dispose of the bonds. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield bonds, especially in a thinly traded market.
Credit Ratings. Credit ratings evaluate the safety of principal and interest payments, not the market value risk of high yield bonds. Also, since credit rating agencies may fail to timely change the credit ratings to reflect subsequent events, a Sub-Advisor must monitor the issuers of high yield bonds in a Fund’s portfolio to determine if the issuers will have sufficient cash flow and profits to meet required principal and interest payments, and to assure the bonds’ liquidity so a Fund can meet redemption requests. A Fund will not necessarily dispose of a portfolio security when its rating has been changed.
Exchange-Traded Notes
The Funds may invest in exchange-traded notes (“ETNs”). ETNs are senior, unsecured, unsubordinated debt securities whose returns are linked to the performance of a particular market benchmark or strategy minus applicable fees. ETNs are traded on an exchange (e.g., the New York Stock Exchange (“NYSE”)) during normal trading hours. However, investors can also hold the ETN until maturity. At maturity, the issuer pays to the investor a cash amount equal to the principal amount, subject to the day’s market benchmark or strategy factor.
ETNs do not make periodic coupon payments or provide principal protection. ETNs are subject to credit risk and the value of the ETN may drop due to a downgrade in the issuer’s credit rating, despite the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes in the issuer’s credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset. When a Fund invests in ETNs, it will bear its proportionate share of any fees and expenses borne by the ETN. A Fund’s decision to sell its ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange, the issuer may not be required to maintain the listing and there can be no assurance that a secondary market will exist for an ETN.
ETNs are also subject to tax risk. The tax treatment of ETNs is unclear. No statutory, juridical or administrative authority directly discusses how ETNs should be treated in this context for U.S. federal income tax purposes. No assurance can be given that the Internal Revenue Service (the “IRS”) will accept, or a court will uphold, how the Fund characterizes and treats ETNs for tax purposes. Further, the IRS and Congress are considering proposals that would change the timing and character of income and gains from ETNs.
An ETN that is tied to a specific market benchmark or strategy may not be able to replicate and maintain exactly the composition and relative weighting of securities, commodities or other components in the applicable market benchmark or strategy. Some ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase or sell at a fair price. Leveraged ETNs are subject to the same risk as other instruments that use leverage in any form.
The market value of ETN shares may differ from their market benchmark or strategy. This difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point in time is not always identical to the supply and demand in the market for the securities, commodities or other components underlying the market benchmark or strategy that the ETN seeks to track. As a result, there may be times when an ETN share trades at a premium or discount to its market benchmark or strategy.
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Participation Notes (International Fund, Alternative Strategies Fund and High Income Alternatives Fund)
The International Fund, the Alternative Strategies Fund and the High Income Alternatives Fund may invest in participation notes (“P-Notes”). Some countries, especially emerging markets countries, do not permit foreigners to participate directly in their securities markets or otherwise present difficulties for efficient foreign investment. The International Fund, the Alternative Strategies Fund and the High Income Alternatives Fund may use P-Notes to establish a position in such markets as a substitute for direct investment. The International Fund, the Alternative Strategies Fund and the High Income Alternatives Fund may also invest in P-Notes, as an alternative to investing directly in the underlying security, if Litman Gregory determines that P-Notes offer greater liquidity than the underlying security. P-Notes are issued by banks or broker-dealers and are designed to track the return of a particular underlying equity or debt security, currency, or market. When the P-Note matures, the issuer of the P-Note will pay to, or receive from, the International Fund, the Alternative Strategies Fund or the High Income Alternatives Fund the difference between the nominal value of the underlying instrument at the time of purchase and that instrument’s value at maturity. Investments in P-Notes involve the same risks associated with a direct investment in the underlying security, currency, or market that they seek to replicate, including, as applicable, foreign, emerging, and frontier risks. In addition, P-Notes are generally traded over-the-counter and are subject to counterparty risk. Counterparty risk is the risk that the issuer of the P-Note will not fulfill its contractual obligation to complete the transaction with the International Fund, the Alternative Strategies Fund or the High Income Alternatives Fund. P-Notes constitute general unsecured contractual obligations of the banks or broker-dealers that issue them, and the International Fund, the Alternative Strategies Fund and the High Income Alternatives Fund would be relying on the creditworthiness of such banks or broker-dealers and would have no rights under a P-Note against the issuer of the underlying assets. In addition, P-Notes may trade at a discount to the value of the underlying securities or markets that they seek to replicate.
Short-Term Investments
Each Fund may invest in any of the following short-term securities and instruments:
Bank Certificates or Deposits, Bankers’ Acceptances and Time Deposits. Each Fund may acquire certificates of deposit, bankers’ acceptances and time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning in effect that the bank unconditionally agrees to pay the face value of the instrument on maturity. Certificates of deposit and bankers’ acceptances acquired by a Fund will be dollar-denominated obligations of domestic or foreign banks or financial institutions which at the time of purchase have capital, surplus and undivided profits in excess of $100 million (including assets of both domestic and foreign branches), based on latest published reports, or less than $100 million if the principal amount of such bank obligations are fully insured by the U.S. Government. If a Fund holds instruments of foreign banks or financial institutions, it may be subject to additional investment risks that are different in some respects from those incurred by a fund that invests only in debt obligations of U.S. domestic issuers. See “Foreign Investments” below. Such risks include those related to future political and economic developments, the possible imposition of withholding taxes by the particular country in which the issuer is located on interest income payable on the securities, the possible seizure or nationalization of foreign deposits, the possible establishment of exchange controls and the possible adoption of other foreign governmental restrictions that might adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental regulations with respect to the amount and types of loans that may be made and interest rates that may be charged. In addition, the profitability of the banking industry depends largely upon the availability and cost of funds for the purpose of financing lending
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operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks are, among other things, required to maintain specified levels of reserves, limited in the amount they can loan to a single borrower, and subject to other regulations designed to promote financial soundness. However, such laws and regulations do not necessarily apply to foreign bank obligations that a Fund may acquire.
In addition to purchasing certificates of deposit and bankers’ acceptances, to the extent permitted under its investment objectives and policies stated above and in its prospectus, a Fund may make interest-bearing time or other interest-bearing deposits in commercial or savings banks. Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of time at a specified interest rate.
Savings Association Obligations. Each Fund may invest in certificates of deposit (interest-bearing time deposits) issued by savings banks or savings and loan associations that have capital, surplus and undivided profits in excess of $100 million, based on latest published reports, or less than $100 million if the principal amount of such obligations is fully insured by the U.S. Government.
Commercial Paper, Short-Term Notes and Other Corporate Obligations. Each Fund may invest a portion of its assets in commercial paper and short-term notes. Commercial paper consists of unsecured promissory notes issued by corporations. Issues of commercial paper and short-term notes will normally have maturities of less than nine months and fixed rates of return, although such instruments may have maturities of up to one year.
Commercial paper and short-term notes in which a Fund may invest will consist of issues rated at the time of purchase “AA-2” or higher by S&P, “Prime-1” or “Prime-2” by Moody’s, or similarly rated by another nationally recognized statistical rating organization or, if unrated, will be determined by a Sub-Advisor to be of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations to finance longer-term credit needs than supported by commercial paper. While such obligations generally have maturities of ten years or more, a Fund may purchase corporate obligations that have remaining maturities of one year or less from the date of purchase and that are rated “AA” or higher by S&P or “Aa” or higher by Moody’s.
Loan Participations and Assignments (Bank Debt) (Alternative Strategies Fund and High Income Alternatives Fund)
The Alternative Strategies Fund and the High Income Alternatives Fund may invest in bank debt, which includes interests in loans to companies or their affiliates undertaken to finance a capital restructuring or in connection with recapitalizations, acquisitions, leveraged buyouts, refinancings or other financially leveraged transactions and may include loans which are designed to provide temporary or bridge financing to a borrower pending the sale of identified assets, the arrangement of longer-term loans or the issuance and sale of debt obligations. These loans, which may bear fixed or floating rates, have generally been arranged through private negotiations between a corporate borrower and one or more financial institutions (“Lenders”), including banks. Each Fund’s investment may be in the form of participations in loans (“Participations”) or of assignments of all or a portion of loans from third parties (“Assignments”).
Each Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling a Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, each Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and each Fund may not benefit directly from any collateral supporting the loan in which it has purchased the
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Participation. Thus, each Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. In addition, in connection with purchasing Participations, each Fund generally will have no role in terms of negotiating or effecting amendments, waivers and consents with respect to the loans underlying the Participations. In the event of the insolvency of the Lender, each Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower.
In certain cases, the rights and obligations acquired by each Fund through the purchase of an Assignment may differ from, and be more limited than, those held by the assigning selling institution. Assignments are sold strictly without recourse to the selling institutions, and the selling institutions will generally make no representations or warranties to each Fund about the underlying loan, the borrowers, the documentation of the loans or any collateral securing the loans.
Investments in Participations and Assignments involve additional risks, including the risk of nonpayment of principal and interest by the borrower, the risk that any loan collateral may become impaired and that each Fund may obtain less than the full value for the loan interests sold because they may be illiquid. Purchasers of loans depend primarily upon the creditworthiness of the borrower for payment of interest and repayment of principal. If scheduled interest or principal payments are not made, the value of the instrument may be adversely affected.
Investments in loans through direct assignment of a financial institution’s interests with respect to a loan may involve additional risks. For example, if a loan is foreclosed, each Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral.
A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. Unless, under the terms of the loan or other indebtedness, each Fund has direct recourse against the borrower, each Fund may have to rely on the agent to apply appropriate credit remedies against a borrower. If assets held by the agent for the benefit of each Fund were determined to be subject to the claims of the agent’s general creditors, each Fund might incur certain costs and delays in realizing payment on the loan or loan participation and could suffer a loss of principal or interest.
Interests in loans are also subject to additional liquidity risks. Loans are generally subject to legal or contractual restrictions on resale. Loans are not currently listed on any securities exchange or automatic quotation system, but are traded by banks and other institutional investors engaged in loan syndication. As a result, no active market may exist for some loans, and to the extent a secondary market exists for other loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Consequently, each Fund may have difficulty disposing of Assignments or Participations in response to a specific economic event such as deterioration in the creditworthiness of the borrower, which can result in a loss. In such market situations, it may be more difficult for each Fund to assign a value to Assignments or Participations when valuing each Fund’s securities and calculating its net asset value (“NAV”).
Each Fund limits the amount of its assets that it will invest in any one issuer or in issuers within the same industry (see “Investment Restrictions” below). For purposes of these limits, each Fund will generally treat the corporate borrower as the “issuer” of indebtedness held by each Fund. In the case of Participations where a bank or other lending institution serves as a financial intermediary between the Fund and the corporate borrower, if the Participation does not shift to each Fund the direct debtor-creditor relationship with the corporate borrower, U.S. Securities and Exchange Commission (the “SEC”) interpretations require each Fund, in appropriate circumstances, to treat both the lending bank or other lending institution and the corporate borrower as “issuers” for the purpose of determining whether each Fund has invested more than 5% of its total assets in a single issuer. Treating a financial intermediary as an issuer of indebtedness may restrict each Fund’s ability to invest in indebtedness related to a single financial intermediary, or a group of intermediaries engaged in the same industry, even if the underlying borrowers represent many different companies and industries.
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Money Market Funds
Each Fund may under certain circumstances invest a portion of its assets in money market funds. The 1940 Act generally prohibits a Fund from investing more than 5% of the value of its total assets in any one investment company or more than 10% of the value of its total assets in investment companies as a group, and also restricts its investment in any investment company to 3% of the voting securities of such investment company. There are some exceptions, however, to these limitations pursuant to various rules promulgated by the SEC. For example, Section 12(d)(1)(F) of the 1940 Act provides that the limitations set forth above do not apply to securities purchased or otherwise acquired by the Fund if immediately after such purchase or acquisition not more than 3% of the total outstanding stock of such investment company is owned by the Fund and all affiliated persons of the Fund. The Fund must comply with certain other administrative requirements in order to comply this exception, including, among others, that the Fund (or the Advisor or Sub-Advisor acting on behalf of the Fund) complies with certain voting restrictions when voting the shares of such investment company. The Advisor and the Sub-Advisors will not impose advisory fees on assets of a Fund invested in a money market mutual fund. However, an investment in a money market mutual fund will involve payment by a Fund of its pro rata share of advisory and administrative fees charged by such fund.
Municipal Securities (Alternative Strategies Fund and High Income Alternatives Fund)
The Alternative Strategies Fund and the High Income Alternatives Fund may invest in municipal securities. Municipal securities are issued by the states, territories and possessions of the United States, their political subdivisions (such as cities, counties and towns) and various authorities (such as public housing or redevelopment authorities), instrumentalities, public corporations and special districts (such as water, sewer or sanitary districts) of the states, territories, and possessions of the United States or their political subdivisions. In addition, municipal securities include securities issued by or on behalf of public authorities to finance various privately operated facilities, such as industrial development bonds, that are backed only by the assets and revenues of the non-governmental user (such as hospitals and airports).
Municipal securities are issued to obtain funds for a variety of public purposes, including general financing for state and local governments, or financing for specific projects or public facilities. Municipal securities are classified as general obligation or revenue bonds or notes. General obligation securities are secured by the issuer’s pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable from revenue derived from a particular facility, class of facilities, or the proceeds of a special excise tax or other specific revenue source, but not from the issuer’s general taxing power. Each Fund will not invest more than 25% of its total assets in a single type of revenue bond. Private activity bonds and industrial revenue bonds do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are issued.
Shareholders of the Alternative Strategies Fund and the High Income Alternatives Fund should be aware that certain deductions and exemptions may be designated “tax preference items,” which must be added back to taxable income for purposes of calculating a shareholder’s federal alternative minimum tax (“AMT”), if applicable to such shareholder. Tax preference items may include tax-exempt interest on private activity bonds. To the extent that the Alternative Strategies Fund and the High Income Alternatives Fund invest in private activity bonds, their shareholders may be required to report that portion of each Fund’s distributions attributable to income from the bonds as a tax preference item in determining their federal AMT, if any. Shareholders are encouraged to consult their tax advisors in this regard.
Municipal leases are entered into by state and local governments and authorities to acquire equipment and facilities such as fire and sanitation vehicles, telecommunications equipment, and other assets. Municipal leases (which normally provide for title to the leased assets to pass eventually to the government issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of debt. The debt-issuance limitations of many state constitutions and statutes are
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deemed to be inapplicable because of the inclusion in many leases or contracts of “non-appropriation” clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis.
Government Obligations
Each Fund may make short-term investments in U.S. Government obligations. Such obligations include Treasury bills, certificates of indebtedness, notes and bonds, and issues of such entities as the Government National Mortgage Association (“GNMA”), Export-Import Bank of the United States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration, Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and the Student Loan Marketing Association (“SLMA”).
Some of these obligations, such as those of the GNMA, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Export-Import Bank of United States, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the FNMA, are supported by the discretionary authority of the U.S. Government to purchase the agency’s obligations; still others, such as those of the SLMA, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law.
Each Fund may invest in sovereign debt obligations of foreign countries. A sovereign debtor’s willingness or ability to repay principal and interest in a timely manner may be affected by a number of factors, including 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 sovereign debtor’s policy toward principal international lenders and the political constraints to which it may be subject. Emerging market governments could default on their sovereign debt. Such sovereign debtors also may be dependent on expected disbursements from foreign governments, multilateral agencies and other entities abroad to reduce principal and interest arrearages on their debt. The commitments on the part of these governments, agencies and others to make such disbursements may be conditioned on a sovereign debtor’s implementation of economic reforms and/or economic performance and the timely service of such debtor’s obligations. Failure to meet such conditions could result in the cancellation of such third parties’ commitments to lend funds to the sovereign debtor, which may further impair such debtor’s ability or willingness to service its debt in a timely manner.
Zero Coupon Securities
Each Fund may invest up to 35% of its net assets in zero coupon securities issued by the U.S. Treasury. Zero coupon Treasury securities are U.S. Treasury notes and bonds that have been stripped of their unmatured interest coupons and receipts, or certificates representing interests in such stripped debt obligations or coupons. Because a zero coupon security pays no interest to its holder during its life or for a substantial period of time, it usually trades at a deep discount from its face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities that make current distributions of interest.
Variable and Floating Rate Instruments
Each Fund may acquire variable and floating rate instruments. Such instruments are frequently not rated by credit rating agencies; however, unrated variable and floating rate instruments purchased by a Fund will be determined by a Sub-Advisor under guidelines established by the Board to be of comparable quality at the time of the purchase to rated instruments eligible for purchase by a Fund. In making such determinations, a Sub-Advisor will consider the earning power, cash flow and other liquidity ratios of the issuers of such instruments (such issuers include financial, merchandising, bank holding and other companies) and will monitor their financial condition. An
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active secondary market may not exist with respect to particular variable or floating rate instruments purchased by a Fund. The absence of such an active secondary market could make it difficult for a Fund to dispose of the variable or floating rate instrument involved in the event that the issuer of the instrument defaults on its payment obligation or during periods in which a Fund is not entitled to exercise its demand rights, and a Fund could, for these or other reasons, suffer a loss to the extent of the default. Variable and floating rate instruments may be secured by bank letters of credit.
Asset-Backed Securities (Alternative Strategies Fund and High Income Alternatives Fund)
The Alternative Strategies Fund and the High Income Alternatives Fund may invest in asset-backed securities. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a specially created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. For example, each Fund may invest in collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”), and other similarly structured entities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust, which is backed by a diversified pool of high-risk, below investment grade fixed-income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans.
The value of an asset-backed security is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement has been exhausted.
Mortgage-Related Securities
Each Fund may invest in mortgage-related securities. Mortgage-related securities are derivative interests in pools of mortgage loans made to U.S. residential home buyers, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations. Each Fund may also invest in debt securities which are secured with collateral consisting of U.S. mortgage-related securities, and in other types of U.S. mortgage-related securities.
The effects of the sub-prime mortgage crisis that began to unfold in 2007 continue to manifest in nearly all sub-divisions of the financial services industry. Sub-prime mortgage-related losses and write downs among investment banks and similar institutions reached significant levels in 2008. The impact of these losses among traditional banks, investment banks, broker-dealers and insurers has forced a number of such institutions into either liquidation or combination, while also drastically increasing the volatility of their stock prices. In some cases, the U.S. government has acted to bail out select institutions, such as insurers; however the risks associated with investment in stocks of such insurers has nonetheless increased substantially.
While the U.S. Department of the Treasury, Federal Reserve Board and Congress have taken steps to address problems in the financial markets and with financial institutions, there can be no assurance that the risks associated with investments in financial services company issuers will decrease as a result of these steps.
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U.S. Mortgage Pass-Through Securities. Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment that consists of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on their residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying residential property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by GNMA) are described as “modified pass-throughs.” These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is GNMA, a wholly-owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders and subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional residential mortgages not insured or guaranteed by any government agency from a list of approved seller/services which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. FHLMC is a government-sponsored corporation created to increase availability of mortgage credit for residential housing and owned entirely by private stockholders. FHLMC issues participation certificates which represent interests in conventional mortgages from FHLMC’s national portfolio. Pass-through securities issued by FNMA and participation certificates issued by FHLMC are guaranteed as to timely payment of principal and interest by FNMA and FHLMC, respectively, but are not backed by the full faith and credit of the United States Government.
Although the underlying mortgage loans in a pool may have maturities of up to 30 years, the actual average life of the pool certificates typically will be substantially less because the mortgages will be subject to normal principal amortization and may be prepaid prior to maturity. Prepayment rates vary widely and may be affected by changes in market interest rates. In periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the actual average life of the pool certificates. Conversely, when interest rates are rising, the rate of prepayments tends to decrease, thereby lengthening the actual average life of the certificates. Accordingly, it is not possible to predict accurately the average life of a particular pool.
Collateralized Mortgage Obligations (“CMOs”). A domestic or foreign CMO in which a Fund may invest is a hybrid between a mortgage-backed bond and a mortgage pass-through security. Like a bond, interest is paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different stated maturity. Actual maturity and average life depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal and interest received from the pool of underlying mortgages, including prepayments, is first returned to the class having the earliest maturity date or highest maturity. Classes that have longer maturity dates and lower seniority will receive principal only after the higher class has been retired.
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Real Estate Investment Trusts
Each Fund may invest in real estate investment trusts (“REITs”). REITs are pooled investment vehicles that invest primarily in either real estate or real estate-related loans. REITs involve certain unique risks in addition to those risks associated with investing in the real estate industry in general (such as possible declines in the value of real estate, lack of availability of mortgage funds, or extended vacancies of property). Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of any credit extended and changes in interest rates. REITs whose underlying assets are concentrated in properties used by a particular industry, such as health care, are also subject to risks associated with such industry. REITs are dependent upon management skills, are not diversified, and are subject to heavy cash flow dependency, risks of default by borrowers, and self-liquidation. REITs are also subject to the possibilities of failing to qualify for preferential tax treatment under the Internal Revenue Code of 1986, as amended (the “Code”), and failing to maintain their exemptions from registration under the 1940 Act.
REITs (especially mortgage REITs) are also subject to interest rate risks, including prepayment risk. When interest rates decline, the value of a REIT’s investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s investment in fixed rate obligations can be expected to decline. If the REIT invests in adjustable rate mortgage loans the interest rates on which are reset periodically, yields on a REIT’s investments in such loans will gradually align themselves to reflect changes in market interest rates. This causes the value of such investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations. REITs may have limited financial resources, may trade less frequently and in a limited volume, and may be subject to more abrupt or erratic price movements than more widely held securities. A Fund’s investment in a REIT may require a Fund to accrue and distribute income not yet received or may result in a Fund making distributions that constitute a return of capital to a Fund’s shareholders for federal income tax purposes. In addition, distributions by a Fund from REITs will not qualify for the corporate dividends-received deduction, or, generally, for treatment as qualified dividend income.
Investments in REITs by a Fund may subject its shareholders to multiple levels of fees and expenses as a Fund’s shareholders will directly bear the fees and expenses of a Fund and will also indirectly bear a portion of the fees and expenses of the REITs in which a Fund invests.
Foreign Investments and Currencies
Each Fund may invest in securities of foreign issuers that are not publicly traded in the United States (the International Fund will invest substantially all of its assets in securities of foreign issuers). Each Fund may also invest in depositary receipts and in foreign currency futures contracts and may purchase and sell foreign currency on a spot basis.
Depositary Receipts. Depositary Receipts (“DRs”) include American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) or other forms of depositary receipts. DRs are receipts typically issued in connection with a U.S. or foreign bank or trust company which evidence ownership of underlying securities issued by a foreign corporation.
Forward Foreign Currency Exchange Contracts (Alternative Strategies Fund and High Income Alternatives Fund). The Alternative Strategies Fund and the High Income Alternatives Fund may use forward foreign currency exchange contracts for hedging purposes as well as investment purposes. A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
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Do not have standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount).
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Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the Commodity Futures Trading Commission (“CFTC”).
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Do not require an initial margin deposit.
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May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
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Foreign Currency Hedging Strategies (Alternative Strategies Fund and High Income Alternatives Fund). A “settlement hedge” or “transaction hedge” is designed to protect each Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars “locks in” the U.S. dollar price of the security. Each Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
Each Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a “position hedge,” would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. Each Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which each Fund’s investment is denominated. This type of hedge, sometimes referred to as a “proxy hedge,” could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that each Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
Each Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a “cross-hedge,” will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause each Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, each Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, each Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
Risks of Investing in Foreign Securities. Investments in foreign securities involve certain inherent risks, including the following:
Political and Economic Factors. Individual foreign economies of certain countries may differ favorably or unfavorably from the United States’ economy in such respects as growth of gross national product, rate of inflation,
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capital reinvestment, resource self-sufficiency, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries.
The European financial markets have continued to experience volatility because of concerns about economic downturns and about high and rising government debt levels of several countries in the European Union and Europe generally. These events have adversely affected the exchange rate of the Euro and the European securities markets, and may spread to other countries in Europe, including countries that do not use the Euro. These events may affect the value and liquidity of certain of the Funds’ investments. Responses to the financial problems by European Union governments, central banks and others, including austerity measures and reforms, may not work, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world.
The United Kingdom (the “U.K.”) exited the European Union on January 31, 2020 (an event commonly referred to as “Brexit”) and entered into a transition period until December 31, 2020. During the transition period, the U.K. effectively remained in the EU from an economic perspective. The impact of Brexit on the UK, the EU and the broader global economy may be significant. As a result of the political divisions within the UK and between the UK and the EU that the referendum vote has highlighted and the uncertain consequences of Brexit, the UK and European economies and the broader global economy could be significantly impacted, which may result in increased volatility and illiquidity and potentially lower economic growth on markets in the UK, Europe and globally, which could potentially have an adverse effect on the value of a Fund’s investments. In addition to concerns related to the effect of Brexit, that referendum may inspire similar initiatives in other EU member countries, producing further risks for global financial markets.
Currency Fluctuations. Each Fund may invest in securities denominated in foreign currencies. Accordingly, a change in the value of any such currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Fund’s assets denominated in that currency. Such changes will also affect a Fund’s income. The value of a Fund’s assets may also be affected significantly by currency restrictions and exchange control regulations enacted from time to time.
Market Characteristics. The Sub-Advisors expect that many foreign securities in which a Fund invests will be purchased in over-the-counter markets or on exchanges located in the countries in which the principal offices of the issuers of the various securities are located, if that is the best available market. Foreign exchanges and markets may be more volatile than those in the United States. While growing in volume, they usually have substantially less volume than U.S. markets, and a Fund’s portfolio securities may be less liquid and more volatile than U.S. Government securities. Moreover, settlement practices for transactions in foreign markets may differ from those in United States markets, and may include delays beyond periods customary in the United States. Foreign security trading practices, including those involving securities settlement where Fund assets may be released prior to receipt of payment or securities, may expose a Fund to increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures options and currency contracts may not be regulated as effectively on foreign exchanges as similar transactions in the United States, and may not involve clearing mechanisms and related guarantees. The value of such positions also could be adversely affected by the imposition of different exercise terms and procedures and margin requirements than in the United States. The value of a Fund’s positions may also be adversely impacted by delays in its ability to act upon economic events occurring in foreign markets during non-business hours in the United States.
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Legal and Regulatory Matters. Certain foreign countries may have less supervision of securities markets, brokers and issuers of securities, and less financial information available to issuers, than is available in the United States.
Taxes. The interest payable on certain of a Fund’s foreign portfolio securities may be subject to foreign withholding or other taxes, thus reducing the net amount of income available for distribution to a Fund’s shareholders.
Costs. To the extent that each Fund invests in foreign securities, its expense ratio is likely to be higher than those of investment companies investing only in domestic securities, since the cost of maintaining the custody of foreign securities is higher.
Emerging markets. Some of the securities in which each Fund may invest may be located in developing or emerging markets, which entail additional risks, including less social, political and economic stability; smaller securities markets and lower trading volume, which may result in a less liquidity and greater price volatility; national policies that may restrict a Fund’s investment opportunities, including restrictions on investment in issuers or industries, or expropriation or confiscation of assets or property; and less developed legal structures governing private or foreign investment. Natural disasters, public health emergencies (including pandemics and epidemics), terrorism and other global unforeseeable events may lead to instability in world economies and markets, may lead to market volatility, and may have adverse long-term effects. The Funds cannot predict the effects of such unforeseeable events in the future on the economy, the markets or the Funds’ investments.
In considering whether to invest in the securities of a foreign company, a Sub-Advisor considers such factors as the characteristics of the particular company, differences between economic trends and the performance of securities markets within the U.S. and those within other countries, and also factors relating to the general economic, governmental and social conditions of the country or countries where the company is located. The extent to which a Fund will be invested in foreign companies and countries and depository receipts will fluctuate from time to time within the limitations described in the prospectus, depending on a Sub-Advisor’s assessment of prevailing market, economic and other conditions.
Options on Securities and Securities Indices
Purchasing Put and Call Options. Each Fund may purchase covered “put” and “call” options with respect to securities which are otherwise eligible for purchase by a Fund and with respect to various stock indices subject to certain restrictions. Each Fund will engage in trading of such derivative securities primarily for hedging purposes.
If a Fund purchases a put option, a Fund acquires the right to sell the underlying security at a specified price at any time during the term of the option (for “American-style” options) or on the option expiration date (for “European-style” options). Purchasing put options may be used as a portfolio investment strategy when a Sub-Advisor perceives significant short-term risk but substantial long-term appreciation for the underlying security. The put option acts as an insurance policy, as it protects against significant downward price movement while it allows full participation in any upward movement. If a Fund is holding a stock which it feels has strong fundamentals, but for some reason may be weak in the near term, a Fund may purchase a put option on such security, thereby giving itself the right to sell such security at a certain strike price throughout the term of the option. Consequently, a Fund will exercise the put only if the price of such security falls below the strike price of the put. The difference between the put’s strike price and the market price of the underlying security on the date a Fund exercises the put, less transaction costs, will be the amount by which a Fund will be able to hedge against a decline in the underlying security. If during the period of the option the market price for the underlying security remains at or above the put’s
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strike price, the put will expire worthless, representing a loss of the price a Fund paid for the put, plus transaction costs. If the price of the underlying security increases, the profit a Fund realizes on the sale of the security will be reduced by the premium paid for the put option less any amount for which the put may be sold.
If a Fund purchases a call option, it acquires the right to purchase the underlying security at a specified price at any time during the term of the option. The purchase of a call option is a type of insurance policy to hedge against losses that could occur if a Fund has a short position in the underlying security and the security thereafter increases in price. Each Fund will exercise a call option only if the price of the underlying security is above the strike price at the time of exercise. If during the option period the market price for the underlying security remains at or below the strike price of the call option, the option will expire worthless, representing a loss of the price paid for the option, plus transaction costs. If the call option has been purchased to hedge a short position of a Fund in the underlying security and the price of the underlying security thereafter falls, the profit a Fund realizes on the cover of the short position in the security will be reduced by the premium paid for the call option less any amount for which such option may be sold.
Prior to exercise or expiration, an option may be sold when it has remaining value by a purchaser through a “closing sale transaction,” which is accomplished by selling an option of the same series as the option previously purchased. Each Fund generally will purchase only those options for which a Sub-Advisor believes there is an active secondary market to facilitate closing transactions.
Writing Call Options. Each Fund may write covered call options. A call option is “covered” if a Fund owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, he may effect a “closing purchase transaction.” This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option will permit a Fund to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction will permit the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of a Fund. If a Fund desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security.
Each Fund will realize a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. Each Fund will realize a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss to a Fund 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 a Fund.
Stock Index Options. Each Fund may also write (sell) and purchase put and call options with respect to the S&P 500 and other stock indices. Such options may be written or purchased as a hedge against changes resulting from market conditions in the values of securities which are held in a Fund’s portfolio or which it intends to purchase or sell, or when they are economically appropriate for the reduction of risks inherent in the ongoing management of a Fund.
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The distinctive characteristics of options on stock indices create certain risks that are not present with stock options generally. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether a Fund will realize a gain or loss on the purchase or sale of an option on an index depends upon movements in the level of stock prices in the stock market generally rather than movements in the price of a particular stock. Accordingly, successful use by a Fund of options on a stock index would be subject to a Sub-Advisor’s ability to predict correctly movements in the direction of the stock market generally. This requires different skills and techniques than predicting changes in the price of individual stocks.
Index prices may be distorted if trading of certain stocks included in the index is interrupted. Trading of index options also may be interrupted in certain circumstances, such as if trading were halted in a substantial number of stocks included in the index. If this were to occur, a Fund would not be able to close out options which it had purchased, and if restrictions on exercise were imposed, a Fund might be unable to exercise an option it holds, which could result in substantial losses to a Fund. It is the policy of each Fund to purchase put or call options only with respect to an index which a Sub-Advisor believes includes a sufficient number of stocks to minimize the likelihood of a trading halt in the index.
Risks of Investing in Options. There are several risks associated with transactions in options on securities and indices. Options may be more volatile than the underlying instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves. There are also significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular options may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of option of underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or clearing corporation may not at all times be adequate to handle current trading volume; or 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 that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The extent to which a Fund may enter into options transactions may be limited by the requirements of the Code with respect to qualification of a Fund as a regulated investment company. See “Dividends and Distributions” and “Taxation.”
In addition, when trading options on foreign exchanges, many of the protections afforded to participants in United States option exchanges will not be available. For example, there may be no daily price fluctuation limits in such exchanges or markets, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, a Fund as an option writer could lose amounts substantially in excess of its initial investment, due to the margin and collateral requirements typically associated with such option writing. See “Dealer Options” below.
Dealer Options. Each Fund may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While a Fund might look to a clearing corporation to exercise exchange-traded options, if a Fund were to purchase a dealer option it would need to rely on the dealer from which it purchased the option to perform if the option were exercised. Failure by the dealer to do so would result in the loss of the premium paid by a Fund as well as loss of the expected benefit of the transaction.
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Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, a Fund may generally be able to realize the value of a dealer option it has purchased only by exercising or reselling the option to the dealer who issued it. Similarly, when a Fund writes a dealer option, a Fund may generally be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to whom a Fund originally wrote the option. While a Fund will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with a Fund, there can be no assurance that a Fund will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless a Fund, as a covered dealer call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, a Fund may be unable to liquidate a dealer option. With respect to options written by a Fund, the inability to enter into a closing transaction may result in material losses to a Fund. For example, because a Fund must maintain a secured position with respect to any call option on a security it writes, a Fund may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair a Fund’s ability to sell portfolio securities at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer options are illiquid securities. A Fund may treat the cover used for written dealer options as liquid if the dealer agrees that a Fund may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. Accordingly, each Fund will treat dealer options as subject to a Fund’s limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, each Fund will change its treatment of such instruments accordingly.
Foreign Currency Options. Each Fund may buy or sell put and call options on foreign currencies. A put or call option on a foreign currency gives the purchaser of the option the right to sell or purchase a foreign currency at the exercise price until the option expires. Each Fund will use foreign currency options separately or in combination to control currency volatility. Among the strategies employed to control currency volatility is an option collar. An option collar involves the purchase of a put option and the simultaneous sale of call option on the same currency with the same expiration date but with different exercise (or “strike”) prices. Generally, the put option will have an out-of-the-money strike price, while the call option will have either an at-the-money strike price or an in-the-money strike price. Foreign currency options are derivative securities. Currency options traded on U.S. or other exchanges may be subject to position limits that may limit the ability of a Fund to reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received. Each Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against exchange rate fluctuations; however, in the event of exchange rate movements adverse to a Fund’s position, a Fund may forfeit the entire amount of the premium plus related transaction costs.
Spread Transactions. Each Fund may purchase covered spread options from securities dealers. These covered spread options are not presently exchange-listed or exchange-traded. The purchase of a spread option gives a Fund the right to put a security that it owns at a fixed dollar spread or fixed yield spread in relationship to another security that a Fund does not own, but which is used as a benchmark. The risk to a Fund, in addition to the risks of dealer options described above, is the cost of the premium paid as well as any transaction costs. The purchase of spread options will be used to protect a Fund against adverse changes in prevailing credit quality spreads, i.e., the yield spread between high quality and lower quality securities. This protection is provided only during the life of the spread options.
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Forward Currency Contracts
Each Fund may enter into forward currency contracts in anticipation of changes in currency exchange rates. A forward currency contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. For example, a Fund might purchase a particular currency or enter into a forward currency contract to preserve the U.S. dollar price of securities it intends to or has contracted to purchase. Alternatively, it might sell a particular currency on either a spot or forward basis to hedge against an anticipated decline in the dollar value of securities it intends to or has contracted to sell. Although this strategy could minimize the risk of loss due to a decline in the value of the hedged currency, it could also limit any potential gain from an increase in the value of the currency.
Credit Default Swap Agreements (Alternative Strategies Fund and High Income Alternatives Fund)
The Alternative Strategies Fund and the High Income Alternatives Fund may enter into credit default swap agreements. The “buyer” in a credit default swap contract is obligated to pay the “seller” a periodic stream of payments over the term of the contract in return for a contingent payment upon the occurrence of a credit event with respect to an underlying reference obligation. Generally, a credit event means bankruptcy, failure to pay, obligation acceleration or modified restructuring. Each Fund may be either the buyer or the seller in the transaction. As a seller, each Fund receives a fixed rate of income throughout the term of the contract, which typically is between one month and five years, provided that no credit event occurs. If a credit event occurs, each Fund typically must pay the contingent payment to the buyer, which is typically the “par value” (full notional value) of the reference obligation. If each Fund writes a credit default swap, it would normally be required to segregate liquid assets equal in value to the notional value of the contract. The contingent payment may be a cash settlement or by physical delivery of the reference obligation in return for payment of the face amount of the obligation. The value of the reference obligation received by each Fund as a seller if a credit event occurs, coupled with the periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to each Fund. If the reference obligation is a defaulted security, physical delivery of the security will cause each Fund to hold a defaulted security. If each Fund is a buyer and no credit event occurs, each Fund will lose its periodic stream of payments over the term of the contract. However, if a credit event occurs, the buyer typically receives full notional value for a reference obligation that may have little or no value.
In a single name credit default swap the underlying asset or reference obligation is a bond of one particular issuer or reference entity. There are generally two sides to the swap trade: a buyer of protection and a seller of protection. If the reference entity of a credit default swap experiences what is known as a credit event (such as a bankruptcy, downgrade, etc.), then the buyer of protection (who pays a premium for that protection) can receive payment from the seller of protection. This is desirable because the price of those bonds will experience a decrease in value due to the negative credit event. There is also the option of physical, rather than cash, trade settlement in which the underlying bond or reference obligation actually changes hands, from buyer of protection to seller of protection.
The major tradable indexes for credit default swaps are: CDX, ABX, CMBX and LCDX. The CDX indexes are broken out between investment grade, high yield, high volatility, crossover and emerging market. For example, the CDX.NA.HY is an index based on a basket of North American (NA) single-name high yield credit default swaps. The crossover index includes names that are split rated, meaning they are rated “investment grade” by one agency, and “below investment grade” by another.
The CDX index rolls over every six months, and its 125 names enter and leave the index as appropriate. For example, if one of the names is upgraded from below investment grade to investment grade, it will move from the high yield index to the investment grade index when the rebalance occurs.
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The ABX and CMBX are baskets of credit default swaps on two securitized products: asset-backed securities and commercial mortgage-backed securities. The ABX is based on asset-backed securities home equity loans and the CMBX on commercial mortgage-backed securities. There are five separate ABX indexes for ratings ranging from ‘AAA’ to ‘BBB-’. The CMBX also has the same breakdown of five indexes by ratings, but is based on a basket of 25 credit default swaps, which reference commercial mortgage-backed securities.
The LCDX is a credit derivative index with a basket made up of single-name, loan-only credit default swaps. The loans referred to are leveraged loans. The basket is made up of 100 names. Although a bank loan is considered secured debt, the names that usually trade in the leveraged loan market are lower quality credits (if they could issue in the normal investment grade markets, they would). Therefore, the LCDX index is used mostly by those looking for exposure to high-yield debt.
All of the aforementioned indexes are issued by the Credit Default Swaps Index Company and administered by Markit. For these indexes to work, they must have sufficient liquidity. Therefore, the issuer has commitments from the largest dealers (large investment banks) to provide liquidity in the market.
Total Return Swap Agreements (Alternative Strategies Fund and High Income Alternatives Fund)
The Alternative Strategies Fund and the High Income Alternatives Fund may enter into total return swap agreements. Total return swap agreements are contracts in which one party agrees to make periodic payments to another party based on the change in market value of the assets underlying the contract, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Total return swap agreements may effectively add leverage to each Fund’s portfolio because, in addition to its total net assets, each Fund would be subject to investment exposure on the notional amount of the swap.
Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to each Fund thereunder. Swap agreements also bear the risk that each Fund will not be able to meet its obligation to the counterparty. Generally, each Fund will enter into total return swaps on a net basis (i.e., the two payment streams are netted against one another with each 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 each Fund’s obligations over its entitlements with respect to each total return swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate NAV at least equal to the accrued excess will be segregated by each Fund. If the total return swap transaction is entered into on other than a net basis, the full amount of each Fund’s obligations will be accrued on a daily basis, and the full amount of each Fund’s obligations will be segregated by each Fund in an amount equal to or greater than the market value of the liabilities under the total return swap agreement or the amount it would have cost each Fund initially to make an equivalent direct investment, plus or minus any amount each Fund is obligated to pay or is to receive under the total return swap agreement.
Futures Contracts and Related Options
Each Fund may invest in futures contracts and options on futures contracts as a hedge against changes in market conditions or interest rates. A Fund may trade in such derivative securities for bona fide hedging purposes and otherwise in accordance with the rules of the CFTC. A Fund will segregate liquid assets in a separate account with its custodian when required to do so by CFTC guidelines in order to cover its obligation in connection with futures and options transactions.
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No price is paid or received by a Fund upon the purchase or sale of a futures contract. When it enters into a domestic futures contract, a Fund will be required to deposit in a segregated account with its custodian an amount of cash or U.S. Treasury bills equal to approximately 5% of the contract amount. This amount is known as initial margin. The margin requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions is different from that of margin in securities transactions. Futures contract margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to a Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. Subsequent payments (called variation margin) to and from the broker will be made on a daily basis as the price of the underlying stock index fluctuates, to reflect movements in the price of the contract making the long and short positions in the futures contract more or less valuable. For example, when a Fund has purchased a stock index futures contract and the price of the underlying stock index has risen, that position will have increased in value and a Fund will receive from the broker a variation margin payment equal to that increase in value. Conversely, when a Fund has purchased a stock index futures contract and the price of the underlying stock index has declined, the position will be less valuable and a Fund will be required to make a variation margin payment to the broker.
At any time prior to expiration of a futures contract, a Fund may elect to close the position by taking an opposite position, which will operate to terminate a Fund’s position in the futures contract. A final determination of variation margin is made on closing the position. Additional cash is paid by or released to a Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation margin, a Fund must segregate liquid assets with its custodian equal to the market value of the futures contracts, in order to comply with SEC requirements intended to ensure that a Fund’s use of futures is unleveraged. The requirements for margin payments and segregated accounts apply to both domestic and foreign futures contracts.
Stock Index Futures Contracts. Each Fund may invest in futures contracts on stock indices. Currently, stock index futures contracts can be purchased or sold with respect to the S&P 500 Stock Price Index on the Chicago Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the New York Stock Exchange Composite Index on the New York Futures Exchange and the Value Line Stock Index on the Kansas City Board of Trade. Foreign financial and stock index futures are traded on foreign exchanges including the London International Financial Futures Exchange, the Singapore International Monetary Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock Exchange.
Interest Rate or Financial Futures Contracts. Each Fund may invest in interest rate or financial futures contracts. Bond prices are established in both the cash market and the futures market. In the cash market, bonds are purchased and sold with payment for the full purchase price of the bond being made in cash, generally within five business days after the trade. In the futures market, a contract is made to purchase or sell a bond in the future for a set price on a certain date. Historically, the prices for bonds established in the futures markets have generally tended to move in the aggregate in concert with cash market prices, and the prices have maintained fairly predictable relationships.
The sale of an interest rate or financial futures contract by a Fund would create an obligation by a Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specific future time for a specified price. A futures contract purchased by a Fund would create an obligation by a Fund, as purchaser, to take delivery of the specific type of financial instrument at a specific future time at a specific price. The specific securities delivered or taken, respectively, at settlement date, would not be determined until at or near that date. The determination would be in accordance with the rules of the exchange on which the futures contract sale or purchase was made.
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Although interest rate or financial futures contracts by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without delivery of securities. Closing out of a futures contract sale is effected by a Fund’s entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and the same delivery date. If the price in the sale exceeds the price in the offsetting purchase, a Fund is paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, a Fund pays the difference and realizes a loss. Similarly, the closing out of a futures contract purchase is effected by a Fund’s entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, a Fund realizes a gain, and if the purchase price exceeds the offsetting sale price, a Fund realizes a loss.
Each Fund will deal only in standardized contracts on recognized exchanges. Each exchange guarantees performance under contract provisions through a clearing corporation, a nonprofit organization managed by the exchange membership. Domestic interest rate futures contracts are traded in an auction environment on the floors of several exchanges – principally, the Chicago Board of Trade and the Chicago Mercantile Exchange. A public market now exists in domestic futures contracts covering various financial instruments including long-term United States Treasury bonds and notes, GNMA modified pass-through mortgage-backed securities, three-month United States Treasury bills, and 90-day commercial paper. Each Fund may trade in any futures contract for which there exists a public market, including, without limitation, the foregoing instruments. International interest rate futures contracts are traded on the London International Financial Futures Exchange, the Singapore International Monetary Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock Exchange.
Interest Rate Caps, Floors and Collars (Alternative Strategies Fund and High Income Alternatives Fund). The Alternative Strategies Fund and the High Income Alternatives Fund may use interest rate caps, floors and collars for the same purposes or similar purposes as for which it uses interest rate futures contracts and related options. Interest rate caps, floors and collars are similar to interest rate swap contracts because the payment obligations are measured by changes in interest rates as applied to a notional amount and because they are generally individually negotiated with a specific counterparty. The purchase of an interest rate cap entitles the purchaser, to the extent that a specific index exceeds a specified interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below specified interest rates, to receive payments of interest on a notional principal amount from the party selling the interest rate floor. The purchase of an interest rate collar entitles the purchaser, to the extent that a specified index exceeds or falls below a specified interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate collar.
Foreign Currency Futures Contracts. Each Fund may use foreign currency future contracts for hedging purposes. A foreign currency futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a foreign currency at a specified price and time. A public market exists in futures contracts covering several foreign currencies, including the Australian dollar, the Canadian dollar, the British pound, the Japanese yen, the Swiss franc, and certain multinational currencies such as the European Currency Unit (“ECU”). Other foreign currency futures contracts are likely to be developed and traded in the future. Each Fund will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system.
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Risks of Transactions in Futures Contracts. There are several risks related to the use of futures as a hedging device. One risk arises because of the imperfect correlation between movements in the price of the futures contract and movements in the price of the securities which are the subject of the hedge. The price of the future may move more or less than the price of the securities being hedged. If the price of the future moves less than the price of the securities which are the subject of the hedge, the hedge will not be fully effective, but if the price of the securities being hedged has moved in an unfavorable direction, a Fund would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, this advantage will be partially offset by the loss on the future. If the price of the future moves more than the price of the hedged securities, a Fund will experience either a loss or a gain on the future which will not be completely offset by movements in the price of the securities which are subject to the hedge.
To compensate for the imperfect correlation of movements in the price of securities being hedged and movements in the price of the futures contract, a Fund may buy or sell futures contracts in a greater dollar amount than the dollar amount of securities being hedged if the historical volatility of the prices of such securities has been greater than the historical volatility over such time period of the future. Conversely, a Fund may buy or sell fewer futures contracts if the historical volatility of the price of the securities being hedged is less than the historical volatility of the futures contract being used. It is possible that, when a Fund has sold futures to hedge its portfolio against a decline in the market, the market may advance while the value of securities held in a Fund’s portfolio may decline. If this occurs, a Fund will lose money on the future and also experience a decline in value in its portfolio securities. However, the Advisor believes that over time the value of a diversified portfolio will tend to move in the same direction as the market indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in the price of securities before a Fund is able to invest its cash (or cash equivalents) in securities (or options) in an orderly fashion, it is possible that the market may decline instead. If a Fund then decides not to invest in securities or options at that time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the futures and the securities being hedged, the price of futures may not correlate perfectly with movement in the stock index or cash market due to certain market distortions. All participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationship between the index or cash market and futures markets. In addition, the 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 also cause temporary price distortions. As a result of price distortions in the futures market and the imperfect correlation between movements in the cash market and the price of securities and movements in the price of futures, a correct forecast of general trends by a Sub-Advisor may still not result in a successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although a Fund may intend to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures position, and in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. When futures contracts have been used to hedge portfolio securities, such securities will not be sold until the futures contract can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, as described above, there is no guarantee that the price of the securities will in fact correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract.
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Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund is also subject to a Sub-Advisor’s ability to predict correctly movements in the direction of the market. For example, if a Fund has hedged against the possibility of a decline in the market adversely affecting stocks held in its portfolio and stock prices increase instead, a Fund will lose part or all of the benefit of the increased value of the stocks which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if a Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. Each Fund may have to sell securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund engages in transactions in futures contracts or options, a Fund could experience delays and losses in liquidating open positions purchased or sold through the broker, and incur a loss of all or part of its margin deposits with the broker.
Options on Futures Contracts. As described above, each Fund may purchase options on the futures contracts they can purchase or sell. A futures option gives the holder, in return for the premium paid, the right to buy (call) from or sell (put) to the writer of the option a futures contract at a specified price at any time during the period of the option. Upon exercise, the writer of the option is obligated to pay the difference between the cash value of the futures contract and the exercise price. Like the buyer or seller of a futures contract, the holder or writer of an option has the right to terminate its position prior to the scheduled expiration of the option by selling, or purchasing an option of the same series, at which time the person entering into the closing transaction will realize a gain or loss. There is no guarantee that such closing transactions can be effected.
Investments in futures options involve some of the same considerations as investments in futures contracts (for example, the existence of a liquid secondary market). In addition, 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 option. Depending on the pricing of the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an option may or may not be less risky than ownership of the futures contract or such securities. In general, the market prices of options can be expected to be more volatile than the market prices on the underlying futures contracts. Compared to the purchase or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential risk to a Fund because the maximum amount at risk is limited to the premium paid for the options (plus transaction costs).
Restrictions on the Use of Futures Contracts and Related Options. Each Fund may engage in transactions in futures contracts or related options primarily as a hedge against changes resulting from market conditions in the values of securities held in a Fund’s portfolio or which it intends to purchase and where the transactions are economically appropriate to the reduction of risks inherent in the ongoing management of each Fund. A Fund may not purchase or sell futures or purchase related options for purposes other than bona fide hedging if, immediately thereafter, more than 25% of its total assets would be hedged. A Fund also may not purchase or sell futures or purchase related options if, immediately thereafter, the sum of the amount of margin deposits on a Fund’s existing futures positions and premiums paid for such options would exceed 5% of the market value of a Fund’s total assets.
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These restrictions, which are derived from current federal regulations regarding the use of options and futures by mutual funds, are not “fundamental restrictions” and may be changed by the Trustees of the Trust if applicable law permits such a change and the change is consistent with the overall investment objective and policies of each Fund.
The extent to which a Fund may enter into futures and options transactions may be limited by the Code requirements for qualification of a Fund as a regulated investment company. See “Taxation.”
Exclusion from Definition of Commodity Pool Operator
The Funds are operated by a person who has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act of 1936, as amended (“CEA”), pursuant to Rule 4.5 under the CEA promulgated by the CFTC. Therefore, neither the Funds nor the Advisor is subject to registrations or regulation as a commodity pool operator under the CEA. Effective December 31, 2012, in order to claim the Rule 4.5 exclusion, each Fund is limited in its ability to invest in certain financial instruments regulated under the CEA (“commodity interests”), including futures, options and certain swaps (including securities futures, broad-based stock index futures and financial futures contracts). In the event that the Funds’ investments in commodity interests are not within the thresholds set forth in the Rule 4.5 exclusion, the Advisor may be required to register as a “commodity pool operator” and/or “commodity trading advisor” with the CFTC with respect to the Funds, which may increase the Funds’ expenses and adversely affect the Funds’ total returns. The Advisor’s eligibility to claim the 4.5 exclusion with respect to the Funds will be based upon, among other things, the level and scope of the Funds’ investments in commodity interests, the purposes of such investments and the manner in which the Funds hold out their use of commodity interests. As a result, in the future, the Funds will be more limited in their ability to invest in commodity interests than in the past, which may negatively impact on the ability of the Advisor to manage the Funds and the Funds’ performance.
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to its portfolio securities. Pursuant to such agreements, a Fund acquires securities from financial institutions such as banks and broker-dealers as are deemed to be creditworthy by the Advisor or a Sub-Advisor, subject to the seller’s agreement to repurchase and a Fund’s agreement to resell such securities at a mutually agreed upon date and price. The repurchase price generally equals the price paid by a Fund plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on the underlying portfolio security). Securities subject to repurchase agreements will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller under a repurchase agreement will be required to maintain the value of the underlying securities at not less than 102% of the repurchase price under the agreement. If the seller defaults on its repurchase obligation, a Fund holding the repurchase agreement will suffer a loss to the extent that the proceeds from a sale of the underlying securities are less than the repurchase price under the agreement. Bankruptcy or insolvency of such a defaulting seller may cause a Fund’s rights with respect to such securities to be delayed or limited. Repurchase agreements are considered to be loans under the 1940 Act, and the total repurchase agreements of a Fund are limited to 33-1/3% of its total assets.
Reverse Repurchase Agreements
Each Fund may enter into reverse repurchase agreements. A Fund typically will invest the proceeds of a reverse repurchase agreement in money market instruments or repurchase agreements maturing not later than the expiration of the reverse repurchase agreement. A Fund may use the proceeds of reverse repurchase agreements to provide liquidity to meet redemption requests when sale of a Fund’s securities is disadvantageous.
Each Fund causes its custodian to segregate liquid assets, such as cash, U.S. Government securities or other high-grade liquid debt securities equal in value to its obligations (including accrued interest) with respect to reverse repurchase agreements. In segregating such assets, the custodian either places such securities in a segregated account or separately identifies such assets and renders them unavailable for investment. Such assets are marked to market daily to ensure full collateralization is maintained.
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TBAs and Dollar Roll Transactions
Funds that purchase or sell mortgage-backed securities may choose to purchase or sell certain mortgage-backed securities on a delayed delivery or forward commitment basis through the “to-be-announced” (“TBA”) market. With TBA transactions, the Fund would enter into a commitment to either purchase or sell mortgage-backed securities for a fixed price, with payment and delivery at a scheduled future date beyond the customary settlement period for mortgage-backed securities. These transactions are considered TBA because the Fund commits to buy a pool of mortgages that have yet to be specifically identified but will meet certain standardized parameters (such as yield, duration, and credit quality) and contain similar loan characteristics. For either purchase or sale transactions, a Fund may choose to extend the settlement through a dollar roll transaction. A dollar roll transaction involves a sale by a Fund of a security to a financial institution concurrently with an agreement by a Fund to purchase a similar security from the institution at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories than those sold. During the period between the sale and repurchase, a Fund will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in additional portfolio securities of a Fund, and the income from these investments, together with any additional fee income received on the sale, may or may not generate income for a Fund exceeding the yield on the securities sold.
Although TBA securities must meet industry-accepted “good delivery” standards, there can be no assurance that a security purchased on a forward commitment basis will ultimately be issued or delivered by the counterparty. During the settlement period, the Fund will still bear the risk of any decline in the value of the security to be delivered. Dollar roll transactions involve the simultaneous purchase and sale of substantially similar TBA securities for different settlement dates. Because these transactions do not require the purchase and sale of identical securities, the characteristics of the security delivered to the Fund may be less favorable than the security delivered to the dealer.
At the time a Fund enters into a dollar roll transaction, it causes its custodian to segregate liquid assets such as cash, U.S. Government securities or other high-grade liquid debt securities having a value equal to the purchase price for the similar security (including accrued interest) and subsequently marks the assets to market daily to ensure that full collateralization is maintained.
In addition, recently finalized rules of FINRA include mandatory margin requirements that require a Fund to post collateral in connection with its TBA transactions. There is no similar requirement applicable to the Funds’ TBA counterparties. The required collateralization of TBA trades could increase the cost of TBA transactions to the Funds and impose added operational complexity.
When-Issued Securities, Forward Commitments and Delayed Settlements
Each Fund may purchase securities on a “when-issued,” forward commitment or delayed settlement basis. In this event, the Custodian will set aside, and the Fund will identify on its books, cash or liquid portfolio securities equal to the amount of the commitment in a separate account. Normally, the Custodian will set aside portfolio securities to satisfy a purchase commitment. In such a case, a Fund may be required subsequently to place additional assets in the separate account in order to assure that the value of the account remains equal to the amount of a Fund’s commitment. It may be expected that a Fund’s net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when it sets aside cash.
Each Fund does not intend to engage in these transactions for speculative purposes but only in furtherance of its investment objectives. Because a Fund will set aside cash or liquid portfolio securities to satisfy its purchase
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commitments in the manner described, a Fund’s liquidity and the ability of a Sub-Advisor to manage it may be affected in the event a Fund’s forward commitments, commitments to purchase when-issued securities and delayed settlements ever exceeded 15% of the value of its net assets.
Each Fund will purchase securities on a when-issued, forward commitment or delayed settlement basis only with the intention of completing the transaction. If deemed advisable as a matter of investment strategy, however, a Fund may dispose of or renegotiate a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered to a Fund on the settlement date. In these cases a Fund may realize a taxable capital gain or loss. When a Fund engages in when-issued, forward commitment and delayed settlement transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in a Fund’s incurring a loss or missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase, forward commitment to purchase securities, or a delayed settlement and any subsequent fluctuations in their market value is taken into account when determining the market value of a Fund starting on the day a Fund agrees to purchase the securities. A Fund does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date.
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities
Each Fund may invest in zero-coupon, step-coupon and pay-in-kind securities. These securities are debt securities that do not make regular cash interest payments. Zero-coupon and step-coupon securities are sold at a deep discount to their face value. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be volatile when interest rates fluctuate. While these securities do not pay current cash income, the Code requires the holders of these securities to include in income each year the portion of the original issue discount (or deemed discount) and other non-cash income on the securities accruing that year. A Fund may be required to distribute a portion of that discount and income and may be required to dispose of other portfolio securities, which may occur in periods of adverse market prices, in order to generate cash to meet these distribution requirements.
Inflation-Linked and Inflation-Indexed Securities
The Alternative Strategies Fund and the High Income Alternatives Fund may invest in inflation-linked bonds. The principal amount of these bonds increases with increases in the price index used as a reference value for the bonds. In addition, the amounts payable as coupon interest payments increase when the price index increases because the interest amount is calculated by multiplying the principal amount (as adjusted) by a fixed coupon rate.
Although inflation-indexed securities protect their holders from long-term inflationary trends, short-term increases in inflation may result in a decline in value. The values of inflation-linked securities generally fluctuate in response to changes to real interest rates, which are in turn tied to the relationship between nominal interest rates and the rate of inflation. If inflation were to rise at a rate faster than nominal interest rates, real interest rates might decline, leading to an increase in value of the inflation-linked securities. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in the value of inflation-linked securities. If inflation is lower than expected during a period the Fund holds inflation-linked securities, the Fund may earn less on such bonds than on a conventional bond. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in inflation-linked securities may not be protected to the extent that the increase is not reflected in the price index used as a reference for the securities. There can be no assurance that the price index used for an inflation-linked security will accurately measure the real rate of inflation in the prices of goods and services. Inflation-linked and inflation-indexed securities include Treasury Inflation-Protected Securities issued by the U.S. government (see the section “U.S. Government Securities” for additional information), but also may include securities issued by state, local and non-U.S. governments and corporations and supranational entities.
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Borrowing
Each of the Equity Fund, International Fund, SBH Focused Small Value Fund and Oldfield International Value Fund is authorized to borrow money from banks from time to time for temporary, extraordinary or emergency purposes or for clearance of transactions in amounts up to 20% of the value of its total assets at the time of such borrowing. The Alternative Strategies Fund and the High Income Alternatives Fund are authorized to borrow money from banks in amounts up to 33-1/3% of their total assets. Each Fund is authorized to borrow money in amounts up to 5% of the value of its total assets at the time of such borrowing s for temporary purposes and is authorized to borrow money in excess of the 5% limit as permitted by the 1940 Act. The 1940 Act requires a Fund to maintain continuous asset coverage (i.e., total assets including borrowings less liabilities exclusive of borrowings) of at least 300% of the amount borrowed. If the 300% asset coverage declines as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. The use of borrowing by the Fund involves special risk considerations that may not be associated with other funds having similar objectives and policies. Since substantially all of the Fund’s assets fluctuate in value, whereas the interest obligation resulting from a borrowing will be fixed by the terms of the Fund’s agreement with its lender, the asset value per share of the Fund will tend to increase more when its portfolio securities increase in value and to decrease more when its portfolio assets decrease in value than would otherwise be the case if the Fund did not borrow funds. In addition, interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds. Under adverse market conditions, the Fund might have to sell portfolio securities to meet interest or principal payments at a time when fundamental investment considerations would not favor such sales.
Lending Portfolio Securities
Each Fund may lend its investment securities to approved institutional borrowers who need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities or completing arbitrage operations. By lending its investment securities, a Fund attempts to increase its net investment income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would belong to the Fund. Each Fund may lend its investment securities so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the 1940 Act or the rules and regulations or interpretations of the SEC thereunder, which currently require that (i) the loan collateral must be equal to at least 100% of the value of the loaned securities, and the borrower must increase such collateral such that it remains equal to 100% of the value of the loaned securities whenever the price of the loaned securities increases (i.e., mark to market on a daily basis); (ii) the Fund must be able to terminate the loan at any time; (iii) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (iv) the Fund may pay reasonable custodial fees in connection with the lending of portfolio securities, which fees must be negotiated by the Fund and the custodian and be approved by the Board; and (v) although the voting rights may pass with the lending of securities, the Board must be obligated to call the loan in time to vote the securities if a material event affecting the investment on loan is to occur.
The primary risk in securities lending is default by the borrower as the value of the borrowed security rises, resulting in a deficiency in the collateral posted by the borrower. The Funds seek to minimize this risk by computing the value of the security loaned on a daily basis and requiring additional collateral if necessary.
The Board has appointed State Street Bank and Trust Company, the Funds’ custodian, as securities lending agent for the Funds’ securities lending activity. The securities lending agent maintains a list of broker-dealers, banks or other institutions that it has determined to be creditworthy. The Funds will only enter into loan arrangements with borrowers on this list and will not lend its securities to be sold short.
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Short Sales
Each Fund is authorized to make short sales of securities which it does not own or have the right to acquire. In a short sale, a Fund sells a security that it does not own, in anticipation of a decline in the market value of the security. To complete the sale, a Fund must borrow the security (generally from the broker through which the short sale is made) in order to make delivery to the buyer. Each Fund is then obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. Each Fund is said to have a “short position” in the securities sold until it delivers them to the broker. The period during which a Fund has a short position can range from one day to more than a year. Until the security is replaced, the proceeds of the short sale are retained by the broker, and a Fund is required to pay to the broker a negotiated portion of any dividends or interest that accrue during the period of the loan. To meet current margin requirements, a Fund is also required to deposit with the broker additional cash or securities so that the total deposit with the broker is maintained daily at 150% of the current market value of the securities sold short (100% of the current market value if a security is held in the account that is convertible or exchangeable into the security sold short within 90 days without restriction other than the payment of money).
Short sales by a Fund create opportunities to increase a Fund’s return but, at the same time, involve specific risk considerations and may be considered a speculative technique. Since each Fund in effect profits from a decline in the price of the securities sold short without the need to invest the full purchase price of the securities on the date of the short sale, a Fund’s NAV per share will tend to increase more when the securities it has sold short decrease in value, and to decrease more when the securities it has sold short increase in value, than would otherwise be the case if it had not engaged in such short sales. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest a Fund may be required to pay in connection with the short sale. Furthermore, under adverse market conditions a Fund might have difficulty purchasing securities to meet its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.
Illiquid Securities
Each Fund may not invest more than 15% of the value of its net assets in illiquid securities, including restricted securities that are not deemed to be liquid by the Sub-Advisor. The Advisor and the Sub-Advisors will monitor the amount of illiquid securities in a Fund’s portfolio, under the supervision of the Board, to ensure compliance with a Fund’s investment restrictions. In accordance with procedures approved by the Board, these securities may be valued using techniques other than market quotations, and the values established for these securities may be different than what would be produced through the use of another methodology or if they had been priced using market quotations. Illiquid securities and other portfolio securities that are valued using techniques other than market quotations, including “fair valued” securities, may be subject to greater fluctuation in their value from one day to the next than would be the case if market quotations were used. In addition, there is no assurance that a Fund could sell a portfolio security for the value established for it at any time, and it is possible that a Fund would incur a loss because a portfolio security is sold at a discount to its established value.
Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placement or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a Fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemption within seven days. A Fund might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
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In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer’s ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. If such securities are subject to purchase by institutional buyers in accordance with Rule 144A promulgated by the SEC under the Securities Act, the Sub-Advisor, pursuant to procedures adopted by the Board, may determine that such securities are not illiquid securities notwithstanding their legal or contractual restrictions on resale. In all other cases, however, securities subject to restrictions on resale will be deemed illiquid.
Exchange-Traded Funds
The Funds may invest in exchange-traded funds (“ETFs”), which are a type of index fund bought and sold on a securities exchange. An ETF trades like common stock and represents a fixed portfolio of securities designed to track a particular market index. A Fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. ETFs are also subject to other risks, including the risk that their prices may not correlate perfectly with changes in the underlying index and the risk of possible trading halts due to market conditions or other reasons that, in the view of the exchange upon which an ETF trades, would make trading in the ETF inadvisable. An exchange-traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based. Investments in ETFs are generally subject to limits in the 1940 Act on investments in other investment companies.
Special Purpose Acquisition Companies Risk (Alternative Strategies Fund)
The Alternative Strategies Fund may invest in the common stock of and other interests (e.g., warrants and rights) in special purpose acquisition companies or similar special purpose entities (collectively, “SPACs”). A SPAC investment typically represents an investment in a special purpose vehicle that seeks to identify and effect an acquisition of, or merger with, an operating company in a particular industry or sector. During the period when management of the SPAC seeks to identify a potential acquisition or merger target, typically most of the capital raised for that purpose (less a portion retained to cover expenses) is invested in income-producing investments. The Alternative Strategies Fund may invest in SPACs for a variety of investment purposes, including to achieve income. SPACs provide the opportunity for common shareholders to have some or all of their shares redeemed by the SPAC at or around the time a proposed merger or acquisition is expected to occur. If not subject to a restriction on resale, the Alternative Strategies Fund may sell its investments in SPACs at any time, including before, at or after the time of a merger or acquisition. The Alternative Strategies Fund may invest in certain SPAC investments where the SPAC or the securities underlying the SPAC will not be registered under the Securities Act of 1933, as amended, and/or no public market may exist for such securities. Such investments involve a high degree of risk which could cause the Alternative Strategies Fund to lose all or part of its investment. The restrictions on resale of certain unregistered SPAC investments may be for an extended time (e.g., two to three years).
Because SPACs and similar entities have no operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable acquisition. Some SPACs may pursue acquisitions only within certain industries or regions, which may increase the volatility of their prices. In addition, some SPACs are typically traded in the over-the-counter market and may be considered illiquid and/or may be subject to restrictions on resale. An investment in a SPAC is subject to a variety of risks, including that (i) a significant portion of the monies raised by the SPAC for the purpose of identifying and effecting an acquisition or merger may be expended during the search for a target transaction; (ii) an attractive acquisition or merger target may not be identified at all and the SPAC will
32
be required to return any remaining monies to shareholders; (iii) any proposed merger or acquisition may be unable to obtain the requisite approval, if any, of SPAC shareholders; (iv) an acquisition or merger once effected may prove unsuccessful and an investment in the SPAC may lose value; (v) the warrants or other rights with respect to the SPAC held by the Alternative Strategies Fund may expire worthless or may be repurchased or retired by the SPAC at an unfavorable price; (vi) the Alternative Strategies Fund may be delayed in receiving any redemption or liquidation proceeds from a SPAC to which it is entitled; (vii) an investment in a SPAC may be diluted by additional later offerings of interests in the SPAC or by other investors exercising existing rights to purchase shares of the SPAC; (viii) no or only a thinly traded market for shares of or interests in a SPAC may develop, leaving the Alternative Strategies Fund unable to sell its interest in a SPAC or to sell its interest only at a price below what the Alternative Strategies Fund believes is the SPAC interest’s intrinsic value; and (ix) the values of investments in SPACs may be highly volatile and may depreciate significantly over time.
Merger Arbitrage (Alternative Strategies Fund)
The Alternative Strategies Fund may utilize merger arbitrage as an investment strategy. Merger arbitrage is a highly specialized investment approach designed to profit from the successful completion of mergers, takeovers, tender offers, leveraged buyouts, spin-offs, liquidations and other corporate reorganizations. The most common arbitrage activity, and the approach the Fund generally will use, involves purchasing the shares of an announced acquisition target company at a discount to their expected value upon completion of the acquisition. The Sub-Advisors may sell securities short when the terms of a proposed acquisition call for the exchange of common stock and/or other securities. In such a case, the common stock of the company to be acquired may be purchased and, at approximately the same time, an equivalent amount of the acquiring company’s common stock and/or other securities may be sold short. The Fund generally engages in active and frequent trading of portfolio securities to achieve its principal investment strategies.
Convertible Arbitrage (Alternative Strategies Fund)
The Alternative Strategies Fund may utilize convertible arbitrage as an investment strategy. Convertible Arbitrage is a specialized strategy that seeks to profit from mispricings between a firm’s convertible securities and its underlying equity. The most common convertible arbitrage approach matches a long position in the convertible security with a short position in the underlying common stock. The Fund seeks to purchase convertible securities at discounts to their expected future values and sell short shares of the underlying common stock in order to mitigate equity market movements. As stock prices rise and the convertible security becomes more equity sensitive, the Fund will sell short additional common shares in order to maintain the relationship between the convertible security and the underlying common stock. As stock prices fall, the Fund will typically buy back a portion of shares which it had sold short. Positions are typically designed to earn income from coupon or dividend payments, and from the short sale of common stock.
Capital Structure Arbitrage (Alternative Strategies Fund)
The Alternative Strategies Fund may utilize capital structure arbitrage as an investment strategy. This strategy attempts to take advantage of relative pricing discrepancies between related debt and/or equity securities. For example, the Fund may purchase a senior secured security of an issuer and sell short an unsecured security of the same issuer. In this example the trade would be profitable if credit quality spreads widened or if the issuer went bankrupt and the recovery rate for the senior debt was higher. Another example might involve the Fund purchasing one class of common stock while selling short a different class of common stock of the same issuer. It is expected that, over time, the relative mispricing of the securities will disappear, at which point the position will be liquidated.
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Initial Public Offerings
The Funds may purchase securities of companies in initial public offerings (“IPOs”). By definition, IPOs have not traded publicly until the time of their offerings. Special risks associated with IPOs may include a limited number of shares available for trading, unseasoned trading, lack of investor knowledge of the company, and limited operating history, all of which may contribute to price volatility. Many IPOs are issued by undercapitalized companies of small- or micro-cap size. The effect of IPOs on a Fund’s performance depends on a variety of factors, including the number of IPOs the Fund invests in relative to the size of the Fund and whether and to what extent a security purchased in an IPO appreciates or depreciates in value. As a Fund’s asset base increases, IPOs often have a diminished effect on such Fund’s performance.
Risks of Investing in Small Companies
Each Fund may, and the SBH Focused Small Value Fund will, invest in securities of small companies. Additional risks of such investments include the markets on which such securities are frequently traded. In many instances the securities of smaller companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Therefore, the securities of smaller companies may be subject to greater and more abrupt price fluctuations. When making large sales, a Fund may have to sell portfolio holdings at discounts from quoted prices or may have to make a series of small sales over an extended period of time due to the trading volume of smaller company securities. Investors should be aware that, based on the foregoing factors, an investment in the Funds may be subject to greater price fluctuations than an investment in a fund that invests exclusively in larger, more established companies. A Sub-Advisor’s research efforts may also play a greater role in selecting securities for a Fund than in a fund that invests in larger, more established companies.
Market Events Risk
Events in certain sectors historically have resulted, and may in the future result, in an unusually high degree of volatility in the financial markets, both domestic and foreign. These events have included, but are not limited to: bankruptcies, corporate restructuring, and other events related to the sub-prime mortgage crisis in 2008; governmental efforts to limit short selling, and high frequency trading; measures to address U.S. federal and state budget deficits; social, political, and economic instability in Europe; economic stimulus by the Japanese central bank; steep declines in oil prices; dramatic changes in currency exchange rates; and China’s economic slowdown. Interconnected global economies and financial markets increase the possibility that conditions in one country or region might adversely impact issuers in a different country or region. Such events may cause significant declines in the values and liquidity of many securities and other instruments. It is impossible to predict whether these conditions will recur. Because such situations may be widespread, it may be difficult to identify both risks and opportunities using past models of the interplay of market forces, or to predict the duration of such events.
An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now spread globally. This coronavirus has resulted in certain travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, cancellations, supply chain disruptions, and lower consumer demand, as well as general concern and uncertainty. The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.
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Large Shareholder Purchase and Redemption Risk
The Equity Fund, the International Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund. Such large shareholder redemptions may cause the Fund to sell its securities at times when it would not otherwise do so, which may negatively impact the Fund’s net asset value and liquidity. Similarly, large share purchases may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. In addition, a large redemption could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio.
Risks of Increased Reliance on Data Analytics
In recent years, the asset management business has become increasingly dependent on data analytics to support portfolio management, investment operations and compliance. The Advisor’s and Sub-Advisors’ regulators have also substantially increased the extent and complexity of the data analytic component of compliance requirements. A failure to source accurate data from third parties or to correctly analyze, integrate or apply data could result in operational, trade or compliance errors, could cause portfolio losses, and could lead to regulatory concerns.
Investment Restrictions
The Trust (on behalf of each Fund) has adopted the following restrictions as fundamental policies, which may not be changed without the favorable vote of the holders of a “majority of the outstanding voting securities,” as defined in the 1940 Act, of a Fund. Under the 1940 Act, the “vote of the holders of a majority of the outstanding voting securities” means the vote of the holders of the lesser of (i) 67% of the shares of a Fund represented at a meeting at which the holders of more than 50% of its outstanding shares are represented or (ii) more than 50% of the outstanding shares of a Fund.
As a matter of fundamental policy, each Fund is diversified; i.e., as to 75% of the value of its total assets: (i) no more than 5% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. Government securities); and (ii) a Fund may not purchase more than 10% of the outstanding voting securities of an issuer. Each Fund’s investment objective is also fundamental.
The following fundamental investment restrictions pertain to the Equity Fund and the International Fund.
Each Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except that (i) a Fund may borrow on an unsecured basis from banks for temporary or emergency purposes or for the clearance of transactions in amounts not exceeding 20% of its total assets (not including the amount borrowed), provided that it will not make investments while borrowings in excess of 5% of the value of its total assets are outstanding; and (ii) this restriction shall not prohibit a Fund from engaging in options, futures and foreign currency transactions or short sales.
2. Purchase securities on margin, except such short-term credits as may be necessary for the clearance of transactions.
3. Act as underwriter (except to the extent a Fund may be deemed to be an underwriter in connection with the sale of securities in its investment portfolio).
4. Invest 25% or more of its net assets, calculated at the time of purchase and taken at market value, in any one industry (other than U.S. Government securities).
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5. Purchase or sell real estate or interests in real estate or real estate limited partnerships (although a Fund may purchase and sell securities which are secured by real estate and securities of companies which invest or deal in real estate).
6. Purchase or sell commodities or commodity futures contracts, except that a Fund may purchase and sell stock index futures contracts and currency and financial futures contracts and related options in accordance with any rules of the CFTC.
7. Invest in oil and gas limited partnerships or oil, gas or mineral leases.
8. Make loans of money (except for purchases of debt securities consistent with the investment policies of a Fund and except for repurchase agreements).
9. Make investments for the purpose of exercising control or management.
With respect to the restriction on investments in oil and gas limited partnerships specified in restriction 7, only direct investment in oil and gas limited partnerships are prohibited. Therefore, the Funds may invest in publicly traded master limited partnerships, public limited partnerships or other investment vehicles that invest in oil and gas limited partnerships.
Each of the Equity Fund and International Fund observes the following non-fundamental restrictions, which may be changed by a vote of the Board at any time:
Each Fund may not:
1. Invest in the securities of other investment companies or purchase any other investment company’s voting securities or make any other investment in other investment companies except to the extent permitted by federal law. (Generally, the 1940 Act prohibits a Fund from investing more than 5% of the value of its total assets in any one investment company or more than 10% of the value of its total assets in investment companies as a group, and also restricts its investment in any investment company to 3% of the voting securities of such investment company. There are some exceptions, however, to these limitations pursuant to various rules promulgated by the SEC.)
2. Invest more than 15% of its net assets in securities that are restricted as to disposition or otherwise are illiquid or have no readily available market (except for securities that are determined by the Sub-Advisor, pursuant to procedures adopted by the Board, to be liquid).
The following fundamental investment restrictions pertain to the Alternative Strategies Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund.
The Alternative Strategies Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund may not:
1. Issue senior securities, except as otherwise permitted by its fundamental policy on borrowing.
2. Borrow money, except that it may (a) borrow from banks (as defined in the 1940 Act) in amounts up to 33-1/3% of its total assets (including the amount borrowed), (b) borrow amounts equal to an additional 5% of its total assets for temporary purposes, (c) engage in transactions in mortgage dollar rolls and reverse repurchase agreements, make leveraged investments, and engage in other transactions that may entail the use of leverage, where, if necessary to comply with Section 18(f) of the 1940 Act, the Fund sets aside in a segregated account, and marks to market daily, liquid securities, such as cash, U.S. government securities, or high-grade debt obligations, equal to the Fund’s potential obligation or economic exposure under these transactions and instruments.
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3. Purchase securities on margin, except such short-term credits as may be necessary for the clearance of transactions.
4. Act as underwriter (except to the extent the Fund may be deemed to be an underwriter in connection with the sale of securities in its investment portfolio).
5. Invest 25% or more of its net assets, calculated at the time of purchase and taken at market value, in any one industry (other than U.S. Government securities).
6. Purchase or sell real estate or interests in real estate, except that (i) the Fund may purchase securities backed by real estate or interests therein, or issued by companies, including real estate investment trusts, which invest in real estate or interests therein; and (ii) the Fund may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein. (For purposes of this restriction, investments by a Fund in mortgage-backed securities and other securities representing interests in mortgage pools shall not constitute the purchase or sale of real estate or interests in real estate or real estate mortgage loans).
7. Purchase or sell commodities or contracts on commodities, except to the extent that the Alternative Strategies Fund may do so in accordance with applicable law and the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. (Alternative Strategies Fund)
8. Purchase or sell commodities or commodity futures contracts, except that the High Income Alternatives Fund may purchase and sell stock index futures contracts and currency and financial futures contracts and related options in accordance with any rules of the CFTC. (High Income Alternatives Fund)
9. Purchase or sell commodities or contracts on commodities, except to the extent that the SBH Focused Small Value Fund may do so in accordance with applicable law and the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. (SBH Focused Small Value Fund)
10. Purchase or sell commodities or contracts on commodities, except to the extent that the Oldfield International Value Fund may do so in accordance with applicable law and the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. (Oldfield International Value Fund)
11. Make loans of money (except for purchases of debt securities consistent with the investment policies of the Fund and except for repurchase agreements).
12. Make investments for the purpose of exercising control or management.
The Alternative Strategies Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund observe the following non-fundamental restrictions, which may be changed by a vote of the Board at any time:
The Alternative Strategies Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund may not:
1. Invest in the securities of other investment companies or purchase any other investment company’s voting securities or make any other investment in other investment companies except to the extent
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permitted by federal law. (Generally, the 1940 Act prohibits the Fund from investing more than 5% of the value of its total assets in any one investment company or more than 10% of the value of its total assets in investment companies as a group, and also restricts its investment in any investment company to 3% of the voting securities of such investment company. There are some exceptions, however, to these limitations pursuant to various rules promulgated by the SEC.)
2. Invest more than 15% of its net assets in securities that are restricted as to disposition or otherwise are illiquid or have no readily available market (except for securities that are determined by a Sub-Advisor, pursuant to procedures adopted by the Board, to be liquid).
BOARD OF TRUSTEES
The overall management of the business and affairs of the Trust is vested with its Board, which is responsible for protecting the interests of shareholders. The Trustees are experienced executives who meet throughout the year to oversee the activities of the Funds, review the compensation arrangements between the Advisor and the Sub-Advisors, review contractual arrangements with companies that provide services to the Funds, including the Advisor, Sub-Advisors, and the Funds’ administrator, custodian and transfer agent, and review the Funds’ performance. The day-to-day operations of the Trust are delegated to its officers, subject to a Fund’s investment objectives and policies and to general supervision by the Board. A majority of the Trustees are not otherwise affiliated with the Advisor or any of the Sub-Advisors.
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Independent Trustees*
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Name, Address and
Year Born
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Position(s)
Held with the
Trust
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Term of
Office
and Length
of
Time Served
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Principal Occupation(s)
During Past Five Years
|
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# of
Portfolios
in Fund
Complex
Overseen
by
Trustee
|
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Other
Directorships
Held by
Trustee
During
Past Five
Years
|
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Julie Allecta
1676 N. California Blvd.,
Suite 500
Walnut Creek, CA 94596
(born 1946)
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Independent Trustee
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Open-ended term; served since June 2013
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Member of Governing Council and Policy Committee, Independent Directors Council (education for investment company independent directors) since 2014; and Retired Partner, Paul Hastings LLP (law firm) from 1999 to 2009.
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6
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Forward Funds (mutual funds)
(3 portfolios)
Salient MS Trust (mutual funds) (2 portfolios)
Salient Midstream & MLP Fund (closed-end fund) (1 portfolio)
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Frederick A. Eigenbrod, Jr., Ph.D.
1676 N. California Blvd.,
Suite 500
Walnut Creek, CA 94596
(born 1941)
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Independent Trustee
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Open-ended term;
served since inception
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Vice President, RoutSource Consulting Services (organizational planning and development) since 2002.
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6
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None
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Harold M. Shefrin, Ph.D.
1676 N. California Blvd.,
Suite 500
Walnut Creek, CA 94596
(born 1948)
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Independent Trustee
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Open-ended term;
served since February 2005
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Professor, Department of Finance, Santa Clara University since 1979.
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6
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SA Funds – Investment Trust (mutual funds) (10 portfolios)
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Interested Trustees & Officers
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Name, Address and
Year Born
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Position(s)
Held with the
Trust
|
|
Term of
Office
and Length
of
Time Served
|
|
Principal Occupation(s)
During Past Five Years
|
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# of
Portfolios
in Fund
Complex
Overseen
by
Trustee
|
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Other
Directorships
Held by
Trustee/
Officer During
Past Five
Years
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Jeremy L. DeGroot**
1676 N. California Blvd., Suite 500
Walnut Creek, CA 94596
(born 1963)
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Chairman of the Board, Trustee and President
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Open-ended term;
served as a Chairman since March 2017, Trustee since December 2008 and President since 2014
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Chief Investment Officer of Litman Gregory Asset Management, LLC since 2008; and Co-Chief Investment Officer of Litman Gregory Asset Management, LLC from 2003 to 2008.
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6
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None
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Name, Address and
Year Born
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Position(s)
Held with the
Trust
|
|
Term of
Office
and Length
of
Time Served
|
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Principal Occupatio(s)
During Past Five Years
|
|
# of
Portfolios
in Fund
Complex
Overseen
by
Trustee
|
|
Other
Directorships
Held by
Trustee/
Officer During
Past Five
Years
|
|
|
|
|
|
|
|
|
Stephen M. Savage
1676 N. California Blvd.,
Suite 500
Walnut Creek, CA 94596
(born 1961)
|
|
Secretary
|
|
Open-ended term;
served since 2014
|
|
Chief Executive Officer of the Advisor since 2015; Managing Partner of the Advisor since 2010; Partner of the Advisor since 2003.
|
|
N/A
|
|
None
|
|
|
|
|
|
|
|
|
John M. Coughlan
1676 N. California Blvd.,
Suite 500
Walnut Creek, CA 94596
(born 1956)
|
|
Treasurer and Chief Compliance Officer
|
|
Open-ended term; served as Treasurer since inception, and as Chief Compliance Officer since September 2004
|
|
Chief Operating Officer and Chief Compliance Officer of the Advisor since 2004.
|
|
N/A
|
|
None
|
|
*
|
Denotes Trustees who are not “interested persons” of the Trust, as such term is defined under the 1940 Act (the “Independent Trustees”).
|
|
**
|
Denotes Trustees who are “interested persons” of the Trust, as such term is defined under the 1940 Act, because of their relationship with the Advisor (the “Interested Trustees”).
|
In addition, Jack Chee, Rajat Jain and Jason Steuerwalt, each a Senior Research Analyst at the Advisor, are each an Assistant Secretary of the Trust.
Additional Information Concerning Our Board of Trustees
The Role of the Board
The Board oversees the management and operations of the Trust. Like most mutual funds, the day-to-day management and operation of the Trust is performed by various service providers to the Trust, such as the Advisor, the Sub-Advisors, and the Funds’ distributor, administrator, custodian, and transfer agent, each of which is discussed in greater detail in this SAI. The Board has appointed senior employees of certain of these service providers as officers of the Trust, with the responsibility to monitor and report to the Board on the Trust’s operations. In conducting this oversight, the Board receives regular reports from these officers and service providers regarding the Trust’s operations. For example, investment officers report on the performance of the Funds. The Board has appointed a Chief Compliance Officer who administers the Trust’s compliance program and regularly reports to the Board as to compliance matters. Some of these reports are provided as part of formal “Board Meetings,” which are typically held quarterly, in person, and involve the Board’s review of recent Trust operations. From time to time, one or more members of the Board may also meet with management in less formal settings, between formal “Board Meetings,” to discuss various topics. In all cases, however, the role of the Board and of any individual Trustee is one of oversight and not of management of the day-to-day affairs of the Trust and its oversight role does not make the Board a guarantor of the Trust’s investments, portfolio pricing, operations or activities.
40
Board Structure, Leadership
The Board has structured itself in a manner that it believes allows it to perform its oversight function effectively. It has established three standing committees, an Audit Committee, a Nominating Committee and a Qualified Legal Compliance Committee, which are discussed in greater detail under “ Board of Trustees – Board Committees” below. Each of the three standing committees of the Board is comprised entirely of Independent Trustees. The Board has also designated Ms. Allecta as the lead Independent Trustee. The Independent Trustees have engaged their own independent counsel to advise them on matters relating to their responsibilities in connection with the Trust. The Board reviews its leadership structure periodically as part of its annual self-assessment process and believes that its structure is appropriate to enable the Board to exercise its oversight of the Trust.
Presently, Mr. DeGroot serves as the Chairman of the Board and President of the Trust and Chief Investment Officer of the Advisor. Mr. DeGroot is an “interested person” of the Trust, as defined in the 1940 Act, by virtue of his employment relationship with the Advisor. In developing the Board’s structure, the Board has determined that Mr. DeGroot’s history with the Trust, familiarity with the Funds’ investment objectives and extensive experience in the field of investments qualifies him to serve as the Chairman of the Board. The Board has also determined that the function and composition of the Audit and Nominating Committees and the appointment of a lead Independent Trustee are appropriate means to address any potential conflicts of interest that may arise from the Chairman’s status as an Interested Trustee.
Board Oversight of Risk Management
As part of its oversight function, the Board receives and reviews various risk management reports and assessments and discusses these matters with appropriate management and other personnel. Risk management is a broad concept comprised of many disparate elements (such as, for example, investment risk, issuer and counterparty risk, compliance risk, operational risk, valuation risk and business continuity risk). Consequently, Board oversight of different types of risks is handled in different ways. In the course of providing oversight, the Board and its committees receive reports on the Trust’s activities regarding the Trust’s investment portfolios and its financial accounting and reporting. The Board also receives periodic reports as to how the Advisor conducts service provider oversight and how it monitors for other risks, such as derivatives risk, business continuity risks and risks that might be present with individual Sub-Advisors or specific investment strategies. The Audit Committee meets regularly with the Chief Compliance Officer to discuss compliance and operational risks. The Audit Committee’s meetings with the Treasurer and the Trust’s independent registered public accounting firm also contribute to its oversight of certain internal control risks. The full Board receives reports from the Advisor as to investment risks as well as other risks that may be also discussed in the Audit Committee.
The Board receives regular reports from a “Valuation Committee,” composed of the following senior employees of the Advisor: John M. Coughlan, Jeremy L. DeGroot, Jack Chee, Rajat Jain and Jason Steuerwalt. The Valuation Committee operates pursuant to the Trust’s Valuation Procedures, as approved by the Board. The Valuation Committee reports to the Board on the valuation of the Funds’ portfolio securities, reviews the performance of each approved pricing service, and recommends to the Board for approval pricing agents for the valuation of Fund holdings.
The Trust believes that the Board’s role in risk oversight must be evaluated on a case-by-case basis and that its existing role in risk oversight is appropriate. However, not all risks that may affect the Trust can be identified or processes and controls developed to eliminate or mitigate their occurrence or effects, and some risks are beyond any control of the Trust, the Advisor or its affiliates or other service providers.
41
Information about Each Trustee’s Qualification, Experience, Attributes or Skills
The Board believes that each of the Trustees has the qualifications, experience, attributes and skills (“Trustee Attributes”) appropriate to their continued service as Trustees of the Trust in light of the Trust’s business and structure. Each of the Trustees has a demonstrated record of business and professional accomplishment that indicates that they have the ability to critically review, evaluate and assess information provided to them. Certain of these business and professional experiences are set forth in detail in the charts above. In addition, certain of the Trustees have served on boards for organizations other than the Trust, and each of the Trustees has served on the Board of the Trust for a number of years. They therefore have substantial boardroom experience and, in their service to the Trust, have gained substantial insight as to the operation of the Trust and have demonstrated a commitment to discharging oversight duties as Trustees in the interest of shareholders.
In addition to the information provided in the charts above, certain additional information concerning each particular Trustee and certain of their Trustee Attributes is provided below. The information provided below, and in the charts above, is not all-inclusive. Many Trustee Attributes involve intangible elements, such as intelligence, work ethic, and the ability to work together, to communicate effectively, to exercise judgment, to ask incisive questions, to manage people and problems, and to develop solutions. The Board annually conducts a self-assessment wherein the effectiveness of the Board and individual Trustees is reviewed. In conducting its annual self-assessment, the Board has determined that the Trustees have the appropriate attributes and experience to continue to serve effectively as Trustees of the Trust.
The summaries set forth below as to the qualifications, attributes, and skills of the Trustees are furnished in response to disclosure requirements imposed by the SEC, do not constitute any representation or guarantee that the Board or any Trustee has any special expertise or experience, and do not impose any greater or additional responsibility or obligation on, or change any standard of care applicable to, any such person or the Board as a whole than otherwise would be the case.
Mr. DeGroot’s Trustee Attributes include his position as principal and Chief Investment Officer of Litman Gregory Asset Management, LLC (“LGAM”). In this position, Mr. DeGroot is responsible for overseeing Sub-Advisor due diligence, asset class research and portfolio tactical allocation decisions. Mr. DeGroot is also Portfolio Manager of the Alternative Strategies Fund and Co-Portfolio Manager of the Equity Fund, the International Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund. He is frequently quoted in the national media in the areas of asset allocation and manager selection. He holds the Chartered Financial Analyst® (CFA®) designation. Mr. DeGroot also has prior experience as an economics consultant and economist.
Ms. Allecta’s Trustee Attributes include her significant professional experience in the legal field as counsel to various mutual funds and private funds. Ms. Allecta also has mutual fund and closed-end fund board experience, having served on the board of trustees of Forward Funds since 2012, the board of trustees of the Salient MS Trust since 2015, and the board of directors of the Salient Midstream & MLP Fund since 2017. Ms. Allecta has also been a member of the Governing Council of the Independent Directors Council since 2014. Ms. Allecta has served as lead Independent Trustee since 2021.
Mr. Eigenbrod’s Trustee Attributes include his significant business advisory experience serving on the Board of Directors for Right Management Consultants providing management and organizational development consulting service as an independent consultant and executive coach.
Mr. Shefrin’s Trustee Attributes include his distinguished academic career as a Professor at Santa Clara University, where he teaches finance. Mr. Shefrin also has a number of years of mutual fund board experience, having served on the board of trustees of SA Funds - Investment Trust since 1999.
42
Board Committees
The Board has three standing committees as described below:
Audit Committee
|
|
|
|
|
|
|
Members
|
|
Description
|
|
Committee Meetings
During Fiscal Year Ended
December 31, 2020
|
|
Julie Allecta
Frederick A. Eigenbrod, Jr., Ph.D.
Harold M. Shefrin, Ph.D. (Chairman)
|
|
Responsible for advising the full Board with respect to accounting, auditing and financial matters affecting the Trust.
|
|
3
|
|
|
|
Qualified Legal Compliance Committee
|
|
|
|
|
|
Members
|
|
Description
|
|
Committee Meetings
During Fiscal Year Ended
December 31, 2020
|
|
Julie Allecta
Frederick A. Eigenbrod, Jr., Ph.D.
Harold M. Shefrin, Ph.D.
|
|
Responsible for the receipt, review and consideration of any report made or referred to it by an attorney of evidence of a material violation of applicable U.S. federal or state securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, Trustee, employee or agent of the Trust
|
|
0
|
|
|
|
Nominating Committee
|
|
|
|
|
|
Members
|
|
Description
|
|
Committee Meetings
During Fiscal Year Ended
December 31, 2020
|
|
Julie Allecta
Frederick A. Eigenbrod, Jr., Ph.D. (Chairman)
Harold M. Shefrin, Ph.D.
|
|
Responsible for evaluating the size and compensation of the Board and seeking and reviewing candidates for consideration as nominees for Trustees.
|
|
0
|
43
Trustee Ownership of Fund Shares
As of December 31, 2020, the Trustees owned the following dollar range of shares of the Funds (1):
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Fund
|
|
Dollar
Range of
Equity
Securities
in the
Funds
|
|
Aggregate Dollar Range of
Equity Securities in all
Registered Investment
Companies Overseen by
Trustee in Family of
Investment Companies (2)
|
|
Independent Trustees
|
|
|
|
|
|
|
|
Julie Allecta
|
|
High Income Alternatives Fund
|
|
E
|
|
E
|
|
|
|
|
|
|
Frederick A. Eigenbrod, Jr., Ph.D.
|
|
Equity Fund
|
|
D
|
|
E
|
|
|
|
International Fund
|
|
C
|
|
|
|
|
|
Alternative Strategies Fund
|
|
E
|
|
|
|
|
|
High Income Alternatives Fund
|
|
D
|
|
|
|
|
|
Oldfield International Value Fund
|
|
C
|
|
|
|
|
|
|
|
|
Harold M. Shefrin, Ph.D.
|
|
International Fund
|
|
E
|
|
E
|
|
|
|
|
|
|
Interested Trustees
|
|
|
|
|
|
|
|
Jeremy DeGroot
|
|
Equity Fund
|
|
E
|
|
E
|
|
|
|
International Fund
|
|
E
|
|
|
|
|
|
Alternative Strategies Fund
|
|
E
|
|
|
|
|
|
High Income Alternatives Fund
|
|
E
|
|
|
|
|
|
SBH Focused Small Value Fund
|
|
E
|
|
|
|
|
|
Oldfield International Value Fund
|
|
D
|
|
|
|
(1)
|
Dollar Range of Equity Securities in the Fund:
|
A=None
B=$1-$10,000
C=$10,001-$50,000
D=$50,001-$100,000
E= Over $100,000
|
(2)
|
As of December 31, 2020, the Trustees each oversaw six registered investment companies in the fund complex.
|
Trustee Interest in Investment Advisor, Distributor or Affiliates
As of December 31, 2020, the Independent Trustees, and their respective immediate family members, did not own any securities beneficially or of record in the Advisor, the Sub-Advisors, ALPS Distributors, Inc. (the “Distributor”) or any of their respective affiliates. Further, the Independent Trustees and their respective immediate family members did not have a direct or indirect interest, the value of which exceeds $120,000, in the Advisor, the Sub-Advisors, the Distributor, or any of their respective affiliates during the two most recently completed calendar years.
Compensation
For the year ended December 31, 2020 each Independent Trustee received an annual fee of $100,000, allocated $9,000 per Fund with the remaining balance pro-rated quarterly based on each PartnerSelect Fund’s assets, plus expenses incurred by the Trustees in connection with attendance at meetings of the Board and its committees. Effective February 10, 2021, each Independent Trustee receives an attendance fee in the amount of $6,000 for each special meeting of the Board.
44
As of April 1, 2021, to the best of the knowledge of the Trust, the Board and the officers of the Funds, as a group, owned of record less than 1% of the outstanding shares of each of the Equity Fund, the International Fund, the Alternative Strategies Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund.
The table below illustrates the annual compensation paid to each Trustee of the Trust during the fiscal year ended December 31, 2020. Trustees do not receive any pension or retirement benefits as a result of their service as a Trustee of the Trust.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Compensation from
|
|
|
|
|
|
|
|
|
|
|
|
Name of Person, Position
|
|
Equity
Fund
|
|
|
International
Fund
|
|
|
Smaller
Companies
Fund+
|
|
|
Alternative
Strategies
Fund
|
|
|
High Income
Alternatives
Fund
|
|
|
SBH
Focused
Small
Value
Fund
|
|
|
Oldfield
International
Value Fund
|
|
|
Total
Compensation
from Trust
Paid to
Trustees
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julie Allecta, Trustee
|
|
$
|
16,340
|
|
|
$
|
17,382
|
|
|
$
|
9,284
|
|
|
$
|
40,393
|
|
|
$
|
13,549
|
|
|
$
|
3,052
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
|
Frederick A. Eigenbrod, Jr.,
Ph.D.
Trustee
|
|
$
|
16,340
|
|
|
$
|
17,382
|
|
|
$
|
9,284
|
|
|
$
|
40,393
|
|
|
$
|
13,549
|
|
|
$
|
3,052
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
|
Harold M. Shefrin, Ph.D.
Trustee
|
|
$
|
16,340
|
|
|
$
|
17,382
|
|
|
$
|
9,284
|
|
|
$
|
40,393
|
|
|
$
|
13,549
|
|
|
$
|
3,052
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremy DeGroot,
President and Trustee*
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
*
|
As of December 31, 2020, Mr. DeGroot was an Interested Trustee because of his relationship with the Advisor and accordingly served on the Board without compensation.
|
|
+
|
The PartnerSelect Smaller Companies Fund (“Smaller Companies Fund”) was reorganized into the SBH Focused Small Value Fund on October 15, 2020.
|
Control Persons and Principal Shareholders
A principal shareholder is any person who owns (either of record or beneficially) 5% or more of the outstanding shares of any class of any of the Funds. A control person is one who owns, either directly or indirectly, more than 25% of the voting securities of a Fund or acknowledges the existence of such control. A control person can have a significant impact on the outcome of a shareholder vote. As of April 1, 2021, the shareholders indicated below were considered to be either a control person or principal shareholder of the Funds.1
Equity Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Shares
|
|
|
% Ownership
|
|
|
Type of Ownership
|
|
Charles Schwab & Co., Inc.
211 Main Street
San Francisco, CA 94104-4151
|
|
|
4,885, 274.87
|
|
|
|
36.46
|
%
|
|
Record
|
|
|
|
|
|
|
National Financial Services, Corp.
499 Washington Blvd.
Jersey City, NJ 07310-2010
|
|
|
1,697,681.39
|
|
|
|
12.67
|
%
|
|
Record
|
|
|
|
|
|
|
TD Ameritrade Inc.
P.O. Box 2226
Omaha, NE 68103-2226
|
|
|
824,324.63
|
|
|
|
6.15
|
%
|
|
Record
|
|
1
|
The Funds have no information regarding the beneficial owners of Fund shares owned through accounts with financial intermediaries.
|
45
International Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Shares
|
|
|
% Ownership
|
|
|
Type of Ownership
|
|
Mac & Co.
500 Grant Street, Room 151-1010
Pittsburgh, PA 15219-2502
|
|
|
5,743,093.722
|
|
|
|
32.63
|
%
|
|
Record
|
|
|
|
|
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
4,547.595.55
|
|
|
|
25.83
|
%
|
|
Record
|
|
|
|
|
|
|
National Financial Services, Corp.
499 Washington Blvd.
Jersey City, NJ 07310-1995
|
|
|
1,476,363.89
|
|
|
|
8.39
|
%
|
|
Record
|
Alternative Strategies Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Shares
|
|
|
% Ownership
|
|
|
Type of Ownership
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
39,993,651.95
|
|
|
|
34.35
|
%
|
|
Record
|
|
|
|
|
|
|
National Financial Services, Corp.
499 Washington Blvd.
Jersey City, NJ 07310-1995
|
|
|
25,252,099.45
|
|
|
|
21.69
|
%
|
|
Record
|
|
|
|
|
|
|
Charles Schwab & Co., Inc.
211 Main Street
San Francisco, CA 94104-4151
|
|
|
11,053,458.45
|
|
|
|
9.49
|
%
|
|
Record
|
|
|
|
|
|
|
TD Ameritrade Inc.
P.O. Box 2226
Omaha, NE 68103-2226
|
|
|
6,200,670.39
|
|
|
|
5.32
|
%
|
|
Record
|
Alternative Strategies Fund – Investor Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Shares
|
|
|
% Ownership
|
|
|
Type of Ownership
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
2,880,066.71
|
|
|
|
44.97
|
%
|
|
Record
|
|
|
|
|
|
|
National Financial Services, Corp.
499 Washington Blvd.
Jersey City, NJ 07310-1995
|
|
|
2,192,239.83
|
|
|
|
35.21
|
%
|
|
Record
|
|
|
|
|
|
|
TD Ameritrade Inc.
P.O. Box 2226
Omaha, NE 68103-2226
|
|
|
473,575.68
|
|
|
|
7.61
|
%
|
|
Record
|
46
High Income Alternatives Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Shares
|
|
|
% Ownership
|
|
|
Type of Ownership
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
6,564,477.82
|
|
|
|
75.45
|
%
|
|
Record
|
|
|
|
|
|
|
National Financial Services, Corp.
499 Washington Blvd.
Jersey City, NJ 07310-1995
|
|
|
1,377,237.04
|
|
|
|
15.83
|
%
|
|
Record
|
SBH Focused Small Value Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Shares
|
|
|
% Ownership
|
|
|
Type of Ownership
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
2,042,478.37
|
|
|
|
48.23
|
%
|
|
Record
|
|
|
|
|
|
|
E*Trade Savings Bank
P.O. Box 6503
Englewood, CO 80155-6503
|
|
|
793,251.04
|
|
|
|
16.61
|
%
|
|
Record
|
|
|
|
|
|
|
National Financial Services, Corp.
499 Washington Blvd.
Jersey City, NJ 07310-1995
|
|
|
445,333.26
|
|
|
|
10.52
|
%
|
|
Record
|
|
|
|
|
|
|
TD Ameritrade Inc.
P.O. Box 2226
Omaha, NE 68103-2226
|
|
|
228,839.02
|
|
|
|
5.4
|
%
|
|
Record
|
Oldfield International Value Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Shares
|
|
|
% Ownership
|
|
|
Type of Ownership
|
|
Charles Schwab & Co., Inc.
211 Main Street
San Francisco, CA 94104-4151
|
|
|
1,285,008.93
|
|
|
|
73.17
|
%
|
|
Record
|
|
|
|
|
|
|
National Financial Services, Corp.
499 Washington Blvd.
Jersey City, NJ 07310-1995
|
|
|
344,574.62
|
|
|
|
19.62
|
%
|
|
Record
|
47
PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
The Board has adopted policies to ensure that any disclosure of information about the Funds’ portfolio holdings is in the best interest of Fund shareholders; and to make clear that information about the Funds’ portfolio holdings should not be distributed to any person unless:
|
|
•
|
|
The disclosure is required to respond to a regulatory request, court order or other legal proceedings;
|
|
|
•
|
|
The disclosure is to a mutual fund rating or statistical agency or person performing similar functions who has signed a confidentiality agreement with the Trust;
|
|
|
•
|
|
The disclosure is made to internal parties involved in the investment process, administration or custody of the Funds, including but not limited to the Advisor, the Sub-Advisors and the Board;
|
|
|
•
|
|
The disclosure is (a) in connection with a quarterly, semi-annual or annual report that is available to the public or (b) relates to information that is otherwise available to the public ( e.g., portfolio information that is available on a Fund’s website); or
|
|
|
•
|
|
The disclosure is made pursuant to prior written approval of the Chief Compliance Officer of the Advisor or the Funds, or the President of the Trust.
|
The Funds make their portfolio holdings publicly available on the Funds’ website 15 days after the end of each calendar quarter.
The Funds do not have any individualized ongoing arrangements to make available information about the Funds’ portfolio securities to any person other than the disclosures made, as described above, to internal parties involved in the Funds’ investment process, administration or custody of the Funds. To the extent required to perform services for the Funds or the Advisor, the Funds’ or the Advisor’s legal counsel or the Funds’ auditors may obtain portfolio holdings information. Such information is provided subject to confidentiality requirements.
THE ADVISOR AND THE SUB-ADVISORS
The Advisor is a registered investment advisor with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Advisor is wholly owned by LGAM. Craig Litman, Kenneth Gregory and certain other senior employees of LGAM own approximately 85% of LGAM, and the remainder of LGAM is owned by a private equity firm.
Subject to the supervision of the Board, investment management and related services are provided by the Advisor to each of the Funds, pursuant to an investment advisory agreement (the “Advisory Agreement”). The Trust, on behalf of the Funds, and the Advisor are parties to the Advisory Agreement. Shareholders are not parties to, or intended (or “third party”) beneficiaries of, the Advisory Agreement. Rather, the Trust and its respective investment series are the sole intended beneficiaries of the Advisory Agreement. Neither this SAI nor the Prospectus is intended to give rise to any contract rights or other rights in any shareholder, other than any rights conferred by federal or state securities laws that may not be waived.
In addition, the assets of each Fund are divided into segments by the Advisor, and individual selection of securities in each segment is provided by a Sub-Advisor approved by the Board pursuant, in each case, to an investment sub-advisory agreement (each, a “Management Agreement”). Under the Advisory Agreement, the Advisor has agreed to (i) furnish each Fund with advice and recommendations with respect to the selection and continued employment of Sub-Advisors to manage the actual investment of each Fund’s assets; (ii) direct the allocation of each Fund’s assets among such Sub-Advisors; (iii) oversee the investments made by such Sub-Advisors on behalf of each Fund, subject to the ultimate supervision and direction of the Board; (iv) oversee the actions of the Sub-Advisors with respect to voting proxies for each Fund, filing Section 13 ownership reports with the SEC for each Fund, and taking other actions on behalf of each Fund; (v) maintain the books and records required to be maintained by each Fund except to the extent arrangements have been made for such books and records to be maintained by the administrator, another agent of each Fund or a Sub-Advisor; (vi) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of each Fund’s assets that
48
each Fund’s administrator or distributor or the officers of the Trust may reasonably request; and (vii) render to the Board such periodic and special reports with respect to each Fund’s investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board.
The Advisor has agreed, at its own expense, to maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under the Advisory Agreement. Personnel of the Advisor may serve as officers of the Trust provided they do so without compensation from the Trust. Without limiting the generality of the foregoing, the staff and personnel of the Advisor shall be deemed to include persons employed or retained by the Advisor to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Advisor or the Board may desire and reasonably request. With respect to the operation of each Fund, the Advisor has agreed to be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the operation of the Trust and each Fund including the provision of persons qualified to serve as officers of the Trust; (ii) compensating the Sub-Advisors selected to invest the assets of each Fund; (iii) the expenses of printing and distributing extra copies of each Fund’s prospectus, statement of additional information, and sales and advertising materials (but not the legal, auditing or accounting fees incurred thereto) to prospective investors (but not to existing shareholders); and (iv) the costs of any special Board meetings or shareholder meetings convened for the primary benefit of the Advisor or any Sub-Advisor.
Under each Management Agreement, each Sub-Advisor agrees to invest its allocated portion of the assets of each Fund in accordance with the investment objectives, policies and restrictions of each Fund as set forth in the Trust’s and each Fund’s governing documents, including, without limitation, the Trust’s Agreement and Declaration of Trust and By-Laws; each Fund’s prospectus, statement of additional information, and undertakings; and such other limitations, policies and procedures as the Advisor or the Trustees of the Trust may impose from time to time in writing to the Sub-Advisor. In providing such services, each Sub-Advisor shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Code, and other applicable law.
Without limiting the generality of the foregoing, each Sub-Advisor has agreed to (i) furnish each Fund with advice and recommendations with respect to the investment of the Sub-Advisor’s allocated portion of each Fund’s assets; (ii) effect the purchase and sale of portfolio securities for the Sub-Advisor’s allocated portion or determine that a portion of such allocated portion will remain uninvested; (iii) manage and oversee the investments of the Sub-Advisor’s allocated portion, subject to the ultimate supervision and direction of the Board; (iv) vote proxies and take other actions with respect to the securities in the Sub-Advisor’s allocated portion; (v) maintain the books and records required to be maintained with respect to the securities in the Sub-Advisor’s allocated portion; (vi) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of each Fund’s assets which the Advisor, Trustees or the officers of the Trust may reasonably request; and (vii) render to the Board such periodic and special reports with respect to Sub-Advisor’s allocated portion as the Board may reasonably request.
As compensation for the Advisor’s services (including payment of the Sub-Advisors’ fees), each Fund pays the Advisor an advisory fee at the rate specified in the prospectus. In addition to the fees payable to the Advisor and the Funds’ administrator, the Trust is responsible for its operating expenses, including: fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Trust for the benefit of each Fund including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily NAV and of maintaining its books of account required under the 1940 Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of each Fund’s shareholders and the Board that are properly payable by each Fund; salaries and expenses of officers and fees and expenses of members of the Board or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Advisor; insurance
49
premiums on property or personnel of each Fund that inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of each Fund or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of each Fund, if any; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as otherwise prescribed in the Advisory Agreement.
Pursuant to a Restated Contractual Advisory Fee Waiver Agreement effective as of January 1, 2006, for one year and renewable annually for additional one-year terms thereafter (the “Fee Waiver Agreement”), the Advisor has agreed to waive a portion of its advisory fees for each Fund to reflect reductions in the Sub-Advisors’ fees. Reductions in Sub-Advisors’ fees can occur due to changes in Sub-Advisors, the negotiation of different Sub-Advisor fee schedules, the reallocation of assets among Sub-Advisors or for other reasons. The Board may terminate the Fee Waiver Agreement upon 60 days’ notice to the Advisor, and the Advisor has reserved the right to decline renewal by written notice to the Trust at least 30 days before the Fee Waiver Agreement’s annual expiration date. The current term of the Fee Waiver Agreement expires on April 30, 2022. The Advisor’s intent in making such waivers is to pass through to the shareholders the benefits of reductions in the fees the Advisor is required to pay to the Sub-Advisors. The Advisor has agreed to waive its right to recoupment of any fees waived pursuant to the Fee Waiver Agreement.
The Advisor has contractually agreed, through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the High Income Alternatives Fund’s daily net assets retained by the Advisor is 0.40% on the first $1 billion of assets, 0.375% on the next $1 billion of assets, 0.35% on the next $1 billion of assets, 0.325% on the next $1 billion of assets and 0.30% on assets in excess of $4 billion. The Advisor has waived its right to receive reimbursement of the portion of its advisory fees waived under this agreement.
Pursuant to a separate Operating Expenses Limitation Agreement (the “Expenses Limitation Agreement”), the Advisor has also agreed to limit the ordinary operating expenses of the High Income Alternatives Fund, through April 30, 2022 (unless otherwise sooner terminated), to an annual rate of 0.98% for the Institutional Class. Such annual rate is expressed as a percentage of the daily net assets of the High Income Alternatives Fund attributable to the applicable class. Any fee waiver or expense reimbursement made by the Advisor pursuant to the Expenses Limitation Agreement is subject to the repayment by the Fund only within three (3) years of the date such amounts were waived or reimbursed, provided that the repayment does not cause the High Income Alternatives Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board. The Advisor has waived its right to receive reimbursement of the portion of its advisory fees waived with respect to prior periods pursuant to this agreement. This agreement may be terminated at any time by the Board of Trustees of the Trust upon sixty (60) days’ written notice to the Advisor, and the Advisor may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Operating expenses referred to in this and the following paragraph include management fees payable to the Advisor but exclude any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, borrowing costs (including commitment fees), dividend expenses, acquired fund fees and expenses and extraordinary expenses such as, but not limited to, litigation costs.
Pursuant to a separate Operating Expenses Limitation Agreement (the “Expenses Limitation Agreement”), the Advisor has also agreed to limit the ordinary operating expenses of the SBH Focused Small Value Fund, through April 30, 2022 (unless otherwise sooner terminated), to an annual rate of 1.15% for the Institutional Class (the “SBH Expense Cap”). Such annual rate is expressed as a percentage of the daily net assets of the SBH Focused Small Value Fund attributable to the applicable class. Any fee waiver or expense reimbursement made by the Advisor
50
pursuant to the Expenses Limitation Agreement is subject to the repayment by the Fund only within three (3) years of the date such amounts were waived or reimbursed, provided that the repayment does not cause the SBH Focused Small Value Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board. The Advisor has waived its right to receive reimbursement of the portion of its advisory fees waived with respect to prior periods pursuant to this agreement. The Advisor has contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the SBH Focused Small Value Fund’s daily net assets retained by the Advisor is 0.35%. This agreement may be terminated at any time by the Board of Trustees of the Trust upon sixty (60) days’ written notice to the Advisor, and the Advisor may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Operating expenses referred to in this and the following paragraph include management fees payable to the Advisor but exclude any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, borrowing costs (including commitment fees), dividend expenses, acquired fund fees and expenses and extraordinary expenses such as but not limited to litigation costs.
Pursuant to an Investment Sub-Advisory Fee Waiver Agreement, SBH has agreed to participate in the limitation of the SBH Focused Small Value Fund’s operating expenses by waiving a portion of its sub-advisory fees until the second anniversary of the effective date of the Investment Sub-Advisory Fee Waiver Agreement. Further, the Sub-Advisor will have no obligation to waive fees in any month in which (i) the average net assets of the SBH Focused Small Value Fund for that month are equal to or greater than $250 million or (ii) the Fund’s actual annualized operating expenses do not exceed the annual SBH Expense Cap. The Investment Sub-Advisory Fee Waiver Agreement will remain in effect for the duration of the Expenses Limitation Agreement and will terminate automatically upon the termination of (i) the Sub-Advisory Agreement or (ii) the Expenses Limitation Agreement.
Pursuant to a separate Operating Expenses Limitation Agreement (the “Expenses Limitation Agreement”), the Advisor has also agreed to limit the ordinary operating expenses of the Oldfield International Value Fund, through April 30, 2022 (unless otherwise sooner terminated), to an annual rate of 0.94% for the Institutional Class (the “Oldfield Expense Cap”). Such annual rate is expressed as a percentage of the daily net assets of the Oldfield International Value Fund attributable to the applicable class. Any fee waiver or expense reimbursement made by the Advisor pursuant to the Expenses Limitation Agreement is subject to the repayment by the Oldfield International Value Fund only within three (3) years of the date such amounts were waived or reimbursed, provided that the repayment does not cause the Oldfield International Value Fund’s annual expense ratio to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of repayment, and the repayment is approved by the Board. The Advisor has waived its right to receive reimbursement of the portion of its advisory fees waived with respect to prior periods pursuant to this agreement. The Advisor has contractually agreed through April 30, 2022, to waive a portion of its advisory fees so that after paying all of the sub-advisory fees, the net advisory fee as a percentage of the Oldfield International Value Fund’s daily net assets retained by the Advisor is 0.35%. This agreement may be terminated at any time by the Board of Trustees of the Trust upon sixty (60) days’ written notice to the Advisor, and the Advisor may decline to renew this agreement by written notice to the Trust at least thirty (30) days before the agreement’s annual expiration date. Operating expenses referred to in this and the following paragraph include management fees payable to the Advisor but exclude any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, borrowing costs (including commitment fees), dividend expenses, acquired fund fees and expenses and extraordinary expenses such as but not limited to litigation costs.
Pursuant to an Investment Sub-Advisory Fee Waiver Agreement, Oldfield Partners LP (“OP”) has agreed to participate in the limitation of the Oldfield International Value Fund’s operating expenses by waiving a portion of its sub-advisory fees until the second anniversary of the effective date of the Investment Sub-Advisory Fee Waiver Agreement. Further, the Sub-Advisor will have no obligation to waive fees in any month in which (i) the average net assets of the Oldfield International Value Fund for that month are equal to or greater than $250 million or (ii) the Fund’s actual annualized operating expenses do not exceed the annual Oldfield Expense Cap. The Investment Sub-Advisory
51
Fee Waiver Agreement will remain in effect for the duration of the Expenses Limitation Agreement and will terminate automatically upon the termination of (i) the Sub-Advisory Agreement or (ii) the Expenses Limitation Agreement.
Under the Advisory Agreement and each Management Agreement, the Advisor and the Sub-Advisors will not be liable to the Trust for any error of judgment by the Advisor or the Sub-Advisors or any loss sustained by the Trust except in the case of a breach of fiduciary duty with respect to the receipt of compensation for services (in which case any award of damages will be limited as provided in the 1940 Act) or of willful misfeasance, bad faith or gross negligence by reason of reckless disregard of its obligations and duties under the applicable agreement.
The Advisory Agreement and the Management Agreements remain in effect for an initial period not to exceed two years. Thereafter, if not terminated, the Advisory Agreement and each Management Agreement will continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually (i) by a majority vote of the Independent Trustees cast in person at a meeting called for the purpose of voting on such approval, and (ii) by the Board or by vote of a majority of the outstanding voting securities of a Fund.
The Advisory Agreement and Management Agreements are terminable by vote of the Board or by the holders of a majority of the outstanding voting securities of a Fund at any time without penalty, upon 60 days’ written notice to the Advisor or a Sub-Advisor, as applicable. The Advisory Agreement and the Management Agreements also may be terminated by the Advisor or a Sub-Advisor, as applicable, upon 60 days’ written notice to the applicable Fund. The Advisory Agreement and the Management Agreements terminate automatically upon their assignment (as defined in the 1940 Act).
In determining whether to renew the Advisory Agreement and the Management Agreements each year, the Board requests and evaluates information provided by the Advisor and the Sub-Advisors, in accordance with Section 15(c) of the 1940 Act. A discussion regarding the Board’s basis for approving the Funds’ Advisory Agreement with the Advisor and each Management Agreement is included in the Funds’ Annual Report to Shareholders for the fiscal year ended December 31, 2020.
Advisory fees net of waivers each of the Funds paid to the Advisor and the amounts waived by the Advisor for the last three fiscal years are specified below. Additional investment advisory fees payable under the Advisory Agreement may have, instead, been reduced by the Advisor and in some circumstances may be subject to reimbursement by the respective Fund, as discussed previously.
Advisor Fees Paid to Advisor, Net of Waivers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Fiscal Year 2020
|
|
|
Fiscal Year 2019
|
|
|
Fiscal Year 2018
|
|
|
Equity Fund
|
|
$
|
2,371,383
|
|
|
$
|
3,174,715
|
|
|
$
|
3,303,233
|
|
|
International Fund
|
|
$
|
2,594,315
|
|
|
$
|
4,339,134
|
|
|
$
|
5,131,159
|
|
|
Smaller Companies Fund*
|
|
$
|
119,026
|
|
|
$
|
336,370
|
|
|
$
|
232,168
|
|
|
Alternative Strategies Fund
|
|
$
|
17,552,627
|
|
|
$
|
26,180,508
|
|
|
$
|
26,339,481
|
|
|
High Income Alternatives Fund
|
|
$
|
196,941
|
|
|
$
|
850,341
|
|
|
$
|
107,180
|
|
|
SBH Focused Small Value Fund**
|
|
$
|
3,813
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Oldfield International Value Fund***
|
|
($
|
30,338
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
*
|
The Smaller Companies Fund was reorganized into the SBH Focused Small Value Fund on October 15, 2020.
|
|
**
|
The SBH Focused Small Value Fund commenced operations on July 31, 2020.
|
|
***
|
The Oldfield International Value Fund commenced operations on November 30, 2020.
|
52
Amounts Waived by Advisor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Fiscal Year 2020
|
|
|
Fiscal Year 2019
|
|
|
Fiscal Year 2018
|
|
|
Equity Fund
|
|
$
|
280,259
|
|
|
$
|
311,514
|
|
|
$
|
389,922
|
|
|
International Fund
|
|
$
|
693,838
|
|
|
$
|
963,627
|
|
|
$
|
1,395,882
|
|
|
Smaller Companies Fund*
|
|
$
|
68,339
|
|
|
$
|
122,904
|
|
|
$
|
135,820
|
|
|
Alternative Strategies Fund
|
|
$
|
4,326,909
|
|
|
$
|
2,325,569
|
|
|
$
|
2,035,928
|
|
|
High Income Alternatives Fund
|
|
$
|
616,326
|
|
|
$
|
368,906
|
|
|
$
|
65,060
|
|
|
SBH Focused Small Value Fund**
|
|
$
|
85,492
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Oldfield International Value Fund***
|
|
$
|
36,009
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
*
|
The Smaller Companies Fund was reorganized into the SBH Focused Small Value Fund on October 15, 2020.
|
|
**
|
The SBH Focused Small Value Fund commenced operations on July 31, 2020.
|
|
***
|
The Oldfield International Value Fund commenced operations on November 30, 2020.
|
ADDITIONAL PORTFOLIO MANAGER INFORMATION
The following section provides information regarding each portfolio manager’s compensation, other accounts managed, material conflicts of interests, and any ownership of securities in the Funds for which they sub-advise. Each portfolio manager or team member is referred to as a portfolio manager below. The portfolio managers are shown together in this section only for ease in presenting the information and should not be viewed for purposes of comparing the portfolio managers or their firms against one another. Each firm is a separate entity that may employ different compensation structures and may have different management requirements, and each portfolio manager may be affected by different conflicts of interest.
Other Accounts Managed by Portfolio Managers
The table below identifies, for each portfolio manager of each Fund, the number of accounts managed (excluding the Funds) and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. To the extent that any of these accounts are based on account performance, this information is reflected in separate tables below. Information in all tables is shown as of the Funds’ fiscal year-end, December 31, 2020. Asset amounts are approximate and have been rounded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment Companies
(excluding the Funds)
|
|
Other Pooled
Investment Vehicles
|
|
Other Accounts
|
|
Fund and
Portfolio Manager
(Firm)
|
|
Number of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
Number
of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
Number
of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
|
|
|
|
|
|
|
|
All Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremy DeGroot (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
|
|
|
|
|
|
|
|
Equity Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack Chee (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
Rajat Jain (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
Christopher C. Davis (Davis Advisors)
|
|
11
|
|
$13.5 billion
|
|
2
|
|
$394.3 million
|
|
48
|
|
$7.3 billion
|
|
Danton Goei (Davis Advisors)
|
|
11
|
|
$14.4 billion
|
|
4
|
|
$688.4 million
|
|
41
|
|
$7.5 billion
|
|
Patrick J. English (FMI)
|
|
6
|
|
$8.3 billion
|
|
5
|
|
$717 million
|
|
1,052
|
|
$7.8 billion
|
|
Jonathan T. Bloom (FMI)
|
|
6
|
|
$8.3 billion
|
|
5
|
|
$717 million
|
|
1,052
|
|
$7.8 billion
|
|
Clyde S. McGregor (Harris)
|
|
2
|
|
$9.1 billion
|
|
13
|
|
$4.8 billion
|
|
116
|
|
$6.0 billion
|
|
William C. Nygren (Harris)
|
|
16
|
|
$19.7 billion
|
|
1
|
|
$33.0 million
|
|
3
|
|
$614.4 million
|
|
Scott Moore (Nuance)
|
|
6
|
|
$4.3 billion
|
|
0
|
|
$0
|
|
935
|
|
$1.6 billion
|
|
Chad Baumler (Nuance)
|
|
6
|
|
$4.3 billion
|
|
0
|
|
$0
|
|
935
|
|
$1.6 billion
|
|
A. Michael Sramek (Sands Capital)
|
|
3
|
|
$5.8 billion
|
|
8
|
|
$2.4 billion
|
|
332
|
|
$18.1 billion
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment Companies
(excluding the Funds)
|
|
Other Pooled
Investment Vehicles
|
|
Other Accounts
|
|
Fund and
Portfolio Manager
(Firm)
|
|
Number of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
Number
of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
Number
of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
International Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rajat Jain (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
David E. Marcus (Evermore)
|
|
1
|
|
$281.3 million
|
|
0
|
|
$0
|
|
6
|
|
$184.4 million
|
|
David G. Herro (Harris)
|
|
13
|
|
$36.7 billion
|
|
32
|
|
$16.5 billion
|
|
36
|
|
$11.5 billion
|
|
Mark Little (Lazard)
|
|
5
|
|
$6.4 billion
|
|
9
|
|
$3.6 billion
|
|
43
|
|
$10.2 billion
|
|
Fabio Paolini (Pictet)
|
|
1
|
|
$280 million
|
|
4
|
|
$884 million
|
|
8
|
|
$1.7 billion
|
|
Benjamin (Ben) Beneche (Pictet)
|
|
1
|
|
$280 million
|
|
4
|
|
$884 million
|
|
8
|
|
$1.7 billion
|
|
|
|
|
|
|
|
|
|
SBH Focused Small Value Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack Chee (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
Mark T. Dickherber (SBH)
|
|
3
|
|
$782.3 million
|
|
0
|
|
$0
|
|
98
|
|
$1.7 billion
|
|
Shaun P. Nicholson (SBH)
|
|
2
|
|
$733.4 million
|
|
0
|
|
$0
|
|
62
|
|
$1.3 billion
|
|
|
|
|
|
|
|
|
|
Alternative Strategies Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jason Steuerwalt (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
Stephen Kealhofer (BXCSS)
|
|
0
|
|
$0
|
|
8
|
|
$3.56 billion
|
|
11
|
|
$3.99 billion
|
|
Paul Harrison (BXCSS)
|
|
0
|
|
$0
|
|
8
|
|
$3.56 billion
|
|
11
|
|
$3.99 billion
|
|
Adam Dwinells (BXCSS)
|
|
0
|
|
$0
|
|
8
|
|
$3.56 billion
|
|
11
|
|
$3.99 billion
|
|
Jeffrey Gundlach (DoubleLine)
|
|
36
|
|
$108.7 billion
|
|
19
|
|
$9.4 billion
|
|
75
|
|
$25.6 billion
|
|
Jeffrey Sherman (DoubleLine)
|
|
23
|
|
$43.7 billion
|
|
8
|
|
$3.3 billion
|
|
18
|
|
$11.2 billion
|
|
Steven Romick (First Pacific)
|
|
2
|
|
$10 billion
|
|
19
|
|
$3.0 billion
|
|
5
|
|
$147.1 million
|
|
Brian Selmo (First Pacific)
|
|
2
|
|
$10 billion
|
|
17
|
|
$2.6 billion
|
|
2
|
|
$144.3 million
|
|
Mark Landecker (First Pacific)
|
|
2
|
|
$10 billion
|
|
17
|
|
$2.9 billion
|
|
2
|
|
$144.3 million
|
|
Matthew Eagan (Loomis Sayles)
|
|
17
|
|
$30 billion
|
|
30
|
|
$12.2 billion
|
|
126
|
|
$22.7 billion
|
|
Elaine Stokes (Loomis Sayles)
|
|
14
|
|
$28.4 billion
|
|
27
|
|
$10.6 billion
|
|
136
|
|
$22.2 billion
|
|
Brian Kennedy (Loomis Sayles)
|
|
13
|
|
$27.9 billion
|
|
19
|
|
$9.7 billion
|
|
123
|
|
$19.5 billion
|
|
Todd Vandam (Loomis Sayles)
|
|
5
|
|
$1.9 billion
|
|
18
|
|
$4.5 billion
|
|
71
|
|
$9.6 billion
|
|
John Orrico (Water Island)
|
|
5
|
|
$1.64 billion
|
|
2
|
|
$133 million
|
|
0
|
|
$0
|
|
Todd Munn (Water Island)
|
|
4
|
|
$1.69 billion
|
|
1
|
|
$125 million
|
|
0
|
|
$0
|
|
Roger Foltynowicz (Water Island)
|
|
4
|
|
$1.69 billion
|
|
1
|
|
$125 million
|
|
0
|
|
$0
|
|
Gregg Loprete (Water Island)
|
|
3
|
|
$313 million
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
|
|
|
|
|
|
|
|
High Income Alternatives Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack Chee (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
Jason Steuerwalt (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
Andrew P. Hofer (BBH)
|
|
3
|
|
$12.6 billion
|
|
6
|
|
$1.5 billion
|
|
107
|
|
$20.6 billion
|
|
Neil Hohmann (BBH)
|
|
3
|
|
$8.8 billion
|
|
6
|
|
$1.5 billion
|
|
107
|
|
$20.6 billion
|
|
Paul Kunz (BBH)
|
|
1
|
|
$483 million
|
|
2
|
|
$365 million
|
|
8
|
|
$8.6 billion
|
|
Scott Minerd (Guggenheim)
|
|
10
|
|
$10.4 billion
|
|
60
|
|
$15.9 billion
|
|
132
|
|
$173.6 billion
|
|
Anne Walsh (Guggenheim)
|
|
17
|
|
$40.9 billion
|
|
5
|
|
$3.3 billion
|
|
85
|
|
$163.1 billion
|
|
Steven Brown (Guggenheim)
|
|
15
|
|
$40 billion
|
|
5
|
|
$3.3 billion
|
|
27
|
|
$17.3 billion
|
|
Adam Bloch (Guggenheim)
|
|
21
|
|
$40.2 billion
|
|
5
|
|
$3.3 billion
|
|
27
|
|
$17.3 billion
|
|
Derek Devens (Neuberger Berman)
|
|
2
|
|
$418 million
|
|
4
|
|
$1.9 billion
|
|
53
|
|
$1.5 billion
|
|
Rory Ewing (Neuberger Berman)
|
|
2
|
|
$418 million
|
|
2
|
|
$234 million
|
|
41
|
|
$1.4 billion
|
|
|
|
|
|
|
|
|
|
Oldfield International Value Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rajat Jain (Litman Gregory)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
Nigel Waller (OP)
|
|
0
|
|
$0
|
|
7
|
|
$900.0
|
|
4
|
|
$2,313.0
|
|
Andrew Goodwin (OP)
|
|
0
|
|
$0
|
|
7
|
|
$900.0
|
|
4
|
|
$2,313.0
|
54
The following table reflects information regarding accounts for which the portfolio manager has day-to-day management responsibilities and with respect to which the advisory fee is based on account performance. The Funds’ portfolio managers not listed below reported that they do not provide day-to-day management of accounts with performance-based advisory fees. Information is shown as of the Funds’ fiscal year-end, December 31, 2020. Asset amounts are approximate and have been rounded.
Other Accounts That Pay Performance-Based Advisory Fees Managed by Portfolio Managers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment Companies
(excluding the Funds)
|
|
Other Pooled
Investment Vehicles
|
|
Other Accounts
|
|
Fund and
Portfolio Manager
(Firm)
|
|
Number
of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
Number
of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
Number
of
Accounts
|
|
Total
Assets
in the
Accounts
|
|
|
|
|
|
|
|
|
|
Equity Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A. Michael Sramek (Sands Capital)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
15
|
|
$1.2 billion
|
|
|
|
|
|
|
|
|
|
International Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David E. Marcus (Evermore)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
3
|
|
$58.6 million
|
|
David G. Herro (Harris)
|
|
0
|
|
$0
|
|
3
|
|
$976.9 million
|
|
0
|
|
$0
|
|
Mark Little (Lazard)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
1
|
|
$392.5 million
|
|
|
|
|
|
|
|
|
|
Alternative Strategies Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen Kealhofer (BXCSS)
|
|
0
|
|
$0
|
|
2
|
|
$236 million
|
|
2
|
|
$833 million
|
|
Paul Harrison (BXCSS)
|
|
0
|
|
$0
|
|
2
|
|
$236 million
|
|
2
|
|
$833 million
|
|
Adam Dwinells (BXCSS)
|
|
0
|
|
$0
|
|
2
|
|
$236 million
|
|
2
|
|
$833 million
|
|
Jeffrey Gundlach (DoubleLine)
|
|
0
|
|
$0
|
|
2
|
|
$2.6 billion
|
|
2
|
|
$986.7 million
|
|
Steven Romick (First Pacific)
|
|
0
|
|
$0
|
|
8
|
|
$803.6 million
|
|
0
|
|
$2.7 million
|
|
Brian Selmo (First Pacific)
|
|
0
|
|
$0
|
|
1
|
|
$55.1 million
|
|
0
|
|
$0
|
|
Mark Landecker (First Pacific)
|
|
0
|
|
$0
|
|
1
|
|
$374.6 million
|
|
0
|
|
$0
|
|
Brian Selmo, Mark Landecker (First Pacific)
|
|
0
|
|
$0
|
|
5
|
|
$315.2 million
|
|
0
|
|
$0
|
|
Matthew Eagan (Loomis Sayles)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
5
|
|
$657.8 million
|
|
Todd Vandam (Loomis Sayles)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
5
|
|
$657.8 million
|
|
Elaine Stokes (Loomis Sayles)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
5
|
|
$657.8 million
|
|
Brian Kennedy (Loomis Sayles)
|
|
0
|
|
$0
|
|
0
|
|
$0
|
|
5
|
|
$657.8 million
|
|
John Orrico (Water Island)
|
|
0
|
|
$0
|
|
1
|
|
$8 million
|
|
0
|
|
$0
|
|
|
|
|
|
|
|
|
|
High Income Alternatives Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Minerd (Guggenheim)
|
|
0
|
|
$0
|
|
37
|
|
$11.4 billion
|
|
14
|
|
$4.4 billion
|
|
Anne Walsh (Guggenheim)
|
|
0
|
|
$0
|
|
3
|
|
$2.5 billion
|
|
4
|
|
$220 million
|
|
Steven Brown (Guggenheim)
|
|
0
|
|
$0
|
|
3
|
|
$2.5 billion
|
|
4
|
|
$220 million
|
|
Adam Bloch (Guggenheim)
|
|
0
|
|
$0
|
|
3
|
|
$2.5 billion
|
|
4
|
|
$220 million
|
Material Conflicts of Interest
Actual or apparent material conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one investment account or in other circumstances. Portfolio managers of each of the following Sub-Advisors who manage other investment accounts in addition to one or more of the Funds may be presented with the potential conflicts described below.
55
BROWN BROTHERS HARRIMAN & CO. (“BBH”)
Sub-Advisor to the High Income Alternatives Fund
BBH, through a separately identifiable department, provides discretionary and non-discretionary investment management services and products to corporations, institutions and individual investors throughout the world. As a result, in the ordinary course of its businesses, BBH may engage in activities in which its interests or the interests of its clients may conflict with or be adverse to the interests of the Fund. In addition, certain of such clients (including the Fund) may utilize the services of BBH for which they will pay to BBH customary fees and expenses that will not be shared with the Fund.
BBH seeks to meet its fiduciary obligation with respect to all investment management clients, including the Fund. BBH has adopted and implemented policies and procedures that seek to manage conflicts of interest. Pursuant to such policies and procedures, BBH monitors a variety of areas, including compliance with Fund investment guidelines, review of allocation decisions and compliance with the sub-advisor’s Code of Ethics. With respect to the allocation of investment opportunities, BBH has adopted and implemented policies designed to achieve fair and equitable allocation of investment opportunities among its clients over time. The sub-advisor has structured the portfolio managers’ compensation in a manner it believes is reasonably designed to safeguard the Fund from being negatively affected as a result of any such potential conflicts.
DAVIS SELECTED ADVISERS, L.P. (“Davis Advisors”)
Sub-Advisor to the Equity Fund
Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one portfolio or other account. More specifically, portfolio managers who manage multiple portfolios and/or other accounts are presented with the following potential conflicts: the management of multiple portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each portfolio and/or other account. Davis Advisors seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using the same investment weightings that are used in connection with the management of the portfolios.
If a portfolio manager identifies a limited investment opportunity which may be suitable for more than one portfolio or other account, a portfolio may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible portfolios and other accounts. To deal with these situations, Davis Advisors has adopted procedures for allocating portfolio transactions across multiple accounts.
With respect to securities transactions for the portfolios, Davis Advisors determines which broker to use to execute each order, consistent with its duty to seek best execution of the transaction. However, with respect to certain other accounts (such as mutual funds, other pooled investment vehicles that are not registered mutual funds, and other accounts managed for organizations and individuals), Davis Advisors may be limited by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these cases, Davis Advisors may place separate, non-simultaneous, transactions for a portfolio and another account which may temporarily affect the market price of the security or the execution of the transaction, or both, to the detriment of the portfolio or the other account.
Finally, substantial investment of assets of Davis Advisors or of the Davis family members in certain mutual funds may lead to conflicts of interest. To mitigate these potential conflicts of interest, Davis Advisors has adopted policies and procedures intended to ensure that all clients are treated fairly over time. Davis Advisors does not receive an incentive-based fee on any account.
Blackstone Credit Systematic Strategies LLC (“BXCSS”)
Sub-Advisor to the Alternative Strategies Fund
Effective December 18, 2020, The Blackstone Group Inc. (“Blackstone”) acquired BXCSS, LLC, which has become a part of the credit-focused business of Blackstone (“Blackstone Credit”) and was subsequently renamed Blackstone Credit Systematic Strategies LLC. The Alternative Strategies Fund’s portion of assets that is sub-advised
56
by BXCSSBX (“BXCSS Sleeve”) and the shareholders of the Alternative Strategies Fund therefore will be subject to a number of actual and potential conflicts of interest involving Blackstone and Blackstone Credit, including BXCSS (together, the “Firm”). In addition, as a consequence of Blackstone holding a controlling interest in Blackstone Credit and Blackstone’s status as a public company, the officers, directors, members, managers and employees of Blackstone Credit will take into account certain additional considerations and other factors in connection with the management of the BXCSS Sleeve that would not necessarily be taken into account if Blackstone were not a public company. The following discussion enumerates certain, but not all, potential conflicts of interest that should be carefully evaluated before making an investment in the Alternative Strategies Fund, but is not intended to be an exclusive list of all such conflicts. The Firm and its personnel may in the future engage in further activities that may result in additional conflicts of interest not addressed below. Any references to the Firm, Blackstone Credit, Blackstone or BXCSS in this section will be deemed to include their respective affiliates, partners, members, shareholders, officers, directors and employees, except that portfolio companies of managed clients shall only be included to the extent the context shall require and references to Blackstone Credit affiliates shall only be to affiliates operating as a part of Blackstone’s credit focused business group.
For purposes of this discussion and ease of reference, the following terms shall have the meanings as set forth below:
“Other Blackstone Credit Clients” means, collectively, the investment funds, client accounts (including managed accounts) and proprietary accounts and/or other similar arrangements (including such arrangements in which the BXCSS Sleeve or one or more Other Blackstone Credit Clients own interests) that Blackstone Credit may establish, advise or sub-advise from time to time and to which Blackstone Credit provides investment management or sub-advisory services (other than the BXCSS Sleeve), in each case including any alternative investment vehicles and additional capital vehicles relating thereto and any vehicles established by Blackstone Credit to exercise its side-by-side or other general partner investment rights as set forth in their respective governing documents; provided, that for the avoidance of doubt, “Other Blackstone Credit Clients” shall not include Blackstone Credit in its role as principal of any account, including any accounts for which Blackstone Credit or an affiliate thereof acts as an advisor.
“Blackstone Clients” means, collectively, the investment funds, client accounts (including managed accounts) and proprietary accounts and/or other similar arrangements (including such arrangements in which the BXCSS Sleeve or one or more Blackstone Clients own interests) that Blackstone may establish, advise or sub-advise from time to time and to which Blackstone provides investment management or sub-advisory services (other than the BXCSS Sleeve and Other Blackstone Credit Clients), in each case including any alternative investment vehicles and additional capital vehicles relating thereto and any vehicles established by Blackstone to exercise its side-by-side or other general partner investment rights as set forth in their respective governing documents; provided that, for the avoidance of doubt, “Blackstone Clients” shall not include Blackstone in its role as principal of any account, including any accounts for which Blackstone or an affiliate thereof acts as an advisor.
“Other Clients” means, collectively, Other Blackstone Credit Clients and Blackstone Clients.
“BXCSS Sleeve” means the portion of the Alternative Strategies Fund’s assets that is sub-advised by BXCSS.
The Firm’s Policies and Procedures. The Firm has implemented policies and procedures to address conflicts that arise as a result of its various activities, as well as regulatory and other legal considerations. Because the Firm has many different asset management and advisory businesses, it is subject to a number of actual and potential conflicts of interest, greater regulatory oversight and more legal and contractual restrictions than that to which it would otherwise be subject if it had just one line of business. In addressing these conflicts and regulatory, legal and contractual requirements across its various businesses and to protect against the inappropriate sharing and/or use of information between the BXCSS Sleeve and the other business units at the Firm, the Firm has implemented certain policies and procedures (e.g., information wall policy) regarding the sharing of information that
57
may reduce the positive synergies that the BXCSS Sleeve expects to utilize for purposes of identifying and managing attractive investments. For example, the Firm will from time to time come into possession of material non-public information with respect to companies in which Other Clients may be considering making an investment or companies that are clients of the Firm. As a consequence, that information, which could be of benefit to the BXCSS Sleeve, might become restricted to those other respective businesses and otherwise be unavailable to the BXCSS Sleeve. It is also possible that the BXCSS Sleeve could be restricted from trading despite the fact that the BXCSS Sleeve did not receive such information. There can be no assurance, however, that any such policies and/or procedures will be effective in accomplishing their stated purpose and/or that they will not otherwise adversely affect the ability of the BXCSS Sleeve to effectively achieve its investment objective by unduly limiting the investment flexibility of the BXCSS Sleeve and/or the flow of otherwise appropriate information between BXCSS and other business units at the Firm. Personnel of the Firm may be unable, for example, to assist with the activities of the BXCSS Sleeve as a result of these walls. There can be no assurance that additional restrictions will not be imposed that would further limit the ability of the Firm to share information internally. Additionally, the terms of confidentiality or other agreements with or related to companies in which any Other Client has or has considered making an investment or which is otherwise a client of the Firm will from time to time restrict or otherwise limit the ability of the BXCSS Sleeve and/or its obligors and their affiliates to make investments in or otherwise engage in businesses or activities competitive with such companies.
Broad and Wide-Ranging Activities. The Firm engages in a broad spectrum of activities. In the ordinary course of its business activities, the Firm will engage in activities where the interests of certain divisions of the Firm or the interests of its clients will conflict with the interests of shareholders in the Alternative Strategies Fund with respect to the BXCSS Sleeve. Other present and future activities of the Firm will give rise to additional conflicts of interest. In the event that a conflict of interest arises, BXCSS will attempt to resolve such conflict in a fair and equitable manner, subject to the limitations of the 1940 Act and the Board’s oversight. Shareholders of the Alternative Strategies Fund should be aware that conflicts will not necessarily be resolved in favor of the BXCSS Sleeve’s interests. In addition, BXCSS may in certain situations choose to obtain the consent of the Board with respect to any specific conflict of interest, including with respect to the approvals required under the 1940 Act and the Advisers Act. The BXCSS Sleeve may enter into joint transactions or cross-trades with Other Clients or affiliates of the Firm to the extent permitted by the 1940 Act and the Advisers Act. Subject to the limitations of the 1940 Act, the BXCSS Sleeve may invest in loans or other securities, the proceeds of which may refinance or otherwise repay debt or securities of companies whose debt is owned by other funds managed by Blackstone Credit.
Allocation of Personnel. BXCSS and its members, officers and employees will devote as much of their time to the activities of the BXCSS Sleeve as they deem necessary to conduct its business affairs in an appropriate manner. By the terms of the investment advisory agreement, the Firm is not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may be in competition with the BXCSS Sleeve and/or may involve substantial time and resources of BXCSS. Firm personnel, including members of the investment committee, will work on other projects, serve on other committees (including boards of directors) and source potential investments for and otherwise assist the investment programs of Other Clients and their portfolio companies, including other investment programs to be developed in the future. These activities could be viewed as creating a conflict of interest in that the time and effort of the members of BXCSS and its officers and employees will not be devoted exclusively to the business of the BXCSS Sleeve, but will be allocated between the business of the BXCSS Sleeve and the management of the monies of such Other Clients of BXCSS . Time spent on these other initiatives diverts attention from the activities of the BXCSS Sleeve, which could negatively impact shareholders of the Alternative Strategies Fund. Furthermore, Blackstone Credit and Blackstone Credit personnel derive financial benefit from these other activities, including fees and performance-based compensation. Firm personnel may share in the fees from the BXCSS Sleeve; similarly, Firm personnel may share in the fees and performance-based compensation generated by Other Clients. These and other factors create conflicts of interest in the allocation of time by Firm personnel. Blackstone Credit’s determination of the amount of time necessary to conduct the BXCSS Sleeve’s activities will be conclusive.
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Integration Risks; Control of BXCSS. Effective December 18, 2020, Blackstone acquired BXCSS, LLC, which has become a part of Blackstone Credit and was subsequently renamed Blackstone Credit Systematic Strategies LLC. While the two organizations believe they share a number of cultural attributes that should enhance and streamline the integration of BXCSS into the broader Blackstone organization and further the cooperation and collaboration between the BXCSS team and Blackstone in developing a world class investment platform at Blackstone, there can be no assurance that such integration will be successful, that disputes will not arise, or that Blackstone or Blackstone’s other businesses, including its private equity, credit, insurance, real estate and other investment related businesses, will not adversely affect the ability of the BXCSS Sleeve to achieve its investment objectives. Although Blackstone and BXCSS do not expect there to be a material change in the day to day management of the BXCSS Sleeve, Blackstone controls BXCSS notwithstanding any titles retained by the BXCSS professionals in the BXCSS investment advisory business.
Further, as a result of becoming affiliated with Blackstone, BXCSS and the BXCSS Sleeve may be restricted from entering into (or maintaining) certain transactions in which Blackstone or a related entity has an interest or which would result in an economic or other incremental benefit to Blackstone or its related entities. For example, the BXCSS Sleeve could be restricted from trading in certain securities as a result of Blackstone’s or Other Clients’ activities. In that regard, it should be noted that Blackstone and portfolio companies of Other Clients have issued, and may in the future issue, high yield bonds and other securities that the BXCSS Sleeve has invested in or that may otherwise be appropriate for the BXCSS Sleeve. Accordingly, it should be expected that the affiliate relationship between Blackstone and BXCSS will cause BXCSS, Blackstone, the BXCSS Sleeve and the Blackstone Clients to be subject to additional restrictions, risks and conflicts of interest, which could have an adverse impact on BXCSS and/or the BXCSS Sleeve or otherwise impede their ability to effectively achieve their investment objectives. There can be no assurance that any conflicts of interest will be resolved favorably for the BXCSS Sleeve.
Outside Activities of Principals and Other Personnel and their Related Parties. Certain of the principals and employees of BXCSS will, in certain circumstances, be subject to a variety of conflicts of interest relating to their responsibilities to the BXCSS Sleeve, Other Clients and their respective portfolio companies, and their outside personal or business activities, including as members of investment or advisory committees or boards of directors of or advisors to investment funds, corporations, foundations or other organizations. Such positions create a conflict if such other entities have interests that are adverse to those of the BXCSS Sleeve, including if such other entities compete with the BXCSS Sleeve for investment opportunities or other resources. The other managed accounts and/or investment funds in which such individuals may become involved may have investment objectives that overlap with the BXCSS Sleeve. Although such principals and employees will seek to limit any such conflicts in a manner that is in accordance with their fiduciary duties to the BXCSS Sleeve, there can be no assurance that conflicts of interest between the interests of the BXCSS Sleeve and Other Clients will be resolved favorably for the BXCSS Sleeve. Furthermore, certain principals and employees of BXCSS may have a greater financial interest in the performance of such other funds or accounts than the performance of the BXCSS Sleeve. Such involvement may create conflicts of interest in making investments on behalf of the BXCSS Sleeve and such other funds and accounts. Also, Blackstone personnel, Firm employees, including employees of BXCSS, are generally permitted to invest in alternative investment funds, private equity funds, real estate funds, hedge funds and other investment vehicles, as well as engage in other personal trading activities relating to companies, assets, securities or instruments (subject to the Firm’s Code of Ethics requirements), some of which will involve conflicts of interests. Such personal securities transactions will, in certain circumstances, relate to securities or instruments which can be expected to also be held or acquired by Other Clients, the BXCSS Sleeve, or otherwise relate to the obligors in which the BXCSS Sleeve has or acquires a different principal investment (including, for example, with respect to seniority). There can be no assurance that conflicts of interest arising out of such activities will be resolved in favor of the BXCSS Sleeve. Shareholders of the Alternative Strategies Fund will not receive any benefit from any such investments, and the financial incentives of Firm personnel in such other investments could be greater than their financial incentives in relation to the BXCSS Sleeve.
Additionally, certain employees and other professionals of the Firm may have family members or relatives employed by advisers and service providers (or their affiliates) or otherwise actively involved in industries and
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sectors in which the BXCSS Sleeve invests, or have business, financial, personal or other relationships with companies in such industries and sectors (including the advisors and service providers described above) or other industries, which gives rise to potential or actual conflicts of interest. For example, such family members or relatives might be employees, officers, directors or owners of companies or assets that are actual or potential investments of the BXCSS Sleeve. Moreover, in certain instances, the BXCSS Sleeve may acquire securities from companies that are owned by such family members or relatives or in respect of which such family members or relatives have other involvement. These relationships also may influence Blackstone, BXCSS and/or Blackstone Credit in deciding whether to select or recommend certain service providers to perform services for the BXCSS Sleeve or obligors (the cost of which will generally be borne directly or indirectly by the Alternative Strategies Fund or such obligors, as applicable). Notwithstanding the foregoing, investment transactions relating to the BXCSS Sleeve that require the use of a service provider will generally be allocated to service providers on the basis of best execution, the evaluation of which includes, among other considerations, such service provider’s provision of certain investment-related services and research that BXCSS believes to be of benefit to the BXCSS Sleeve. To the extent that the Firm determines appropriate, conflict mitigation strategies can be expected to be put in place with respect to a particular circumstance, such as internal information barriers or recusal, disclosure or other steps determined appropriate by the Firm.
Other Firm Businesses, Activities and Relationships. As part of its regular business, Blackstone provides a broad range of investment banking, advisory and other services. In addition, from time to time, the Firm will provide services in the future beyond those currently provided. Shareholders will not receive any benefit from any fees relating to such services.
In the regular course of its capital markets, investment banking, real estate advisory and other businesses, Blackstone represents potential purchasers, sellers and other involved parties, including corporations, financial buyers, management, shareholders and institutions, with respect to transactions that could give rise to other transactions that are suitable for the BXCSS Sleeve. In such a case, a Blackstone advisory client would typically require Blackstone to act exclusively on its behalf. Such advisory client requests may preclude all Blackstone-affiliated clients, including the BXCSS Sleeve, from participating in related transactions that would otherwise be suitable. Blackstone will be under no obligation to decline any such engagements in order to make an investment opportunity available to the BXCSS Sleeve. In connection with its capital markets, investment banking, advisory, real estate and other businesses, Blackstone comes into possession of information that limits its ability to engage in potential transactions. The BXCSS Sleeve’s activities are expected to be constrained as a result of the inability of Blackstone personnel to use such information.
The BXCSS Sleeve may invest in securities of the same issuers as Other Clients, other investment vehicles, accounts and clients of the Firm and BXCSS. To the extent that the BXCSS Sleeve holds interests that are different (or more senior or junior) than those held by such Other Clients, Blackstone Credit may be presented with decisions involving circumstances where the interests of such Other Clients are in conflict with those of the BXCSS Sleeve. Furthermore, it is possible the BXCSS Sleeve’s interest may be subordinated or otherwise adversely affected by virtue of such Other Clients’ involvement and actions relating to its investment.
Other Affiliate Transactions and Investments in Different Levels of Capital Structure. The Firm owes a fiduciary duty to Other Clients as well as to the Alternative Strategies Fund and will encounter conflicts in the exercise of these duties. Certain Other Clients can be expected to invest in securities of publicly traded companies that are actual or potential investments of the BXCSS Sleeve or its obligors. The trading activities of those vehicles may differ from or be inconsistent with activities that are undertaken for the account of the BXCSS Sleeve or its obligors in any such securities or related securities. From time to time, the BXCSS Sleeve and the Other Clients can be expected to make investments at different levels of an issuer’s capital structure or otherwise in different classes of an issuer’s securities or loans, subject to the limitations of the 1940 Act. Such investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities or loans that may be held by such entities. To the extent the BXCSS Sleeve holds securities or loans that are different (including with respect to their relative seniority) than those held by an Other Client, BXCSS and its affiliates may
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be presented with decisions when the interests of the funds are in conflict. For example, conflicts could arise where the BXCSS Sleeve lends funds to a portfolio company while an Other Client invests in equity securities of such portfolio company. In this circumstance, for example, if such portfolio company were to go into bankruptcy, become insolvent or otherwise be unable to meet its payment obligations or comply with its debt covenants, conflicts of interest could arise between the holders of different types of securities or loans as to what actions the portfolio company should take. In addition, purchases or sales of securities or loans for the account of the BXCSS Sleeve (particularly marketable securities) will be bunched or aggregated with orders for Other Clients, including other funds. It is frequently not possible to receive the same price or execution on the entire volume of securities sold, and the various prices will, in certain circumstances, be averaged, which may be disadvantageous to the BXCSS Sleeve. Further conflicts could arise after the BXCSS Sleeve and Other Clients have made their respective initial investments. Blackstone Credit may in its discretion take steps to reduce the potential for adversity between the BXCSS Sleeve and the Other Clients, including causing the BXCSS Sleeve and/or such Other Clients to take certain actions that, in the absence of such conflict, it would not take. Such conflicts will be more difficult if the BXCSS Sleeve and Other Clients hold significant or controlling interests in competing or different tranches of a portfolio company’s capital structure. In addition, there may be circumstances where Blackstone Credit agrees to implement certain procedures to ameliorate conflicts of interest that may involve a forbearance of rights relating to the BXCSS Sleeve or Other Clients.
In addition, conflicts may arise in determining the amount of an investment, if any, to be allocated among potential investors and the respective terms thereof. There can be no assurance that any conflict will be resolved in favor of the BXCSS Sleeve, and, subject to applicable law, a decision by Blackstone Credit to take any particular action could have the effect of benefiting an Other Client (and, incidentally, may also have the effect of benefiting Blackstone Credit) and therefore may not have been in the best interests of, and may be adverse to, the BXCSS Sleeve. There can be no assurance that the return on the BXCSS Sleeve’s investment will be equivalent to or better than the returns obtained by the Other Clients participating in the transaction.
Other Blackstone and Blackstone Credit Clients; Allocation of Investment Opportunities. Certain inherent conflicts of interest arise from the fact that BXCSS, Blackstone Credit and Blackstone provide investment management, advisory and sub-advisory services to the BXCSS Sleeve and Other Clients.
The respective investment programs of the BXCSS Sleeve and the Other Clients may or may not be substantially similar. Blackstone Credit and/or Blackstone may give advice to, and recommend securities for, Other Clients that may differ from advice given to, or securities recommended or bought for, the BXCSS Sleeve, even though their investment objectives may be the same as or similar to those of the BXCSS Sleeve. While Blackstone Credit will seek to manage potential conflicts of interest in a fair and equitable manner, the portfolio strategies employed by Blackstone Credit and Blackstone in managing their respective Other Clients are likely to conflict from time to time with the transactions and strategies employed by BXCSS in managing the BXCSS Sleeve and may affect the prices and availability of the securities and instruments in which the BXCSS Sleeve invests. Conversely, participation in specific investment opportunities may be appropriate, at times, for both the BXCSS Sleeve and Other Clients. In any event, it is the policy of Blackstone Credit to allocate investment opportunities and sale opportunities on a basis deemed by Blackstone Credit, in its sole discretion, to be fair and equitable over time.
Allocation Methodology Considerations. Blackstone Credit will share any investment and sale opportunities with such Other Clients and the BXCSS Sleeve in accordance with the Advisers Act, and Firm-wide allocation policies, which generally provide for sharing pro rata based on targeted acquisition size or targeted sale size.
Notwithstanding the foregoing, Blackstone Credit may also consider the following factors in making any allocation determinations, and such factors may result in a different allocation of investment and/or sale opportunities: (i) the risk-return and target return profile of the proposed investment relative to the BXCSS Sleeve’s and the Other Clients’ current risk profiles; (ii) the BXCSS Sleeve’s and/or the Other Clients’ investment guidelines, restrictions, terms and objectives, including whether such objectives are considered solely in light of the specific
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investment under consideration or in the context of the respective portfolios’ overall holdings; (iii) the need to re-size risk in the BXCSS Sleeve’s or the Other Clients’ portfolios (including the potential for the proposed investment to create an industry, sector or issuer imbalance in the BXCSS Sleeve’s and Other Clients’ portfolios, as applicable) and taking into account any existing non-pro rata investment positions in the portfolio of the BXCSS Sleeve and Other Clients; (iv) liquidity considerations of the BXCSS Sleeve and the Other Clients, including during a ramp-up or wind-down of one or more of the BXCSS Sleeve or such Other Clients, proximity to the end of the BXCSS Sleeve’s or Other Clients’ specified term or investment period, any redemption/withdrawal requests, anticipated future contributions and available cash; (v) legal, tax, accounting, political, national security and other consequences; (vi) regulatory or contractual restrictions or consequences (including, without limitation, requirements under the 1940 Act and any related rules, orders, guidance or other authority applicable to the BXCSS Sleeve or Other Blackstone Credit Clients); (vii) avoiding a de minimis or odd lot allocation; (viii) availability and degree of leverage and any requirements or other terms of any existing leverage facilities; (ix) the BXCSS Sleeve’s or Other Clients’ investment focus on a classification attributable to an investment or issuer of an investment, including, without limitation, investment strategy, geography, industry or business sector; (x) the nature and extent of involvement in the transaction on the part of the respective teams of investment professionals dedicated to the BXCSS Sleeve or such Other Clients; (xi) the management of any actual or potential conflict of interest; (xii) with respect to investments that are made available to Blackstone Credit by counterparties pursuant to negotiated trading platforms (e.g., ISDA contracts), the absence of such relationships which may not be available to the BXCSS Sleeve and all Other Clients; (xiii) available capital of the BXCSS Sleeve and the Other Clients, (xiv) primary and permitted investment strategies, guidelines, liquidity positions and requirements, and objectives of the BXCSS Sleeve and the Other Clients, including, without limitation, with respect to Other Clients that expect to invest in or alongside other funds or across asset classes based on expected return (such as certain managed accounts with similar investment strategies and objectives), (xv) sourcing of the investment, (xvi) the specific nature (including size, type, amount, liquidity, holding period, anticipated maturity and minimum investment criteria) of the investment, (xvii) expected investment return, (xviii) expected cash characteristics (such as cash-on-cash yield, distribution rates or volatility of cash flows), (xix) capital expenditure required as part of the investment, (xx) portfolio diversification and concentration concerns (including, but not limited to, whether a particular fund already has its desired exposure to the investment, sector, industry, geographic region or markets in question), (xxi) relation to existing investments in a fund, if applicable (e.g., “follow on” to existing investment, joint venture or other partner to existing investment, or same security as existing investment), and (xxii) any other considerations deemed relevant by Blackstone Credit in good faith.
Blackstone Credit shall not have any obligation to present any investment opportunity (or portion of any investment opportunity) to the BXCSS Sleeve if Blackstone Credit determines in good faith that such opportunity (or portion thereof) should not be presented to the BXCSS Sleeve for any one or a combination of the reasons specified above, or if Blackstone Credit is otherwise restricted from presenting such investment opportunity to the BXCSS Sleeve.
Moreover, with respect to Blackstone Credit’s ability to allocate investment opportunities, including where such opportunities are within the common objectives and guidelines of the BXCSS Sleeve and one or more Other Clients (which allocations are to be made on a basis that Blackstone Credit believes in good faith to be fair and reasonable), Blackstone Credit and Blackstone have established general guidelines and policies, which it may update from time to time, for determining how such allocations are to be made, which, among other things, set forth principles regarding what constitutes “debt” or “debt-like” investments, criteria for defining “control-oriented equity” or “infrastructure” investments, guidance regarding allocation for certain types of investments (e.g., distressed energy) and other matters. In addition, certain Other Clients may receive certain priority or other allocation rights with respect to certain investments, subject to various conditions set forth in such Other Clients’ respective governing agreements. The application of those guidelines and conditions may result in the BXCSS Sleeve or Other Clients not participating (and/or not participating to the same extent) in certain investment opportunities in which they would have otherwise participated had the related allocations been determined without regard to such guidelines and conditions and based only on the circumstances of those particular investments. Additionally, investment opportunities sourced by Blackstone Credit will be allocated in accordance with
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Blackstone’s and Blackstone Credit’s allocation policies, which may provide that investment opportunities will be allocated in whole or in part to other business units of the Firm on a basis that Blackstone and Blackstone Credit believe in good faith to be fair and reasonable, based on various factors, including the involvement of the respective teams from Blackstone Credit and such other business units. It should also be noted that investment opportunities sourced by business units of the Firm other than Blackstone Credit will be allocated in accordance with such business units’ allocation policies, which will result in such investment opportunities being allocated, in whole or in part, away from Blackstone Credit, the BXCSS Sleeve and Other Blackstone Credit Clients.
Blackstone Credit makes good faith determinations for allocation decisions based on expectations that will, in certain circumstances, prove inaccurate. Information unavailable to Blackstone Credit, or circumstances not foreseen by Blackstone Credit at the time of allocation, may cause an investment opportunity to yield a different return than expected. Conversely, an investment that Blackstone Credit expects to be consistent with the BXCSS Sleeve’s objectives will, in certain circumstances, fail to achieve them.
Orders may be combined for the BXCSS Sleeve and all other participating Other Clients, and if any order is not filled at the same price, they may be allocated on an average price basis. Similarly, if an order on behalf of more than one account cannot be fully executed under prevailing market conditions, securities may be allocated among the different accounts on a basis that Blackstone Credit or its affiliates consider equitable.
Cross Transactions. Situations may arise where certain assets held by the BXCSS Sleeve may be transferred to Other Clients and vice versa. Such transactions will be conducted in accordance with, and subject to, BXCSS’s contractual obligations to the Alternative Strategies Fund and applicable law, including the 1940 Act. The BXCSS Sleeve or its obligors may purchase investments or assets from or sell investments or assets to shareholders, other obligors of the Alternative Strategies Fund, portfolio companies of Other Clients or their respective related parties. Purchases and sales of investments or assets between the BXCSS Sleeve or its obligors, on the one hand, and shareholders, other obligors of the Alternative Strategies Fund, portfolio companies of Other Clients or their respective related parties, on the other hand, are not, unless required by applicable law, subject to the approval of the Board or any shareholder. These transactions involve conflicts of interest, as the Firm may receive fees and other benefits, directly or indirectly, from or otherwise have interests in both parties to the transaction, including different financial incentives Blackstone may have with respect to the parties to the transaction. For example, there can be no assurance that any investment or asset sold by the BXCSS Sleeve to a shareholder, other obligors of the Alternative Strategies Fund, portfolio company of Other Clients or any of their respective related parties will not be valued or allocated a sale price that is lower than might otherwise have been the case if such asset were sold to a third party rather than to a shareholder, portfolio company of Other Clients or any of their respective related parties. The Firm will not be required to solicit third party bids or obtain a third party valuation prior to causing the BXCSS Sleeve or any of its obligors to purchase or sell any asset or investment from or to a shareholder, other obligors of the Alternative Strategies Fund, portfolio company of Other Clients or any of their respective related parties as provided above.
Transactions with Obligors/Portfolio Companies. The Firm and obligors/portfolio companies of the BXCSS Sleeve and Other Clients operate in multiple industries and provide products and services to or otherwise contract with or have other business arrangements with obligors/portfolio companies of the BXCSS Sleeve, among others. The BXCSS Sleeve and shareholders of the Alternative Strategies Fund will not share in any fees, economics, equity or other benefits accruing to the Firm, Other Clients and their portfolio companies as a result of the any such business arrangements. Moreover, payments made to the Firm in connection with such arrangements will not reduce the management fee payable to BXCSS. Additionally, the Firm or an affiliate thereof will from time to time hold equity or other investments in companies or businesses that provide services to or otherwise contract with portfolio companies. The BXCSS Sleeve and shareholders of the Alternative Strategies Fund will not share in any fees or economics accruing to Blackstone and/or Blackstone Credit as a result of these relationships and/or participation by portfolio companies.
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Restrictions Arising under the Securities Laws. The Firm’s activities and the activities of Other Clients (including the holding of securities positions or having one of its employees on the board of directors of a portfolio company) could result in securities law restrictions on transactions in securities held by the BXCSS Sleeve, affect the prices of such securities or the ability of such entities to purchase, retain or dispose of such investments, or otherwise create conflicts of interest, any of which could have an adverse impact on the performance of the BXCSS Sleeve and thus the return to shareholders of the Alternative Strategies Fund.
The 1940 Act may limit the Alternative Strategies Fund’s ability to undertake certain transactions with or alongside its affiliates that are registered under the 1940 Act. As a result of these restrictions, the BXCSS Sleeve may be prohibited from executing “joint” transactions with the Alternative Strategies Fund’s 1940 Act registered affiliates, which could include investments in the same portfolio company (whether at the same or different times) or buying investments from, or selling them to, Other Clients. These limitations may limit the scope of investment opportunities that would otherwise be available to the BXCSS Sleeve.
Additional Potential Conflicts of Interest. The officers, directors, members, managers, employees and personnel of BXCSS can be expected to trade in securities and make personal investments for their own accounts, subject to restrictions and reporting requirements as may be required by law or the Firm’s policies, or otherwise determined from time to time by BXCSS. In addition, certain Other Clients may be subject to the 1940 Act or other regulations that, due to the role of the Firm, could restrict the ability of the BXCSS Sleeve to buy investments from, to sell investments to or to invest in the same securities as, such Other Clients. Such regulations may have the effect of limiting the investment opportunities available to the BXCSS Sleeve. Such personal securities transactions and investments will, in certain circumstances, result in conflicts of interest, including to the extent they relate to (i) a company in which the BXCSS Sleeve holds or acquires an investment (either directly through a privately negotiated investment or indirectly through the purchase of securities or other traded instruments related thereto) and (ii) entities that have interests which are adverse to those of the BXCSS Sleeve or pursue similar investment opportunities as the BXCSS Sleeve. In addition, as a consequence of Blackstone’s status as a public company, the officers, directors, members, managers and personnel of BXCSS can be expected to take into account certain considerations and other factors in connection with the management of the BXCSS Sleeve that would not necessarily be taken into account if Blackstone were not a public company. The directors of Blackstone have fiduciary duties to shareholders of the public company that may conflict with their duties to the Alternative Strategies Fund. Finally, although the Firm believes its positive reputation in the marketplace provides benefit to the BXCSS Sleeve and Other Clients, BXCSS could decline to undertake investment activity or transact with a counterparty on behalf of the BXCSS Sleeve for reputational reasons, and this decision could result in the BXCSS Sleeve foregoing a profit or suffering a loss.
DOUBLELINE CAPITAL LP (“DoubleLine”)
Sub-Advisor to the Alternative Strategies Fund
From time to time, potential and actual conflicts of interest may arise between a portfolio manager’s management of the investments of the Alternative Strategies Fund, on the one hand, and the management of other accounts, on the other. Potential and actual conflicts of interest also may result because of DoubleLine’s other business activities. Other accounts managed by a portfolio manager might have similar investment objectives or strategies as the Alternative Strategies Fund, be managed (benchmarked) against the same index the Alternative Strategies Fund tracks, or otherwise hold, purchase, or sell securities that are eligible to be held, purchased or sold by the Alternative Strategies Fund. The other accounts might also have different investment objectives or strategies than the Alternative Strategies Fund.
Knowledge and Timing of Fund Trades. A potential conflict of interest may arise as a result of the portfolio managers’ management of the Alternative Strategies Fund. Because of their positions with the Alternative Strategies Fund, the portfolio managers know the size, timing and possible market impact of the Alternative Strategies Fund’s trades. It is theoretically possible that a portfolio manager could use this information to the advantage of other accounts under management, and also theoretically possible that actions could be taken (or not taken) to the detriment of the Alternative Strategies Fund.
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Investment Opportunities. A potential conflict of interest may arise as a result of a portfolio manager’s management of a number of accounts with varying investment guidelines. Often, an investment opportunity may be suitable for both the Alternative Strategies Fund and other accounts managed by the portfolio manager, but securities may not be available in sufficient quantities for both the Alternative Strategies Fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by the Alternative Strategies Fund and another account. DoubleLine has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.
Under DoubleLine’s allocation procedures, investment opportunities are allocated among various investment strategies based on individual account investment guidelines, DoubleLine’s investment outlook, cash availability and a series of other factors. DoubleLine has also adopted additional internal practices to complement the general trade allocation policy that are designed to address potential conflicts of interest due to the side-by-side management of the Alternative Strategies Fund and certain pooled investment vehicles, including investment opportunity allocation issues.
Conflicts potentially limiting the Alternative Strategies Fund’s investment opportunities may also arise when the Alternative Strategies Fund and other clients of DoubleLine invest in, or even conduct research relating to, different parts of an issuer’s capital structure, such as when the Alternative Strategies Fund owns senior debt obligations of an issuer and other clients own junior tranches of the same issuer. In such circumstances, decisions over whether to trigger an event of default, over the terms of any workout, or how to exit an investment may result in conflicts of interest. In order to minimize such conflicts, a portfolio manager may avoid certain investment opportunities that would potentially give rise to conflicts with other clients of DoubleLine or result in DoubleLine receiving material, non-public information, or DoubleLine may enact internal procedures designed to minimize such conflicts, which could have the effect of limiting the Alternative Strategies Fund’s investment opportunities. Additionally, if DoubleLine acquires material non-public confidential information in connection with its business activities for other clients, a portfolio manager or other investment personnel may be restricted from purchasing securities or selling certain securities for the Alternative Strategies Fund or other clients. When making investment decisions where a conflict of interest may arise, DoubleLine will endeavor to act in a fair and equitable manner between the Alternative Strategies Fund and other clients; however, in certain instances the resolution of the conflict may result in DoubleLine acting on behalf of another client in a manner that may not be in the best interest, or may be opposed to the best interest, of the Alternative Strategies Fund.
Investors in the Alternative Strategies Fund may also be advisory clients of DoubleLine. Accordingly, DoubleLine may in the course of its business provide advice to advisory clients whose interests may conflict with those of the Alternative Strategies Fund, may render advice to the Alternative Strategies Fund that provides a direct or indirect benefit to DoubleLine or a related party or may manage or advise a product in which the Alternative Strategies Fund is invested in such a way that would not be beneficial to the Fund. For example, DoubleLine may advise a client who has invested in the Alternative Strategies Fund to redeem its investment in the Alternative Strategies Fund, which may cause the Alternative Strategies Fund to incur transaction costs and/or have to sell assets at a time when it would not otherwise do so. DoubleLine could also, for example, make decisions with respect to a structured product managed or sponsored by DoubleLine in a manner that could have adverse effects on investors in the product, including, potentially, the Alternative Strategies Fund. DoubleLine currently provides asset allocation investment advice, including recommending the purchase and/or sale of shares of the Alternative Strategies Fund, to a large number of investors.
Broad and Wide-Ranging Activities. The portfolio managers, DoubleLine and its related parties engage in a broad spectrum of activities. In the ordinary course of their business activities, the portfolio managers, DoubleLine and its related parties may engage in activities where the interests of certain divisions of DoubleLine and its related parties or the interests of their clients may conflict with the interests of the shareholders of the Alternative Strategies Fund.
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Possible Future Activities. DoubleLine and its related parties may expand the range of services that they provide over time. Except as provided herein, DoubleLine and its related parties will not be restricted in the scope of its business or in the performance of any such services (whether now offered or undertaken in the future) even if such activities could give rise to conflicts of interest, and whether or not such conflicts are described herein. DoubleLine and its related parties have, and will continue to develop, relationships with a significant number of companies, financial sponsors and their senior managers, including relationships with clients who may hold or may have held investments similar to those intended to be made by the Alternative Strategies Fund. These clients may themselves represent appropriate investment opportunities for the Alternative Strategies Fund or may compete with a Fund for investment opportunities.
Performance Fees and Personal Investments. A portfolio manager may advise certain accounts with respect to which the advisory fee is based entirely or partially on performance or in respect of which the portfolio manager may have made a significant personal investment. Such circumstances may create a conflict of interest for the portfolio manager in that the portfolio manager may have an incentive to allocate the investment opportunities that he or she believes might be the most profitable to such other accounts instead of allocating them to the Alternative Strategies Fund. DoubleLine has adopted policies and procedures reasonably designed to allocate investment opportunities between the Alternative Strategies Fund and performance fee based accounts on a fair and equitable basis over time.
EVERMORE GLOBAL ADVISORS, LLC (“Evermore”)
Sub-Advisor to the International Fund
Potential conflicts of interest may arise when the International Fund’s portfolio manager has day-to-day management responsibilities with respect to one or more other funds or other accounts.
Evermore has adopted compliance policies and procedures that are designed to address various conflicts of interest that may arise for Evermore and the individuals that it employs. For example, Evermore has adopted a side-by-side management of mutual funds and private accounts policy and trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is no guarantee, however, that the policies and procedures adopted by Evermore will be able to detect and/or prevent every situation in which an actual or potential conflict may appear.
These potential conflicts include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Limited Investment Opportunities. If the portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a fund’s and/or account’s ability to take full advantage of the investment opportunity.
Pursuit of Differing Strategies. At times, the portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.
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Selection of Brokers/Dealers. The portfolio manager may be able to select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide portfolio managers with brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended (the “1934 Act”)), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others. Although the payment of brokerage commissions is subject to the requirement that the portfolio manager determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to the fund, the portfolio manager’s decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the funds and/or accounts that he or she manages.
Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of Evermore’s management fee and/or the portfolio manager’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which Evermore and/or its affiliates have interests. Similarly, the desire to maintain or raise assets under management or to enhance the portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager to lend preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.
Related Business Opportunities. Evermore or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to Evermore and its affiliates.
FIDUCIARY MANAGEMENT, INC. (“FMI”)
Sub-Advisor to the Equity Fund
The portfolio managers at FMI are often responsible for managing other accounts. FMI typically assigns accounts with similar investment strategies to the portfolio managers to mitigate the potentially conflicting investment strategies, the side-by-side management of the Equity Fund and other accounts may raise potential conflicts of interest due to the interest held by the portfolio managers (for example, cross trades between the Equity Fund and another account and allocation of aggregated trades). FMI has developed policies and procedures reasonably designed to mitigate those conflicts. In particular, FMI has adopted policies designed to ensure the fair allocation of securities purchased on an aggregated basis.
FIRST PACIFIC ADVISORS, LP (“First Pacific”)
Sub-Advisor to the Alternative Strategies Fund
First Pacific has potential conflicts of interest in connection with its investment activities. For example, First Pacific manages multiple client accounts with different investment objectives and guidelines, and with different fee structures. First Pacific receives both asset-based fees and performance-based fees as compensation for its investment advisory services. Performance-based fees create an incentive for First Pacific to favor those accounts over asset-based fee accounts or make investments that are riskier or more speculative than would be the case in the absence of performance-based fee clients. To mitigate potential conflicts of interest when managing performance-based fee clients side-by-side with asset-based fee clients, First Pacific has developed a policy in which portfolio managers seek to allocate investment opportunities among eligible accounts on a pro rata basis if that is practical; or, if a pro rata allocation is not practical, to allocate the investment opportunities among First Pacific advisory clients on a basis that over time is fair and equitable to each advisory client relative to other clients.
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First Pacific has also implemented other policies and procedures that seek to address other potential conflicts of interest that may arise in connection with First Pacific’s business and that are designed to seek to ensure that all client accounts are treated fairly and equitably over time, including with respect to, among others, code of ethics, insider trading, best execution, trade aggregation, soft dollars, gifts and entertainment, political contributions, among others.
GUGGENHEIM PARTNERS INVESTMENT MANAGEMENT (“Guggenheim”)
Sub-Advisor to the High Income Alternatives Fund
Potential Conflicts Related to the Sale of Fund Shares. Guggenheim, its affiliates and its respective employees may have relationships with distributors, consultants and others who recommend, or engage in transactions with or for, the Fund. The Fund and/or Guggenheim or its affiliates may compensate such distributors, consultants and other parties in connection with such relationships. As a result of these relationships, distributors, consultants and other parties may have conflicts that create incentives for them to promote the Fund over other funds or financial products.
To the extent permitted by applicable law, Guggenheim and its affiliates and the Fund may make payments to authorized dealers and other financial intermediaries and to salespersons to promote the Fund. These payments may be made out of the assets of Guggenheim or its affiliates or amounts payable to Guggenheim or its affiliates. These payments may create an incentive for such persons to highlight, feature or recommend the Fund over other funds or financial products.
Potential Conflicts Related to Management of the Fund by Guggenheim. The following are descriptions of certain conflicts, financial or otherwise, that Guggenheim and their employees may have in managing the Fund. The descriptions below are not intended to be a complete enumeration or explanation of all of the conflicts of interests that may arise from the business activities of Guggenheim, its affiliates, or their respective clients. To address these and other actual or potential conflicts, Guggenheim and/or the Fund have established various policies and procedures that are reasonably designed to identify and mitigate such conflicts and to ensure that such conflicts are appropriately resolved taking into consideration the best interest of all clients involved, consistent with Guggenheim’s fiduciary obligations and in accordance with applicable law. However, there can be no guarantee that these policies and procedures will be successful in every instance. In certain cases, transactions involving potential conflicts of interest described below may be elevated for review by a conflicts review committee, the members of which are senior personnel of Guggenheim’s affiliates and are not employees or clients of Guggenheim. Additional information about potential conflicts of interest regarding Guggenheim is set forth in Guggenheim’s Form ADV. A copy of Part 1 and Part 2A of Guggenheim’s Form ADV is available on the SEC’s website at www.adviserinfo.sec.gov.
Guggenheim and its Affiliates Provide a Broad Array of Services and Have Various Investment Banking, Advisory and Other Relationships. Guggenheim is an affiliate of Guggenheim Partners, LLC (“Guggenheim Partners”), which is a global, full service financial services firm. Guggenheim Partners and its affiliates, including Guggenheim (collectively, “Guggenheim Entities”), provide their clients with a broad array of investment management, insurance, broker-dealer, investment banking and other similar services (“Other Business Activities”). These Other Business Activities create actual and potential conflicts of interest for Guggenheim in managing the Fund.
For example, the Other Business Activities may create conflicts between the interests of the Fund, on the one hand, and the interests of Guggenheim, its affiliates and their respective other clients, on the other hand. Guggenheim and its affiliates may act as advisers to clients in investment banking, loan arranging and structuring, financial advisory, asset management and other capacities related to securities and instruments that may be purchased, sold or held by the Fund, and Guggenheim or an affiliate may issue, or be engaged as underwriter for the issuer of, securities and instruments that the Fund may (in accordance with applicable rules) purchase, sell or hold. At times, these activities may cause Guggenheim and its affiliates to give advice to their clients that may cause these
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clients to take actions in conflict with or adverse to the interest of the Fund. In addition, Guggenheim Entities may take action that differs from, potentially conflicts with or is adverse to advice given or action taken for Guggenheim’s clients. The Guggenheim Entities and their respective officers, directors, managing directors, partners, employees and consultants may act in a proprietary capacity with long or short positions in securities and instruments of all types, including those that may be purchased, sold or held by the Fund. Such activities could affect the prices and availability of the securities and instruments that the Fund holds or that Guggenheim seeks to buy or sell for the Fund’s account, which could adversely impact the financial returns of the Fund.
These Other Business Activities may create other potential conflicts of interests in managing the Fund, may cause the Fund to be subject to additional regulatory limits and, in certain circumstances, may prevent the Fund from participating or limit the Fund’s participation in an investment opportunity that the Fund’s portfolio managers view to be favorable. As a result, activities and dealings of Guggenheim and its affiliates may affect the Fund in ways that may disadvantage or restrict the Fund or be deemed to benefit Guggenheim, its affiliates or other client accounts.
Guggenheim’s and its Affiliates’ Activities on Behalf of Other Clients. Guggenheim and its affiliates currently manage and expect to continue to manage a variety of client accounts, including (without limitation) separately managed accounts, open-end registered funds, closed-end registered funds, private funds and other collective investment vehicles, and may serve as asset or collateral manager or in other capacities for certain non-registered structured products (collectively, “Other Clients”). Investors in such Other Clients include insurance companies affiliated with or related to Guggenheim as described below. Other Clients invest pursuant to the same or different investment objectives, strategies and philosophies as those employed by the Fund and may seek to make or sell investments in the same securities, instruments, sectors or strategies as the Fund. There are no restrictions on the ability of Guggenheim and its affiliates to manage Other Clients following the same, similar or different investment objectives, strategies and philosophies as those employed by the Fund. This “side-by-side” management of multiple accounts may create potential conflicts, particularly in circumstances where the availability or liquidity of investment opportunities is limited. Other Clients may also be subject to different legal restrictions or regulatory regimes than the Fund. Regardless of the similarity in investment objectives and strategies between the Fund and Other Clients, Guggenheim may give advice and recommend investments to Other Clients that may differ from advice given to, or investments bought or sold for, the Fund, and the Fund and Other Clients may vote differently on or take or refrain from taking different actions with respect to the same security or instrument, which may be disadvantageous to the Fund and adversely affect their performance.
The investment policies, fee arrangements and other characteristics of the Fund may also vary from those of Other Clients. In some cases, Guggenheim or an affiliate may receive a potentially larger financial benefit from managing one or more such Other Clients as compared to the Fund (for example, some Other Clients are charged performance or incentive fees constituting a percentage of profits or gains), which may provide an incentive to favor such Other Clients over the Fund or to recommend favorable investments to Other Clients who pay higher fees or who have the potential to generate greater fees over the Fund. Guggenheim on behalf of the Fund or Other Clients may, pursuant to one transaction or in a series of transactions over time, invest in different parts of an issuer’s or borrower’s capital structure (including but not limited to investments in public versus private securities, investments in debt versus equity, or investments in senior versus subordinated debt or when the same or similar investments have different rights or benefits), depending on the respective client’s investment objectives and policies. Relevant issuers or borrowers may also include special purpose issuers or borrowers in structured finance, asset backed, collateralized loan obligation, collateralized debt obligation or similar transactions. As a result of the foregoing, the interests of one group of clients could conflict with those of other clients with respect to the same issuer or borrower. In managing such investments, Guggenheim will consider the interests of all affected clients in deciding what actions to take with respect to a given issuer or borrower, but at times will pursue or enforce rights on behalf of some clients in a manner that may have an adverse effect on, or result in asymmetrical financial outcomes to, other clients owning a different, including more senior or junior, investment in the same issuer or borrower. In these types of scenarios, Guggenheim may occasionally engage and appoint an independent party to provide independent analysis or recommendations with respect to consents, proxy voting, or other similar shareholder or debt holder rights decision (or a series of consents, votes or similar decisions) pertaining to the Fund and other clients. These
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potential conflicts of interests between Guggenheim’s clients may become more pronounced in situations in which an issuer or borrower experiences financial or operational challenges, or as a result of the Fund’s use of certain investment strategies, including small capitalization, emerging market, distressed or less liquid strategies.
Guggenheim Activities on Behalf of Affiliated or Related Accounts. To the extent permitted by the 1940 Act and other laws, Guggenheim, from time to time, may initiate or recommend transactions in the loans or securities of companies in which Guggenheim, its related persons, or its respective affiliates have a controlling or other material direct or indirect interest.
Sammons Enterprises, Inc. (“Sammons”), a diversified company with several insurance company subsidiaries, is the largest single equity holder in Guggenheim Capital, LLC (“Guggenheim Capital”), Guggenheim’s ultimate parent company. Sammons has relationships with Guggenheim and various Guggenheim Entities. In addition, Guggenheim Capital wholly owns Guggenheim Life and Annuity Company and Clear Spring Life Insurance Company (together with Sammons, the “Affiliated Insurance Companies”), which are also advisory clients of Guggenheim. Certain Affiliated Insurance Companies and their subsidiaries are advisory clients of Guggenheim and, accordingly, pay Guggenheim a substantial amount of annual fees for advisory services. Sammons is the largest individual stakeholder of Guggenheim and the largest individual source of annual advisory fees paid to Guggenheim.
Furthermore, some officers and directors of Guggenheim Capital and its subsidiaries, including Guggenheim (“Guggenheim Related Persons”) have economic interests or voting interests in companies, including insurance companies that are advisory clients of Guggenheim. Guggenheim Related Persons from time to time enter into transactions, including loans and other financings, with these companies. Some Guggenheim Related Persons also may have economic interests or voting interests in issuers, which may be controlling or otherwise material interests, or may serve as a director or on the board of issuers in which Guggenheim has invested or will invest on behalf of its clients or to which Guggenheim has provided or will provide financing on behalf of its clients. Additionally, Guggenheim Related Persons may have direct or indirect investments in and/or have financial or other relationships with some of Guggenheim’s clients or other investment vehicles that may create potential conflicts of interest. Sammons and certain advisory or other clients in which Guggenheim Related Persons have interests have provided, and from time to time may provide, significant loans and other financing to Guggenheim and its affiliates. In addition, Guggenheim Related Persons have direct or indirect proprietary or personal investments in and/or have financial or other relationships with financial industry participants or other entities (including trading platforms) that may perform services on behalf of, or in connection with, investments made by Guggenheim on behalf of their clients. Guggenheim does not expect these transactions to be material.
The relationships described above create potential conflicts of interest for Guggenheim in managing the Fund and could create an incentive for Guggenheim to favor the interests of these companies over other clients. These incentives are more pronounced where Guggenheim has multiple relationships with the affiliated client. For example, Guggenheim has invested, and may in the future invest, on behalf of its clients in issuers or transactions in which Affiliated Insurance Companies or Guggenheim Related Persons have direct and/or indirect interests, which may include a controlling or significant beneficial interest. In addition, Guggenheim Related Persons and the accounts of Affiliated Insurance Companies and other Guggenheim clients have invested, and may in the future invest, in securities at different levels of the capital structure of the same issuer, in some cases at the same time and in other cases at different times as the Fund and other clients of Guggenheim. The following conflicts may arise in such situations: (i) enforcement of rights or determination not to enforce rights by Guggenheim on behalf of the Fund and other clients may have an adverse effect on the interests of its affiliates or related persons, and vice versa, (ii) Guggenheim may have an incentive to invest client funds in the issuer or borrower to either facilitate or obtain preferable terms for a proposed investment by an affiliate or related person in such issuer or borrower, or (iii) Guggenheim may have an incentive to preserve or protect the value or rights associated with an existing economic interest of an affiliate or related person in the issuer or borrower, which may have an adverse effect on the interests of other clients, including the Fund. In addition, Guggenheim may be subject to conflicts of interest with respect to financial industry participants or other entities (including trading platforms) because transactions on or through such platforms may result in compensation directly being paid to these entities that indirectly benefits Guggenheim Related Persons.
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Guggenheim mitigates potential conflicts of interest in the foregoing and similar situations, including through policies and procedures (i) designed to identify and mitigate conflicts of interest on a transaction-by-transaction basis and (ii) that require investment decisions for all client accounts be made independently from those of other client accounts and be made with specific reference to the individual needs and objectives of each client account, without consideration of Guggenheim’s pecuniary or investment interests (or those of their respective employees or affiliates). The Fund and Guggenheim also maintain procedures to comply with applicable laws, notably relevant provisions of the 1940 Act that prohibit Fund transactions with affiliates (or exemptive rules thereunder).
Allocation of Investment Opportunities. As described above, Guggenheim and its affiliates currently manage and expect to continue to manage Other Clients that may invest pursuant to the same or different strategies as those employed by the Fund, and such Other Clients could be viewed as being in competition with the Fund for appropriate investment opportunities, particularly where there is limited capacity with respect to such investment opportunities. The investment policies, fee arrangements and other circumstances of the Fund may vary from those of the Other Clients, and Guggenheim may face potential conflicts of interest because Guggenheim may have an incentive to favor particular client accounts (such as client accounts that pay performance-based fees) over other client accounts that may be less lucrative in the allocation of investment opportunities.
In order to minimize execution costs for clients, trades in the same security transacted on behalf of more than one client will generally be aggregated (i.e., blocked or bunched) by Guggenheim, unless it believes that doing so would conflict or otherwise be inconsistent with its duty to seek best execution for the clients and/or the terms of the respective investment advisory contracts and other agreements and understandings relating to the clients for which trades are being aggregated. When Guggenheim believes that it can effectively obtain best execution for the clients by aggregating trades, it will do so for all clients participating in the trade for which aggregated trades are consistent with the respective investment advisory contracts, investment guidelines, and other agreements and understandings relating to the clients.
Guggenheim has implemented policies and procedures that govern the allocation of investment opportunities among clients in a fair and equitable manner, taking into account the needs and financial objectives of the clients, their specific objectives and constraints for each account, as well as prevailing market conditions. If an investment opportunity would be appropriate for more than one client, Guggenheim may be required to choose among those clients in allocating the opportunity, or to allocate less of the opportunity to a client than it would ideally allocate if it did not have to allocate to multiple clients. In addition, Guggenheim may determine that an investment opportunity is appropriate for a particular client account, but not for another.
Guggenheim allocates transactions on an objective basis and in a manner designed to assure that no participating client is favored over any other participating client over time. If an investment is suitable and desirable for more than one client account, an initial allocation study will be determined based upon demand ascertained from the portfolio managers. With respect to fixed income and private equity assets, this initial allocation study is overseen by an allocation group and generally reflects a pro rata participation in the investment opportunity among the participating client accounts that expressed demand. Final allocation decisions are made or verified independently by the allocation group. With respect to public equity securities and public equity-related securities, the allocation shall generally reflect a pro rata participation in the investment opportunity among participating client accounts. Allocations may be adjusted under specific circumstances, such as situations of scarcity where pro rata allocations would result in de minimis positions or odd lots.
The application of relevant allocation factors often result in non-pro rata allocations, and particular client accounts (including client accounts in which Guggenheim and its affiliates or related persons, or their respective officers, directors or employees, including portfolio managers or senior managers, have an interest) may receive an
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allocation when other client accounts do not or receive a greater than pro-rata allocation. There can be no assurance that a particular investment opportunity will be allocated in any particular manner, and circumstances may occur in which an allocation could have adverse effects on the Fund with respect to the price or size of securities positions obtainable or saleable. All of the foregoing procedures could in certain circumstances adversely affect the price paid or received by the Fund or the size of the position purchased or sold by the Fund (including prohibiting the Fund from purchasing a position) or may limit the rights that the Fund may exercise with respect to an investment.
Allocation of Limited Time and Attention. The portfolio managers for the Fund may devote as much time to the Fund as Guggenheim deems appropriate to perform their duties in accordance with reasonable commercial standards and Guggenheim’s duties. However, as described above, these portfolio managers are presently committed to and expect to be committed in the future to providing investment advisory and other services for Other Clients and engage in Other Business Activities in which the Fund may have no interest. As a result of these separate business activities, Guggenheim may have conflicts of interest in allocating management time, services and functions among the Fund and Other Business Activities or Other Clients in that the time and effort of the Fund’s portfolio managers would not be devoted exclusively to the business of the Fund.
Potential Restrictions and Issues Related to Material Non-Public Information. By reason of Other Business Activities as well as services and advice provided to Other Clients, Guggenheim and its affiliates may acquire confidential or material non-public information and may be restricted from initiating transactions in certain securities and instruments. Guggenheim will not be free to divulge, or to act upon, any such confidential or material non-public information and, due to these restrictions, Guggenheim may be unable to initiate a transaction for the Fund’s account that it otherwise might have initiated. As a result, the Fund may be frozen in an investment position that it otherwise might have liquidated or closed out or may not be able to acquire a position that it might otherwise have acquired.
Valuation of the Fund’s Investments. Fund assets are valued in accordance with the Fund’s valuation procedures. The valuation of a security or other asset for the Fund may differ from the value ascribed to the same asset by affiliates of Guggenheim (particularly difficult-to-value assets) or Other Clients because, among other things, they may have procedures that differ from the Fund’s procedures or may have access to different information or pricing vendors or use different models or techniques. Guggenheim plays a role in the valuation of Fund assets and may face a potential conflict with respect to such valuations.
Investments in Other Guggenheim Funds. To the extent permitted by applicable law, the Fund may invest in other funds sponsored, managed, advised or sub-advised by Guggenheim. Investments by the Fund in such funds present potential conflicts of interest, including potential incentives to invest in smaller or newer funds to increase asset levels or provide greater viability and to invest in funds managed by the portfolio manager(s) of the Fund. As may be disclosed in the Prospectus and this SAI, Guggenheim has agreed to waive certain fees associated with these investments. In other circumstances, Guggenheim may make investments for clients for various portfolio management purposes in limited partnerships or similar vehicles that are managed or otherwise serviced by affiliates of Guggenheim that will be compensated for such services.
Potential Conflicts Associated with Guggenheim and its Affiliates Acting in Multiple Capacities Simultaneously.
Principal and Cross Transactions. Guggenheim may, to the extent permitted under applicable law, effect client cross transactions where Guggenheim causes a transaction to be effected between the Fund and an Other Client; provided, that conditions set forth in SEC rules under the 1940 Act are followed. Cross transactions present an inherent conflict of interest because Guggenheim represents the interests of both the selling account and the buying account in the same transaction, and Guggenheim could seek to treat one party to the cross transaction more favorably than the other party. Guggenheim has policies and procedures designed to mitigate these conflicts and help ensure that any cross transactions are in the best interests of, and appropriate for, all clients involved and the transactions are consistent with Guggenheim’s fiduciary duties and obligation to seek best execution and applicable rules.
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Guggenheim and its Affiliates May Act in Multiple Commercial Capacities. Subject to applicable law and subject to the provisions of the 1940 Act and rules thereunder, Guggenheim may cause the Fund to invest in securities, bank loans or other obligations of companies or structured product vehicles that result in commissions, initial or ongoing fees, or other remuneration paid to (or retained by) Guggenheim or one of its affiliates. Such investments may include (i) investments that Guggenheim or one of its affiliates originated, arranged or placed, (ii) investments in which Guggenheim’s affiliate provided investment banking, financial advisory or similar services to a party involved in the transaction to which the investment relates (such as acquisition financing in a transaction in which Guggenheim’s affiliate represented the buyer or seller); (iii) investments where Guggenheim or its affiliates provided other services to a transaction participant or other third party, (iv) investments where Guggenheim or one of its affiliates acts as the collateral agent, administrator, originator, manager, or other service provider, and (v) investments that are secured or otherwise backed by collateral that could include assets originated, sold or financed by Guggenheim or its affiliates, investment funds or pools managed by Guggenheim or its affiliates or assets or obligations managed by Guggenheim or its affiliates. Commissions, fees, or other remuneration payable to Guggenheim or its affiliates in these transactions may present a potential conflict in that Guggenheim may be viewed as having an incentive to purchase such investments to earn, or facilitate its affiliates’ ability to earn, such additional fees or compensation.
In some circumstances, and also subject to applicable law, Guggenheim may cause the Fund to invest in or provide financing to issuers or borrowers, or otherwise participate in transactions, in which the issuer, borrower or another transaction party (such as a placement agent or arranger) is, or is a subsidiary or affiliate of or otherwise related to, (a) an Other Client or (b) a company with which Guggenheim Related Persons, or officers or employees of Guggenheim, have investment, financial or other interests or relationships (including but not limited to directorships or equivalent roles). The financial interests of Guggenheim’s affiliates or their related persons in issuers or borrowers create potential conflict between the economic interests of these affiliates or related persons and the interests of Guggenheim’s clients. In addition, to the extent that a potential issuer or borrower (or one of its affiliates) is an advisory client of Guggenheim, or Guggenheim’s advisory client is a lender or financing provider to Guggenheim or its affiliates (including a parent), a potential conflict may exist as Guggenheim may have an incentive to favor the interests of those clients relative to those of its other clients.
Because of limitations imposed by applicable law, notably by provisions of the 1940 Act and rules thereunder, the involvement or presence of Guggenheim’s affiliates in the offerings described above or the financial markets more broadly may restrict the Fund’s ability to acquire some securities or loans, even if they would otherwise be desirable investments for the Fund, or affect the timing or price of such acquisitions or the sale of an investment, which may adversely affect the Fund’s performance.
Subject to applicable law and regulation, personnel of the Guggenheim Entities may support the overall investment management functions of Guggenheim but may be subject to potential conflicts of interest with respect to certain investment opportunities and, as such, may have an incentive to identify investment opportunities for, and allocate investment opportunities to, third-parties. Similarly, to the extent that other Guggenheim Entities sponsor and manage funds that compete with the Fund’s investment programs, these funds may reduce capacity otherwise available to the Fund.
To the extent permitted by applicable law, Guggenheim and its affiliates may create, write, sell, issue, invest in or act as placement agent or distributor of derivative instruments related to the Fund, or with respect to portfolio holdings of the Fund, or which may be otherwise based on or seek to replicate or hedge the performance of the Fund. Such derivative transactions, and any associated hedging activity, may differ from and be adverse to the interests of the Fund.
Present and future activities of Guggenheim and its affiliates (and the role and relationships of Guggenheim’s personnel with other Guggenheim Entities), in addition to those described in this SAI, may give rise to additional or different conflicts of interest.
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Portfolio Manager Compensation. As discussed in this SAI, portfolio managers may own Fund shares, and a portion of their compensation may include equity in the form of shares of certain funds (other than the Fund) managed by the particular portfolio manager. As a result, a potential conflict of interest may arise to the extent a portfolio manager owns or has an interest in shares of a specific Fund or fund that he or she manages. These personal investments may create an incentive for a portfolio manager to favor such Fund or fund(s) over other advisory clients, including other funds.
HARRIS ASSOCIATES L.P. (“Harris”)
Sub-Advisor to the Equity Fund and the International Fund
Conflicts may arise when Harris manages the Fund(s) and has discretionary authority over other accounts. Specifically, conflicts of interest may arise in the allocation of investment opportunities and the allocation of aggregated orders among the Equity Fund, International Fund and the other accounts managed by the portfolio managers. A portfolio manager potentially could give favorable treatment to some accounts for a variety of reasons, including favoring larger accounts, accounts that have a different advisory fee arrangement (including any accounts that pay performance-based fees), accounts of affiliated companies, or accounts in which the portfolio manager has a personal investment. With respect to the allocation of investment opportunities, Harris makes decisions to recommend, purchase, sell or hold securities for all of its client accounts, including the Equity Fund and International Fund, based on the specific investment objectives, guidelines, restrictions and circumstances of each account. It is Harris’ policy to allocate investment opportunities to each account, including the Equity Fund and International Fund, over a period of time on a fair and equitable basis relative to its other accounts. With respect to the allocation of aggregated orders, each account that participates in the aggregated order will participate at the average share price, and where the order has not been completely filled, each institutional account, including the Equity Fund and International Fund, will generally participate on a pro rata basis.
Additionally, a conflict of interest might exist in the exercise of Harris’ proxy voting authority. For example, a conflict could arise when an issuer who is soliciting proxy votes also has a client relationship with Harris, when a client of Harris is involved in a proxy contest (such as a corporate director) or when one of Harris’ employees has a personal interest in a proxy matter.
Harris has compliance policies and procedures in place that it believes are reasonably designed to mitigate these conflicts. However, there is no guarantee that such procedures will detect each and every situation in which an actual or potential conflict may arise. Harris seeks to anticipate circumstances that could cause a conflict between the firm and its employees on the one hand and the firm’s clients on the other. Harris has adopted and enforces a Code of Ethics that sets forth specific requirements and restrictions to address and help mitigate potential conflicts.
LAZARD ASSET MANAGEMENT LLC (“LAZARD”)
Sub-Advisor to the International Fund
Lazard’s portfolio managers manage multiple accounts for a diverse client base, including private clients, institutions and investment funds. Lazard manages all portfolios on a team basis. The team is involved at all levels of the investment process. This team approach allows for every portfolio manager to benefit from his/her peers, and for clients to receive the firm’s best thinking, rather than that of a single portfolio manager. Lazard manages all like investment mandates against a model portfolio. Specific client objectives, guidelines or limitations then are applied against the model, and any necessary adjustments are made.
Although the potential for conflicts of interest exists when an investment adviser and portfolio managers manage other accounts that invest in securities in which the International Fund may invest or that may pursue a strategy similar to the Fund’s investment strategies implemented by Lazard (collectively, “Similar Accounts”), Lazard has procedures in place that are designed to ensure that all accounts are treated fairly and that the Fund is not
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disadvantaged, including procedures regarding trade allocations and “conflicting trades” (e.g., long and short positions in the same or similar securities). In addition, the Fund, as a registered investment company, is subject to different regulations than certain of the Similar Accounts, and, consequently, may not be permitted to engage in all the investment techniques or transactions, or to engage in such techniques or transactions to the same degree, as the Similar Accounts.
Potential conflicts of interest may arise because of Lazard’s management of the Fund and Similar Accounts, including the following:
1. Similar Accounts may have investment objectives, strategies and risks that differ from those of the Fund. In addition, the Fund is an open-end investment company and “diversified” as defined in the Investment Company Act, subject to different regulations than certain of the Similar Accounts and, consequently, may not be permitted to invest in the same securities, exercise rights to exchange or convert securities or engage in all the investment techniques or transactions, or to invest, exercise or engage to the same degree, as the Similar Accounts. For these or other reasons, the portfolio managers may purchase different securities for the Fund and the corresponding Similar Accounts, and the performance of securities purchased for the Fund may vary from the performance of securities purchased for Similar Accounts, perhaps materially.
2. Conflicts of interest may arise with both the aggregation and allocation of securities transactions and allocation of limited investment opportunities. Lazard may be perceived as causing accounts it manages to participate in an offering to increase Lazard’s overall allocation of securities in that offering, or to increase Lazard’s ability to participate in future offerings by the same underwriter or issuer. Allocations of bunched trades, particularly trade orders that were only partially filled due to limited availability, and allocation of investment opportunities generally, could raise a potential conflict of interest, as Lazard may have an incentive to allocate securities that are expected to increase in value to preferred accounts. Initial public offerings, in particular, are frequently of very limited availability. A potential conflict of interest may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as when a purchase increases the value of securities previously purchased by the other account, or when a sale in one account lowers the sale price received in a sale by a second account.
3. Portfolio managers may be perceived to have a conflict of interest because of the large number of Similar Accounts, in addition to the Fund, that they are managing on behalf of Lazard. Although Lazard does not track each individual portfolio manager’s time dedicated to each account, Lazard periodically reviews each portfolio manager’s overall responsibilities to ensure that he or she is able to allocate the necessary time and resources to effectively manage the Fund. Most of Lazard’s portfolio managers manage a significant number of Similar Accounts in addition to the Fund.
4. Generally, Lazard and/or its portfolio managers have investments in Similar Accounts. This could be viewed as creating a potential conflict of interest, since certain of the portfolio managers do not invest in the Fund.
5. The table above notes the portfolio managers who manage Similar Accounts with respect to which the advisory fee is based on the performance of the account, which could give the portfolio managers and Lazard an incentive to favor such Similar Accounts over the Fund.
6. Portfolio managers may place transactions on behalf of Similar Accounts that are directly or indirectly contrary to investment decisions made for the Fund, which could have the potential to adversely impact the Fund, depending on market conditions. In addition, if the Fund’s investment in an issuer is at a different level of the issuer’s capital structure than an investment in the issuer by Similar Accounts, in the event of credit deterioration of the issuer, there may be a conflict of interest between the Fund’s and such Similar Accounts’ investments in the issuer. If Lazard sells securities short, including on behalf of a Similar Account, it may be seen as harmful to the performance of the Fund to the extent it invests “long” in the same or similar securities whose market values fall as a result of short-selling activities.
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7. Investment decisions are made independently from those of the Similar Accounts. If, however, such Similar Accounts desire to invest in, or dispose of, the same securities as the Fund, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Fund or the price paid or received by the Fund.
8. Under Lazard’s trade allocation procedures applicable to domestic and foreign initial and secondary public offerings and Rule 144A transactions (collectively herein a “Limited Offering”), Lazard will generally allocate Limited Offering shares among client accounts, including the Fund, pro rata based upon the aggregate asset size (excluding leverage) of the account. Lazard may also allocate Limited Offering shares on a random basis, as selected electronically, or other basis. It is often difficult for the Adviser to obtain a sufficient number of Limited Offering shares to provide a full allocation to each account. Lazard’s allocation procedures are designed to allocate Limited Offering securities in a fair and equitable manner.
LITMAN GREGORY
Advisor to the Funds
Litman Gregory has overall responsibility for assets under management and conducts oversight and evaluation of the Funds’ investment managers and other duties. Litman Gregory generally does not make day-to-day decisions with respect to the purchase and sale of portfolio securities by the Funds. Accordingly, no material conflicts of interest are expected to arise between the Funds and other accounts managed by the portfolio managers. Litman Gregory has adopted compliance policies, including allocation policies and a code of ethics, which are intended to prevent or mitigate conflicts of interest, if any, that may arise.
LOOMIS, SAYLES & COMPANY, L.P. (“Loomis Sayles”)
Sub-Advisor to the Alternative Strategies Fund
Conflicts of interest may arise in the allocation of investment opportunities and the allocation of aggregated orders among the Alternative Strategies Fund and other accounts managed by the portfolio managers. A portfolio manager potentially could give favorable treatment to some accounts for a variety of reasons, including favoring larger accounts, accounts that pay higher fees, accounts that pay performance-based fees, accounts of affiliated companies and accounts in which the portfolio manager has an interest. Such favorable treatment could lead to more favorable investment opportunities or allocations for some accounts. Loomis Sayles makes investment decisions for all accounts (including institutional accounts, mutual funds, hedge funds and affiliated accounts) based on each account’s availability of other comparable investment opportunities and Loomis Sayles’ desire to treat all accounts fairly and equitably over time. Loomis Sayles maintains trade allocation and aggregation policies and procedures to address these potential conflicts. Conflicts of interest also arise to the extend a portfolio manager short sells a stock in one client account but holds that stock long in other accounts, including the Alternative Strategies Fund, or sells a stock for some accounts while buying the stock for others, and through the use of “soft dollar arrangements,” which are addressed in Loomis Sayles’ Brokerage Allocation Policies and Procedures and Loomis Sayles’ Trade Aggregation and Allocation Policies and Procedures.
NEUBERGER BERMAN INVESTMENT ADVISERS LLC (“Neuberger Berman”)
Sub-Advisor to the High Income Alternatives Fund
Actual or apparent conflicts of interest may arise when a Portfolio Manager for Neuberger Berman has day-to-day management responsibilities with respect to more than one fund or other account. The management of multiple funds and accounts (including proprietary accounts) may give rise to actual or potential conflicts of interest if the funds and accounts have different or similar objectives, benchmarks, time horizons, and fees, as the Portfolio Manager must allocate his or her time and investment ideas across multiple funds and accounts. The Portfolio Manager may execute transactions for another fund or account that may adversely impact the value of securities or instruments held by a fund, and which may include transactions that are directly contrary to the positions taken by a
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fund. For example, a Portfolio Manager may engage in short sales of securities or instruments for another account that are the same type of securities or instruments in which a fund it manages also invests. In such a case, the Portfolio Manager could be seen as harming the performance of the fund for the benefit of the account engaging in short sales if the short sales cause the market value of the securities or instruments to fall. Additionally, if a Portfolio Manager identifies a limited investment opportunity that may be suitable for more than one fund or other account, a fund may not be able to take full advantage of that opportunity. There may also be regulatory limitations that prevent a fund from participating in a transaction that another account or fund managed by the same Portfolio Manager will invest. For example, the 1940 Act prohibits the mutual funds from participating in certain transactions with certain of its affiliates and from participating in “joint” transactions alongside certain of its affiliates. The prohibition on “joint” transactions may limit the ability of the funds to participate alongside its affiliates in privately negotiated transactions unless the transaction is otherwise permitted under existing regulatory guidance and may reduce the amount of privately negotiated transactions that the funds may participate in. Further, Neuberger Berman may take an investment position or action for a fund or account that may be different from, inconsistent with, or have different rights than (e.g., voting rights, dividend or repayment priorities or other features that may conflict with one another), an action or position taken for one or more other funds or accounts, including a fund, having similar or different objectives. A conflict may also be created by investing in different parts of an issuer’s capital structure (e.g., equity or debt, or different positions in the debt structure). Those positions and actions may adversely impact, or in some instances benefit, one or more affected accounts, including the funds. Potential conflicts may also arise because portfolio decisions and related actions regarding a position held for a fund or another account may not be in the best interests of a position held by another fund or account having similar or different objectives. If one account were to buy or sell portfolio securities or instruments shortly before another account bought or sold the same securities or instruments, it could affect the price paid or received by the second account. Securities selected for funds or accounts other than a fund may outperform the securities selected for the fund. Finally, a conflict of interest may arise if Neuberger Berman and a Portfolio Manager have a financial incentive to favor one account over another, such as a performance-based management fee that applies to one account but not all funds or accounts for which the Portfolio Manager is responsible. In the ordinary course of operations certain businesses within the Neuberger Berman organization (“NB”) will seek access to material non-public information. For instance, Neuberger Berman portfolio managers may obtain and utilize material non-public information in purchasing loans and other debt instruments and certain privately placed or restricted equity instruments. From time to time, NB portfolio managers will be offered the opportunity on behalf of applicable clients to participate on a creditors or other similar committee in connection with restructuring or other “work-out” activity, which participation could provide access to material non-public information. NB maintains procedures that address the process by which material non-public information may be acquired intentionally by NB. When considering whether to acquire material non-public information, NB will attempt to balance the interests of all clients , taking into consideration relevant factors, including the extent of the prohibition on trading that would occur, the size of NB’s existing position in the issuer, if any, and the value of the information as it relates to the investment decision-making process. The acquisition of material non-public information would likely give rise to a conflict of interest since NB may be prohibited from rendering investment advice to clients regarding the securities or instruments of such issuer and thereby potentially limiting the universe of securities or instruments that NB, including a fund, may purchase or potentially limiting the ability of NB, including a fund, to sell such securities or instruments. Similarly, where NB declines access to (or otherwise does not receive or share within NB) material non-public information regarding an issuer, the portfolio managers could potentially base investment decisions with respect to assets of such issuer solely on public information, thereby limiting the amount of information available to the portfolio managers in connection with such investment decisions. In determining whether or not to elect to receive material non-public information, NB will endeavor to act fairly to its clients as a whole. NB reserves the right to decline access to material non-public information, including declining to join a creditors or similar committee.
Neuberger Berman has adopted certain compliance procedures which are designed to address these types of conflicts. However, there is no guarantee that such procedures will detect each and every situation in which a conflict arises.
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NUANCE INVESTMENTS, LLC (“Nuance”)
Sub-Advisor to the Equity Fund
Nuance’s management of other accounts may give rise to potential conflicts of interest in connection with the management of the Equity Fund’s investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Equity Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby Nuance could favor one account over another. Another potential conflict could include Nuance’s knowledge about the size, timing and possible market impact of Equity Fund trades, whereby Nuance could use this information to the advantage of other accounts and to the disadvantage of the Equity Fund. However, Nuance has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
OLDFIELD PARTNERS LLP (“OP”)
Sub-Advisor to the Oldfield International Value Fund
As a general matter, OP attempts to minimize conflicts of interest and has implemented policies and procedures identifying circumstances that might give rise to conflicts of interest. OP’s portfolio managers may manage multiple accounts which may give rise to potential conflicts of interest. Some of these accounts may have the same investment objective as the Fund; a potential conflict of interest may arise as a result of identical investment objectives, whereby the portfolio manager could favor one account over another account. In order to address such potential conflicts, OP manages all global equity accounts in line, except for client specific restrictions which can occasionally cause small differences. Decisions for global equity portfolios are made across all portfolios and trades are created for all accounts in one block, ensuring each client receives the same price. In addition, the firm manages long only portfolios and does have any strategies that hedge. This means there is no possibility of one strategy being short of a position or exposure that is held as a long position in another strategy. Where possible, OP will aggregate orders for clients for the purchase or sale of the same security using the same executing broker. Such aggregation may enable OP to obtain for clients a more favorable price or a better commission rated based upon the volume of a particular transaction. Nevertheless, there may be circumstances when aggregation works to the disadvantage of a client. OP will aggregate client orders where it reasonably believes that it is in clients’ overall best interests or to provide equitable treatment. OP’s allocation procedures are reasonably designed to ensure that no unfair preference is given to any client. OP also requires its employees to obtain prior approval from the Compliance Officer of all outside business interests. The Compliance Officer considers any conflicts as part of the approval process and would consider any new conflicts arising after approval is given.
On occasion, OP and its principals and employees may buy and sell securities for themselves that they also recommend to clients. OP and its principals and employees are also investors in some of the investment funds managed by OP. OP has adopted a Code of Ethics that is reasonably designed to address conflicts that may arise with respect to these transactions. All employees are required to seek prior approval for and to report their personal securities transactions and holdings to the Chief Compliance Officer.
PICTET ASSET MANAGEMENT LIMITED (“Pictet”)
Sub-Advisor to the International Fund
Pictet is governed by The Financial Conduct Authority (FCA). The FCA is a financial regulatory body in the United Kingdom, but operates independently of the U.K. government, and is financed by charging fees to members of the financial services industry. Pictet is required under FCA rules (a) to take all reasonable steps to identify conflicts of interest between (i) Pictet (including its staff or any person directly, or indirectly linked to us by control) and a client, or (ii) one client and another; (b) maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of its clients; and (c) establish, implement and maintain an effective written conflicts of interest policy (“the Conflicts of Interest Policy”) which identifies those conflicts of interest which constitute or may give rise to a conflict of interest entailing a material risk of damage to the interests of one or more clients and the procedures which are followed to manage such conflicts.
Pictet is also registered with the SEC which has similar requirements for the identification and management of conflicts of interest. This includes the requirement to make full and fair disclosure to clients of all material facts about the advisory relationship, particularly regarding conflicts of interest.
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SANDS CAPITAL MANAGEMENT, LLC (“Sands Capital”)
Sub-Advisor to the Equity Fund
As an investment adviser to a variety of clients, Sands Capital recognizes there may be actual or potential conflicts of interest inherent in the firm’s activities. For example, conflicts of interest could result from portfolio managers’ management of multiple accounts for multiple clients, the execution and allocation of investment opportunities, the use of brokerage commissions to obtain research, and personal trading by employees. These conflicts have been addressed by developing policies and procedures reasonably designed to treat all clients in a fair and equitable manner over time. The firm’s policies and procedures address such issues as execution of portfolio transactions, aggregation and allocation of trades, directed brokerage, and the use of brokerage commissions. Additionally, the Code of Ethics and Insider Trading Policy and Procedures address rules on personal trading and insider information.
SEGALL BRYANT & HAMILL, LLC (“SBH”)
Sub-Advisor to the SBH Focused Small Value Fund
Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one fund or other account. Where conflicts of interest arise between the SBH Focused Small Value Fund and other accounts managed by the portfolio managers, SBH will proceed in a manner that ensures that the SBH Focused Small Value Fund will not be treated less favorably. There may be instances where similar portfolio transactions may be executed for the same security for numerous accounts managed by the portfolio managers. In such instances, securities will be allocated in accordance with SBH’s trade allocation policy. SBH has also adopted policies and procedures that address potential conflicts of interest that may arise related to personal investing activities, structure of portfolio manager compensation, conflicting investment strategies and proxy voting of portfolio securities.
WATER ISLAND CAPITAL, LLC (“Water Island”)
Sub-Advisor to the Alternative Strategies Fund
Water Island maintains policies and procedures reasonably designed to detect and minimize potential conflicts of interest inherent in circumstances when a portfolio manager has day-to-day responsibilities for managing multiple portfolios. Other portfolios managed by Water Island may include, without limitation: separately managed accounts, registered investment companies, unregistered investment companies such as pooled investment vehicles and hedge funds, and proprietary accounts. However, no set of policies and procedures can possibly anticipate or relieve all potential conflicts of interest. These conflicts may be real, potential, or perceived. Certain of these conflicts are described below.
Allocation of Limited Investment Opportunities. If a portfolio manager identifies a limited investment opportunity (including initial public offerings and private placement securities) that may be suitable for multiple funds and/or accounts, the investment opportunity may be allocated among these multiple funds or accounts, which may limit a client’s ability to take full advantage of the investment opportunity, due to liquidity constraints or other factors. Water Island has adopted trade aggregation and allocation procedures designed to ensure that allocations of limited investment opportunities are conducted in a fair and equitable manner among client accounts, including the Alternative Strategies Fund. Nevertheless, investment opportunities may be allocated differently among client accounts due to the characteristics of an account, such as the size of the account, cash position, investment guidelines and restrictions, or risk controls.
Similar Investment Strategies. Water Island and its portfolio management team may manage multiple portfolios with similar investment strategies. Investment decisions for each portfolio are generally made based on
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each portfolio’s investment objectives and guidelines, cash availability, current holdings, and risk controls. Purchases or sales of securities for a portfolio may be appropriate for other portfolios with like objectives and may be bought or sold in different amounts and at different times in multiple portfolios. In these cases, transactions are allocated to portfolios in a manner believed fair and equitable across client account portfolios by Water Island’s allocation methodology. Purchase and sale orders for a portfolio may be combined with those of other portfolios in the interest of achieving the most favorable net results for all portfolios.
Different Investment Strategies. Water Island and its portfolio management team may manage multiple portfolios with different investment strategies. As such, the potential exists for short sales of securities in certain portfolios while the same security is held long in one or more other portfolios. In an attempt to mitigate the inherent risks of simultaneous management of portfolios with different investment strategies, Water Island has established and implemented procedures to promote fair and equitable treatment of all portfolios. The procedures include monitoring and surveillance of trading activity and supervisory reviews of accounts. Any proposed cross trades must be reviewed and approved by Water Island’s compliance department prior to execution and must comply with Rule 17a-7 under the 1940 Act.
Differences in Financial Incentives. A conflict of interest may arise where the financial or other benefits available to a portfolio manager or an investment adviser differ among the funds and/or accounts under management. For example, when the structure of an investment adviser’s management fee differs among the funds and/or accounts under its management (such as where certain funds or accounts pay higher management fees or performance-based management fees), a portfolio manager might be motivated to favor certain funds and/or accounts over others. Performance-based fees could also create an incentive for an investment adviser to make investments that are riskier or more speculative. In addition, a portfolio manager might be motivated to favor funds and/or accounts in which the portfolio manager or Water Island has a financial interest. For instance, Water Island may from time to time establish “pilot” or “incubator” funds for the purpose of testing proposed investment strategies or products prior to accepting assets from outside investors. Typically, Water Island or an affiliate supplies the funding for these accounts. Employees of Water Island, including portfolio managers of the Alternative Strategies Fund, may also invest in certain pilot accounts. Similarly, the desire to maintain or raise assets under management or to enhance the portfolio manager’s performance record in a particular investment strategy or to derive other rewards, financial or otherwise, could influence a portfolio manager to lend preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager. To manage conflicts that arise from management of portfolios that may have differences in financial incentives, performance in portfolios with like strategies is regularly reviewed by management. Moreover, Water Island has adopted a policy to treat pilot accounts in the same manner as other client accounts for purposes of trade aggregation and allocation -- neither favoring nor disfavoring them (except that pilot accounts do not receive allocations of initial public offerings or private placement securities unless other accounts receive a full allocation first).
Selection of Brokers/Dealers. A portfolio manager may be able to select or influence the selection of the brokers/dealers that are used to execute securities transactions. In addition to executing trades, some brokers/dealers provide Water Island with brokerage and research services (as those terms are defined in Section 28(e) of the Exchange Act), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain accounts than to others. To be assured of continuing to receive services considered of value to the Alternative Strategies Fund and its other clients, Water Island has adopted a brokerage allocation policy embodying the concepts of Section 28(e) of the Exchange Act. A portfolio manager’s decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the accounts that they manage, although the payment of brokerage commissions is always subject to the requirement that Water Island determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services received.
Personal Holdings and Transactions. Water Island’s portfolio managers and other employees may have beneficial ownership of holdings in personal accounts that are the same or similar to those held in client accounts, including the Alternative Strategies Fund. Under limited circumstances, Water Island allows its employees to trade
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in securities that it recommends to advisory clients, and the actions taken by such individuals on a personal basis may differ from, or be inconsistent with, the nature and timing of advice or actions taken by Water Island for its client accounts. Water Island and its employees may also invest in registered investment companies and other pooled investment vehicles that are managed by Water Island. This may result in a potential conflict of interest since Water Island’s employees have knowledge of such funds’ investment holdings, which is non-public information. Water Island has implemented a Code of Ethics which is designed to address and mitigate the possibility that these professionals could place their own interests ahead of those of clients. The Code of Ethics addresses this potential conflict of interest by imposing preclearance and reporting requirements, trading blackout periods, a minimum holding period, supervisory oversight, and other measures designed to reduce conflicts of interest.
Water Island and the Alternative Strategies Fund’s portfolio managers may also face other potential conflicts of interest in the management of the Alternative Strategies Fund and other client accounts, and the examples above are not intended to provide an exhaustive list or complete description of every conflict that may arise.
Compensation Structure and Methods
The following section describes the structure of, and the methods used to determine the different types of compensation (e.g., salary, bonus, deferred compensation, retirement plans and arrangements) for each of the Funds’ portfolio managers as of the fiscal year ended December 31, 2020.
BBH
Sub-Advisor to the High Income Alternatives Fund
BBH portfolio managers are paid a fixed base salary and variable incentives based on performance, investment strategy performance, and the overall profitability of BBH. Base salaries are determined within a market competitive salary range, based on experience and performance, and is consistent with the salaries paid to other fixed income portfolio managers of BBH. The variable incentives are composed of two separate elements. The first element is a cash bonus paid at the end of each calendar year based on multiple performance criteria using a Balanced Scorecard methodology (the “Performance Bonus”). The second and typically smaller element is participation in a profit sharing plan that allows all employees to share in the success of BBH in meeting its profit objectives. This participation is a uniform portion of each employee’s base salary and is paid to each employee’s 401(k) account that vests over time. The main criteria for establishing Performance Bonuses are the investment performance of the portfolios managed and their respective leadership, collaboration, and communication skills.
DAVIS ADVISORS
Sub-Advisor to the Equity Fund
Christopher C. Davis’ annual compensation as an employee and general partner of Davis Advisors consists of a base salary.
Danton Goei’s compensation for services provided to the Sub-Advisor consists of: (i) a base salary; (ii) an annual discretionary bonus; (iii) awards of equity (“Units”) in Davis Selected Advisers, L.P., including Units and/or phantom Units; (iv) an incentive plan whereby the Sub-Advisor purchases shares in certain mutual funds managed by the Sub-Advisor, which vest based on the passage of time provided that the Portfolio Manager is still employed by the Sub-Advisor; and (v) an incentive plan whereby the Sub-Advisor purchases shares in selected mutual funds managed by the Sub-Advisor. At the end of specified periods, generally five-years following the date of purchase, some, all or none of the Fund shares will be registered in the employee’s name based on Fund performance, after expenses on a pre-tax basis, versus the Fund’s benchmark index, as described in the Fund’s prospectus or, in limited cases, based on performance ranking among established peer groups. The Sub-Advisor does not purchase incentive shares in every fund these portfolio managers manage or assist on. In limited cases, such incentive compensation is tied on a memorandum basis to the performance of the portion of the Fund (“sleeve”) managed by the analyst versus the Fund’s benchmark.
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The Sub-Advisor’s portfolio managers are provided benefits packages including life insurance, health insurance, and participation in the Sub-Advisor’s 401(k) plan comparable to that received by other company employees.
Sub-Advisor to the Alternative Strategies Fund
BXCSS’s financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary and a discretionary bonus.
Base Compensation. Generally, portfolio managers receive base compensation and employee benefits based on their individual seniority and/or their position with the firm.
Discretionary Compensation. In addition to base compensation, portfolio managers may receive discretionary compensation. Discretionary compensation is based on individual seniority, contributions to BXCSS and performance of the client assets for which the portfolio manager has primary responsibility. The discretionary compensation is not based on a precise formula, benchmark or other metric. These compensation guidelines are structured to closely align the interests of employees with those of BXCSS and its clients.
DOUBLELINE
Sub-Advisor to the Alternative Strategies Fund
The overall objective of the compensation program for the portfolio managers employed by the Sub-Advisor is for the Sub-Advisor to attract competent and expert investment professionals and to retain them over the long-term. Compensation is comprised of several components which, in the aggregate, are designed to achieve these objectives and to reward the Sub-Advisor’s portfolio managers for their contribution to the success of the clients and the Sub-Advisor. The Sub-Advisor’s Portfolio managers are compensated through a combination of base salary, discretionary bonus and, in some cases, equity participation in the Sub-Advisor.
Salary. Salary is agreed to with managers at time of employment and is reviewed from time to time. It does not change significantly and often does not constitute a significant part of a portfolio manager’s compensation.
Discretionary Bonus/Guaranteed Minimums. Portfolio managers receive discretionary bonuses. However, in some cases, pursuant to contractual arrangements, some portfolio managers may be entitled to a mandatory minimum bonus if the sum of their salary and profit sharing does not reach certain levels.
Equity Incentives. Some portfolio managers participate in equity incentives based on overall firm performance of the Sub-Advisor, through direct ownership interests in the Sub-Advisor. These ownership interests or participation interests provide eligible portfolio managers the opportunity to participate in the financial performance of the Sub-Advisor. Participation is generally determined in the discretion of the Sub-Advisor, taking into account factors relevant to the portfolio manager’s contribution to the success of the Sub-Advisor.
Other Plans and Compensation Vehicles. Portfolio managers may elect to participate in the Sub-Advisor’s 401(k) plan, to which they may contribute a portion of their pre- and post-tax compensation to the plan for investment on a tax-deferred basis. The Sub-Advisor may also choose, from time to time, to offer certain other compensation plans and vehicles, such as a deferred compensation plan, to portfolio managers.
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Summary. As described above, an investment professional’s total compensation is determined through a subjective process that evaluates numerous quantitative and qualitative factors, including the contribution made to the overall investment process. Not all factors apply to each employee and there is no particular weighting or formula for considering certain factors. Among the factors considered are: relative investment performance of portfolios (although there are no specific benchmarks or periods of time used in measuring performance); complexity of investment strategies; participation in the investment team’s dialogue; contribution to business results and overall business strategy; success of marketing/business development efforts and client servicing; seniority/length of service with the firm; management and supervisory responsibilities; and fulfillment of the Sub-Advisor’s leadership criteria.
EVERMORE
Sub-Advisor to the International Fund
Because Mr. Marcus may manage other accounts, including accounts that may pay higher fees or accounts that may pay performance-based fees, potential conflicts of interest could exist, including potential conflicts between the investment strategy of the International Fund and the investment strategy of the other accounts managed by the portfolio manager and potential conflicts in the allocation of investment opportunities between the International Fund and the other accounts.
Mr. Marcus is a member of Evermore. His compensation consists of a fixed based salary and a membership interest in the firm’s profits. Mr. Marcus may also participate in Evermore’s matching 401(k) retirement plan. He may receive bonuses based on the performance of his duties and his contribution to Evermore. The compensation program does not disproportionately reward outperformance by higher fee/performance fee products. Evermore’s profits interest is the primary incentive for persons to maintain employment with Evermore. Evermore believes this is the best incentive to maintain stability of portfolio management personnel.
FMI
Sub-Advisor to the Equity Fund
Patrick J. English. Mr. English’s salary is based upon revenues of FMI. The type of account and source of the revenues has no bearing upon the salary except insofar as they affect the revenues of the company.
Jonathan T. Bloom. Mr. Bloom’s salary and bonus are based upon the revenues of FMI. The type of account has no bearing upon the salary and bonus except insofar as they affect the revenues of the company.
FIRST PACIFIC
Sub-Advisor to the Alternative Strategies Fund
Compensation of the portfolio managers consists of: (i) a base salary; (ii) an annual bonus; and (iii) for the portfolio managers that are equity owners of the firm, participation in residual profits of the firm.
The bonus calculation has both variable and fixed components and is primarily based on the revenues received on the assets managed by the portfolio managers, including the relevant account’s assets. The most significant portion of the variable component is based upon the firm’s assessment of the portfolio managers’ performance in three key areas: long-term performance, team building, and succession planning. The firm assesses long-term performance over a full market cycle, which generally lasts between five and ten years. Other considerations include portfolio manager and strategy recognition, client engagement and retention, and business development. The portfolio managers can receive 100% of their variable participation even if the strategy is closed to investors. In addition, the value of a portfolio manager’s equity ownership interest in the firm is dependent upon his ability to effectively manage the business over the long term, which includes the three main components discussed above: long-term performance, team-building and succession planning.
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First Pacific believes this compensation structure aligns the interests of the portfolio managers with those of investors by reducing conflicts such as disparate compensation structures, establishing appropriate fee rates for accounts in the strategy and keeping the portfolio managers incentivized in areas such as long-term performance, team building and succession.
Compensation for some of the firm’s investment professionals involved in the management of certain UCITs accounts is governed by the provisions of the firm’s Remuneration Policy which is designed to comply with requirements mandated by the European Securities and Markets Authority’s ‘Guidelines on sound remuneration policies under the UCITS Directive and AIFMD.
GUGGENHEIM
Sub-Advisor to the High Income Alternatives Fund
Guggenheim compensates portfolio managers for their management of a fund’s portfolio. Compensation is evaluated qualitatively based on their contribution to investment performance and factors such as teamwork and client service efforts. The portfolio managers’ incentives may include: a competitive base salary, bonus determined by individual and firm wide performance, equity participation, co-investment options, and participation opportunities in various investments, including through deferred compensation programs. All employees of Guggenheim are also eligible to participate in a 401(k) plan to which a discretionary match may be made after the completion of each plan year. Guggenheim’s deferred compensation programs include equity that vests over a period of years, including equity in the form of shares of fund(s) managed by the particular portfolio manager. The value of the fund shares under the deferred compensation program is awarded annually and each award vests over a period of years (generally 4 years). A portfolio manager’s ownership of shares of a fund managed by the portfolio manager may create conflicts of interest that incentivize the portfolio manager to favor such fund over other funds or other accounts.
HARRIS
Sub-Advisor to the Equity Fund and the International Fund
Compensation
Harris receives fees based on the assets under management of the Equity Fund and International Fund, respectively, as set forth in the Investment Sub-Advisory Agreements between Harris and Litman Gregory.
Harris is solely responsible for compensating its portfolio managers. Compensation for each of its portfolio managers is based on Harris’ assessment of the individual’s long-term contribution to the investment success of the firm. Each portfolio manager receives a base salary and participates in a discretionary bonus pool. In addition, most of the portfolio managers also participate in a long-term compensation plan that provides current compensation to certain key employees of Harris and deferred compensation to both current and former key employees. The compensation plan consists of bonus units awarded to participants that vest and are paid out over a period of time.
The determination of the amount of such portfolio manager’s base salary and discretionary bonus participation and, where applicable, participation in the long-term compensation plan is based on a variety of qualitative and quantitative factors. The factor given the most significant weight is the subjective assessment of the individual’s contribution to the overall investment results of Harris’ domestic or international investment group, whether as a portfolio manager, a research analyst or both.
The quantitative factors considered in evaluating the contribution of a portfolio manager include the performance of the portfolios managed by that individual relative to benchmarks, peers and other portfolio managers, as well as the assets under management in the accounts managed by the portfolio manager. The portfolio managers’ compensation is not based solely on an evaluation of the performance of the accounts or the amount of assets under management. Performance is measured in a number of ways, including by funds, accounts and by
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strategy, and is compared to one or more of the following benchmarks: S&P 500® Index, Russell Mid-Cap® Value Index, Russell 1000® Value Index, Lipper Balanced Funds Index (60% S&P 500® Index and 40% Barclays Bond Index), MSCI World Index, MSCI World ex U.S. Index, MSCI World ex-U.S. Small Cap Index and Harris’ approved lists of stocks, depending on whether the portfolio manager manages accounts in the particular strategy to which these benchmarks would be applicable. Performance is measured over short and long term periods, including one year, three years, five years, ten years and since a fund’s inception or since a portfolio manager has been managing a fund, as applicable. Performance is measured on a pre-tax and after-tax basis to the extent such information is available.
If a portfolio manager also serves as a research analyst, then his compensation is also based on the contribution made to Harris in that role. The specific quantitative and qualitative factors considered in evaluating a research analyst’s contributions include, among other things, new investment ideas, the performance of investment ideas covered by the analyst during the current year as well as over longer-term periods, the portfolio impact of the analyst’s investment ideas, other contributions to the research process, and an assessment of the quality of analytical work. If a portfolio manager also serves as a research analyst, then such manager may participate in a long-term compensation plan that may provide future compensation upon vesting after a multi-year period. The plan consists of an award based on a quantitative evaluation of the performance of the investment ideas covered by the analyst over the same multi-year period. In addition, an individual’s other contributions to Harris, such as a role in investment thought leadership and management, are taken into account in the overall compensation process.
LAZARD
Sub-Advisor to the International Fund
Lazard compensates key investment personnel by a competitive salary and bonus structure, which is determined both quantitatively and qualitatively.
Salary and bonus are paid in cash, stock and restricted interests in funds managed by Lazard or its affiliates. Portfolio managers are compensated on the performance of the aggregate group of portfolios managed by them rather than for a specific fund or account. Various factors are considered in the determination of a portfolio manager’s compensation. All of the portfolios managed by a portfolio manager are comprehensively evaluated to determine his or her positive and consistent performance contribution over time. Further factors include the amount of assets in the portfolios as well as qualitative aspects that reinforce Lazard’s investment philosophy.
Total compensation is generally not fixed, but rather is based on the following factors: (i) leadership, teamwork and commitment; (ii) maintenance of current knowledge and opinions on companies owned in the portfolio; (iii) generation and development of new investment ideas, including the quality of security analysis and identification of appreciation catalysts; (iv) ability and willingness to develop and share ideas on a team basis; and (v) the performance results of the portfolios managed by the investment teams of which the portfolio manager is a member.
A variable bonus is based on the portfolio manager’s quantitative performance as measured by his or her ability to make investment decisions that contribute to the pre-tax absolute and relative returns of the accounts managed by the teams of which the portfolio manager is a member, by comparison of each account to a predetermined benchmark (as set forth in the prospectus or other governing document) over the current fiscal year and the longer-term performance of such account, as well as performance of the account relative to peers. In addition, the portfolio manager’s bonus can be influenced by subjective measurement of the manager’s ability to help others make investment decisions. A portion of a portfolio manager’s variable bonus is awarded under a deferred compensation arrangement pursuant to which the portfolio manager may allocate certain amounts awarded among certain accounts in shares that vest in two to three years. Certain portfolio managers’ bonus compensation may be tied to a fixed percentage of revenues or assets generated by the accounts managed by such portfolio management teams.
85
LITMAN GREGORY
Advisor to the Funds
Litman Gregory’s portfolio managers are compensated based on a fixed salary and a distribution of Litman Gregory’s profits commensurate with the portfolio managers’ respective ownership percentages in the parent company of the Advisor.
LOOMIS SAYLES
Sub-Advisor to the Alternative Strategies Fund
Loomis Sayles believes that portfolio manager compensation should be driven primarily by the delivery of consistent and superior long-term performance for its clients. Portfolio manager compensation is made up primarily of three main components: base salary, variable compensation and a long-term incentive program. Although portfolio manager compensation is not directly tied to assets under management, a portfolio manager’s base salary and/or variable compensation potential may reflect the amount of assets for which the manager is responsible relative to other portfolio managers. Loomis Sayles also offers a profit sharing plan and a defined benefit plan to all employees hired before May 3, 2003.
Base salary is a fixed amount based on a combination of factors, including industry experience, firm experience, job performance and market considerations.
Variable compensation is an incentive-based component and generally represents a significant multiple of base salary. Variable compensation is based on four factors: investment performance, profit growth of the firm, profit growth of the manager’s business unit and personal conduct. Investment performance is the primary component of total variable compensation and generally represents at least 60% of the total for fixed income managers. The other three factors are used to determine the remainder of variable compensation, subject to the discretion of the firm’s Chief Investment Officer and senior management. The Chief Investment Officer and senior management evaluate these other factors annually.
While mutual fund performance and asset size do not directly contribute to the compensation calculation, investment performance for fixed income managers is measured by comparing the performance of Loomis Sayles’ institutional composite (pre-tax and net of fees) in the manager’s style to the performance of an external benchmark and a customized peer group. The benchmark used for the investment style utilized for the Alternative Strategies Fund is the 3-Month LIBOR. The customized peer group is created by Loomis Sayles and is made up of institutional managers in the particular investment style. A portfolio manager’s relative performance for the past five years, or seven years for some products, is used to calculate the amount of variable compensation payable due to performance. To ensure consistency, Loomis Sayles analyzes the five- or seven-year performance on a rolling three-year basis. If a manager is responsible for more than one product, the rankings of each product are weighted based on relative revenue size of accounts represented in each product.
Loomis Sayles uses both an external benchmark and a customized peer group as a point of comparison for fixed income manager performance because Loomis Sayles believes they represent an appropriate combination of the competitive fixed-income product universe and the investment styles offered by Loomis Sayles.
In addition to the compensation described above, portfolio managers may receive additional compensation based on the overall growth of their strategies.
General
Most mutual funds do not directly contribute to a portfolio manager’s overall compensation because Loomis Sayles uses the performance of the portfolio manager’s institutional accounts compared to an institutional peer group. However, each fund managed by Loomis Sayles employs strategies endorsed by Loomis Sayles and fits into the product category for the relevant investment style. Loomis Sayles may adjust compensation if there is significant dispersion among the returns of the composite and accounts not included in the composite.
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Loomis Sayles has developed and implemented two distinct long-term incentive plans to attract and retain investment talent. These plans supplement existing compensation and apply to certain portfolio managers, certain other investment talent, and certain high-ranking officers. The first plan has several important components distinguishing it from traditional equity ownership plans:
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•
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The plan grants units that entitle participants to an annual payment based on a percentage of company earnings above an established threshold;
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•
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Upon retirement a participant will receive a multi-year payout for his or her vested units;
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•
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Participation is contingent upon signing an award agreement, which includes a non-compete covenant.
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The second plan grants participants an annual participation in company earnings is deferred for two years from the time of award and is only payable if the portfolio manager remains at Loomis Sayles. In this plan, there are no post-retirement payments or non-compete covenants, but there is a non-solicitation covenant.
Senior management expects that the variable compensation portion of overall compensation will continue to remain the largest source of income for those investment professionals included in the plan. The plan(s) was/were initially offered to portfolio managers and over time, the scope of eligibility widened to include other key investment professionals. Management has full discretion over what units are issued and to whom.
Portfolio managers also participate in the Loomis Sayles profit sharing plan, in which Loomis Sayles makes a contribution to the retirement plan of each employee based on a percentage of base salary (up to a maximum amount). The portfolio managers may also participate in the Loomis Sayles defined benefit pension plan, which applies to all Loomis Sayles employees who joined the firm prior to May 3, 2003. The defined benefit is based on years of service and base compensation (up to a maximum amount).
In addition, portfolio managers may also participate in the Loomis Sayles deferred compensation plan which requires all Loomis Sayles employees to defer 50% of their annual bonus if in excess of a certain dollar amount, except for those Loomis Sayles employees who will be age 61 or older on the date the bonus is awarded. These amounts are deferred over a two year period with 50% being paid out one year from the bonus anniversary date and the second 50% being paid out two years from the bonus anniversary date. These deferrals are deposited into an investment account on the Loomis Sayles employee’s behalf, but the employee must be with Loomis Sayles on the vesting dates in order to receive the deferred bonus.
NEUBERGER BERMAN
Sub-Advisor to the High Income Alternatives Fund
Neuberger Berman’s compensation philosophy is one that focuses on rewarding performance and incentivizing our employees. Neuberger Berman is also focused on creating a compensation process that it believes is fair, transparent, and competitive with the market.
Compensation for Portfolio Managers consists of fixed (salary) and variable (bonus) compensation but is more heavily weighted on the variable portion of total compensation and is paid from a team compensation pool made available to the portfolio management team with which the Portfolio Manager is associated. The size of the team compensation pool is determined based on a formula that takes into consideration a number of factors including the pre-tax revenue that is generated by that particular portfolio management team, less certain adjustments. The bonus portion of the compensation is discretionary and is determined on the basis of a variety of criteria, including investment performance (including the aggregate multi-year track record), utilization of central resources (including research, sales and operations/support), business building to further the longer term sustainable
87
success of the investment team, effective team/people management, and overall contribution to the success of the Neuberger Berman organization (“NB”). Certain Portfolio Managers may manage products other than mutual funds, such as high net worth separate accounts. For the management of these accounts, a Portfolio Manager may generally receive a percentage of pre-tax revenue determined on a monthly basis less certain deductions. The percentage of revenue a Portfolio Manager receives pursuant to this arrangement will vary based on certain revenue thresholds.
The terms of Neuberger Berman’s long-term retention incentives are as follows:
Employee-Owned Equity. Certain employees (primarily senior leadership and investment professionals) participate in NB’s equity ownership structure, which was designed to incentivize and retain key personnel. In addition, in prior years certain employees may have elected to have a portion of their compensation delivered in the form of equity. Neuberger Berman also offers an equity acquisition program which allows employees a more direct opportunity to invest in NB. For confidentiality and privacy reasons, Neuberger Berman cannot disclose individual equity holdings or program participation.
Contingent Compensation. Certain employees may participate in the Neuberger Berman Group Contingent Compensation Plan (the “CCP”) to serve as a means to further align the interests of our employees with the success of the firm and the interests of our clients, and to reward continued employment. Under the CCP, up to 20% of a participant’s annual total compensation in excess of $500,000 is contingent and subject to vesting. The contingent amounts are maintained in a notional account that is tied to the performance of a portfolio of NB investment strategies as specified by the firm on an employee-by-employee basis. By having a participant’s contingent compensation tied to NB investment strategies, each employee is given further incentive to operate as a prudent risk manager and to collaborate with colleagues to maximize performance across all business areas. In the case of members of investment teams, including Portfolio Managers, the CCP is currently structured so that such employees have exposure to the investment strategies of their respective teams as well as the broader NB portfolio.
Restrictive Covenants. Most investment professionals, including Portfolio Managers, are subject to notice periods and restrictive covenants which include employee and client non-solicit restrictions as well as restrictions on the use of confidential information. In addition, depending on participation levels, certain senior professionals who have received equity grants have also agreed to additional notice and transition periods and, in some cases, non-compete restrictions. For confidentiality and privacy reasons, Neuberger Berman cannot disclose individual restrictive covenant arrangements.
NUANCE
Sub-Advisor to the Equity Fund
The Nuance team is compensated in three ways: salary, bonus and profit sharing. The profit sharing component of the compensation is motivation to stay loyal to the firm and participate in its growth through the overall profitability of the firm. It is paid monthly. Additionally, all employees of Nuance have a clear path to “equity rights” – without upfront capital that can be difficult for families. These rights grant true equity value without the upfront investment which adds clear retentive qualities.
Scott Moore, President, Co-Chief Investment Officer, and portfolio manager, owns 78.12% of Nuance. As such, his performance is tied to the profits of the firm. He firmly believes that the profits of the firm will coincide directly with the success of the investment products he manages with his team. The vast majority of his compensation has a direct correlation with the success of his clients and their experience as clients with Nuance.
OP
Sub-Advisor to the Oldfield International Value Fund
Remuneration within OP will reflect at least in part the overall profitability or otherwise of the firm. Partners (including all portfolio managers) receive their remuneration in the form of non-guaranteed profit share. Part of this is paid as a fixed amount which is equivalent to a salary and then each partner or employee is eligible for
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a discretionary profit share or bonus, dependent on the availability of profit. This discretionary part is decided by the remuneration committee consisting of the four non-executive directors of Oldfield & Co. (a member of OP) and Richard Oldfield, the chief executive of Oldfield & Co. and OP. The discretionary element of profit share for partners and bonuses for employees is limited to 1/3 of the pre bonus profits in total. The firm has an appraisal system which includes the setting of objectives each year for every executive by his/her manager and assessment against those objectives. The appraisal output is the basis of the remuneration process, when in addition to the profitability of the business as a whole and the specific area in which the executive is involved (e.g., global equity portfolios) may be taken into account, along with other factors. The remuneration committee considers the appraisal output in making its decisions and, in the case of portfolio managers, other factors include. but are not limited to, contribution to overall investment debate and portfolio performance. Portfolio performance is appraised over the short term (one year) and long term (up to since inception) with a higher weighting being given to the longer term measure. Performance is judged against the respective benchmarks of the portfolios, such as the MSCI World Index.
PICTET
Sub-Advisor to the International Fund
Pictet’s remuneration policy aligns individuals’ pay with the interests of Pictet’s clients and the long-term performance of the business.
Pictet’s Managing Partners, as part of the responsibilities of the Partners’ Committee, oversee all remuneration policies and provide independent oversight for remuneration decisions. The Partners’ attention to a sound risk management approach protects investors, the Pictet Group, Pictet, and employees. Pictet’s remuneration policy complies with regulatory requirements and external best practices.
An individual’s total compensation typically comprises a fixed salary; a performance related bonus; Pictet Parts (linking pay to Group results); and, for key senior executives, Long-Term Incentive Plan Units (linking pay to the long-term growth and continued success of Pictet). The variable elements of pay create a direct link between pay and performance, aligning Pictet’s staff’s incentives with the best interests of Pictet’s clients. The appropriate mix of different pay elements and deferrals ensures that an individual’s compensation is appropriately stable over time and encourages responsible risk-taking and sustainable performance for Pictet’s clients.
SANDS CAPITAL
Sub-Advisor to the Equity Fund
The primary goal of Sands Capital’s compensation and equity plans is tying the firm’s key contributors to the success of its clients. Sands Capital believes a carefully built compensation plan combined with an equity plan have been critical elements in the firm’s ability to attract and retain talent and deliver on our mission.
Investment professionals benefit from (1) a competitive salary; (2) a qualitative bonus: paid annually and based on each individual’s responsibilities and objectives that are agreed upon at the beginning of each year; (3) a 401(k) plan with a profit sharing component; and (4) an investment results bonus: calculated as each strategy’s value added versus their respective benchmarks over 1-, 3-, and 5-year periods—weighted toward longer time periods—this bonus is a significant component of compensation and aligns objectives and rewards with those of our clients’ results. Lastly, senior members of the firm are equity partners.
SBH
Sub-Advisor to the SBH Focused Small Value Fund
Compensation for investment professionals generally consists of base salary and potential incentive compensation, as well as possible equity ownership in the firm. Investment professionals are paid a salary that is competitive with industry standards, along with a team-based incentive bonus based on revenues derived from SBH’s investment strategies managed by the investment professional. Individual incentive allocation is merit based
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as determined by the portfolio manager, with final approval from SBH’s Chief Executive Officer. SBH believes that revenue-based compensation encompasses all aspects of the overall results we deliver to our clients, including investment performance. Portfolio managers may also participate in SBH’s defined contribution retirement plan, which includes normal matching provisions in accordance with applicable tax regulations.
WATER ISLAND
Sub-Advisor to the Alternative Strategies Fund
Investment professionals are compensated with salary and a bonus based on individual performance, both relative and absolute fund performance, and profitability of Water Island. Profit sharing in Water Island may also be included as potential compensation. In addition, Water Island believes employee ownership and the opportunity for all employees to hold ownership interests in Water Island fosters teamwork and encourages longevity in tenure. Ownership shares may be issued to employees based on tenure, position, and contribution to Water Island. Water Island’s policies help ensure that the financial interests of its key investment personnel are aligned with its clients’ financial interests. Water Island also expends efforts to help ensure it attracts and retains key investment talent. Its goal is to focus its employees on long-term rather than short-term performance and to encourage employee retention.
Portfolio Manager Securities Ownership
The table below identifies the dollar range of Fund shares beneficially owned by each portfolio manager of such Fund, as of December 31, 2020.
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Portfolio Manager/
Fund(s) Managed
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Dollar Range of
Securities Owned
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Chad Baumler/
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Equity Fund
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A
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Benjamin (Ben) Beneche/
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International Fund
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A
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Adam Bloch/
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High Income Alternatives Fund
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A
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Jonathan T. Bloom/
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Equity Fund
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A
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Steven Brown/
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High Income Alternatives Fund
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C
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Jack Chee/
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Equity Fund
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C
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International Fund
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D
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SBH Focused Small Value Fund
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A
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Alternative Strategies Fund
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E
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High Income Alternatives Fund
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E
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Christopher C. Davis/
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Equity Fund
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A
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Jeremy DeGroot/
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Equity Fund
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E
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International Fund
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E
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SBH Focused Small Value Fund
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E
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Alternative Strategies Fund
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E
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High Income Alternatives Fund
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E
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Oldfield International Value Fund
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D
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Derek Devens/
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High Income Alternatives Fund
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C
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Mark T. Dickherber/
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SBH Focused Small Value Fund
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A
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90
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Portfolio Manager/
Fund(s) Managed
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Dollar Range of
Securities Owned
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Adam Dwinells/
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Alternative Strategies Fund
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A
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Matthew Eagan/
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Alternative Strategies Fund
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A
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Patrick J. English/
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Equity Fund
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A
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Roger Foltynowicz/
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Alternative Strategies Fund
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A
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Danton Goei/
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Equity Fund
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A
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Andrew Goodwin
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Oldfield International Value Fund
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A
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Jeffrey Gundlach/
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Alternative Strategies Fund
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A
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Paul Harrison/
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Alternative Strategies Fund
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A
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David G. Herro/
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International Fund
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A
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Andrew Hofer/
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High Income Alternatives Fund
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A
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Neil Hohmann/
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High Income Alternatives Fund
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A
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Rajat Jain/
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Equity Fund
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A
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International Fund
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D
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SBH Focused Small Value Fund
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B
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Alternative Strategies Fund
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C
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High Income Alternatives Fund
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A
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Oldfield International Value Fund
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Stephen Kealhofer/
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Alternative Strategies Fund
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A
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Brian Kennedy/
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Alternative Strategies Fund
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A
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Paul Kunz/
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High Income Alternatives Fund
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A
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Mark Landecker/
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Alternative Strategies Fund
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A
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Mark Little/
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International Fund
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A
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Gregg Loprete/
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Alternative Strategies Fund
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E
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David E. Marcus/
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International Fund
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A
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Clyde S. McGregor/
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Equity Fund
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A
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Scott Minerd/
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High Income Alternatives Fund
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A
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Scott Moore/
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Equity Fund
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A
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91
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Portfolio Manager/
Fund(s) Managed
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Dollar Range of
Securities Owned
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Todd Munn/
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Alternative Strategies Fund
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D
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Shaun P. Nicholson/
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SBH Focused Small Value Fund
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A
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William C. Nygren/
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Equity Fund
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A
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John Orrico/
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Alternative Strategies Fund
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A
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Fabio Paolini/
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International Fund
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A
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Steven Romick/
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Alternative Strategies Fund
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A
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Brian Selmo/
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Alternative Strategies Fund
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A
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Jeffrey Sherman/
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Alternative Strategies Fund
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A
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A. Michael Sramek/
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Equity Fund
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A
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Jason Steuerwalt/
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Equity Fund
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B
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International Fund
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C
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Alternative Strategies Fund
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D
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High Income Alternatives Fund
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D
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Elaine Stokes/
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Alternative Strategies Fund
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A
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Todd Vandam/
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Alternative Strategies Fund
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A
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Nigel Waller
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Oldfield International Value Fund
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A
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Anne Walsh/
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High Income Alternatives Fund
|
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A
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Key of Dollar Ranges for Table: A - None; B - $1 to $10,000; C - $10,001 to $50,000; D - $50,001 to $100,000; E - $100,001 - $500,000; F - $500,001 - $1,000,000; G - Over $1,000,000.
PROXY VOTING POLICIES AND PROCEDURES
The Board has delegated the responsibility for voting proxies relating to portfolio securities held by the Funds to the Advisor as a part of the Advisor’s general management of the Funds, subject to the Board’s continuing oversight. The policy of the Trust is also to adopt the policies and procedures used by the Advisor to vote proxies relating to portfolio securities held by its clients.
The following information is a summary of the proxy voting policies and procedures of the Advisor and the Sub-Advisors.
LITMAN GREGORY
Advisor to the Funds
It is the Advisor’s policy to vote all proxies received by the Funds in a timely manner. In general, the Advisor will vote in accordance with its pre-determined voting guidelines (the “Guidelines”). However, the Advisor
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reserves the right to depart from any of the Guidelines and make a voting decision on a case-by-case basis. Although many proxy proposals will be covered by the Guidelines, the Advisor recognizes that some proposals require special consideration, and the Advisor will make a decision on a case-by-case basis in these situations. Where such a case-by-case determination is required, the Advisor’s proxy voting coordinator may, but is not required to, consult with other personnel of the Advisor to determine the appropriate action on the matter.
Unless otherwise instructed by the Funds, the Advisor may, and generally will, delegate the responsibility for voting proxies relating to the Funds’ portfolio securities to one or more of the Sub-Advisors. To the extent such responsibility is delegated to a Sub-Advisor, the Sub-Advisor shall assume the fiduciary duty and reporting responsibilities of the Advisor. Unless otherwise instructed by the Funds or the Advisor, the Sub-Advisor shall apply its own proxy voting policies and procedures.
The Advisor’s duty is to vote in the best interests of the Funds’ shareholders. In situations where the Advisor determines that a proxy proposal raises a material conflict of interest between the interests of the Advisor, the Funds’ principal underwriter, or an affiliated person of the Advisor or the principal underwriter and that of one or more Funds, the conflict shall be resolved by voting in accordance with a predetermined voting policy. However, to the extent that (1) no pre-determined voting policy applies to the specific proposal or (2) there is an applicable pre-determined voting policy, but the Advisor has discretion to deviate from such policy, the Advisor shall disclose the conflict to the Board and seek the Board’s direction or consent to the proposed vote prior to voting on such proposal.
BBH
Sub-Advisor to the High Income Alternatives Fund
As part of BBH’s annual review of its compliance policies and procedures, BBH will consider the independent third party proxy agent’s (“Proxy Adviser’s”) (and to the extent proxy voting is delegated to a sub-adviser, such sub-adviser’s) capacity and competency to analyze proxy voting matters, whether the Proxy Adviser has an effective process for seeking input from issuers and clients to ensure current and accurate information, whether the Proxy Adviser has disclosed how it arrives at voting recommendations and the adequacy of the Proxy Adviser’s policies and procedures concerning identifying, disclosing and addressing conflicts of interests and that voting determinations are not based on potential factual errors, incompleteness or methodological weaknesses. BBH will seek to evaluate the services of the Proxy Adviser, including any material changes in services or operations and conduct a reasonable investigation into matters on which the Proxy Adviser and the sub-adviser votes to evaluate its compliance with Rule 206(4)-6 under the Advisers Act, including sampling proxy votes.
DAVIS ADVISORS
Sub-Advisor to the Equity Fund
Davis Advisors votes on behalf of its clients in matters of corporate governance through the proxy voting process. Davis Advisors takes its ownership responsibilities very seriously and believes the right to vote proxies for its clients’ holdings is a significant asset of the clients. Davis Advisors exercises its voting responsibilities as a fiduciary, solely with the goal of maximizing the value of its clients’ investments.
Davis Advisors votes proxies with a focus on the investment implications of each issue. For each proxy vote, Davis Advisors takes into consideration its duty to clients and all other relevant facts known to Davis Advisors at the time of the vote. Therefore, while these guidelines provide a framework for voting, votes are ultimately cast on a case-by-case basis.
Davis Advisors has adopted written Proxy Voting Policies and Procedures and established a Proxy Oversight Group to oversee voting policies and deal with potential conflicts of interest. In evaluating issues, the Proxy Oversight Group may consider information from many sources, including the portfolio manager for each client account, management of a company presenting a proposal, shareholder groups, and independent proxy research services.
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The most important factors that Davis Advisors considers in evaluating proxy issues are: (i) the company’s or management’s long-term track record of creating value for shareholders, with the recommendations of management with a good record of creating value for shareholders given more weight than those of managements with a poor record; (ii) whether, in Davis Advisors’ estimation, the current proposal being considered will significantly enhance or detract from long-term value for existing shareholders; and (iii) whether a poor record of long-term performance resulted from poor management or from factors outside of managements control.
Other factors that Davis Advisors considers may include:
(a) Shareholder oriented management. One of the factors that Davis Advisors considers in selecting stocks for investment is the presence of shareholder-oriented management. In general, such managements will have a large ownership stake in the company. They also will have a record of taking actions and supporting policies designed to increase the value of the company’s shares and thereby enhance shareholder wealth. Davis Advisors’ research analysts are active in meeting with top management of portfolio companies and in discussing their views on policies or actions that could enhance shareholder value. Whether management shows evidence of responding to reasonable shareholder suggestions, and otherwise improving general corporate governance, is a factor that may be taken into consideration in proxy voting.
(b) Allowing responsible management teams to run the business. Because Davis Advisors generally tries to invest with “owner oriented” managements (see above), Davis Advisors votes with the recommendation of management on most routine matters, unless circumstances such as long-standing poor performance or a change from Davis Advisors’ initial assessment indicate otherwise. Examples include the election of directors and ratification of auditors. Davis Advisors supports policies, plans and structures that give management teams appropriate latitude to run the business in the way that is most likely to maximize value for owners. Conversely, Davis Advisors opposes proposals that limit management’s ability to do this. Davis Advisors will generally vote with management on shareholder social and environmental proposals on the basis that their impact on share value is difficult to judge and is therefore best done by management.
(c) Preserve and expand the power of shareholders in areas of corporate governance. Equity shareholders are owners of the business, and company boards and management teams are ultimately accountable to them. Davis Advisors supports policies, plans and structures that promote accountability of the board and management to owners, and align the interests of the board and management with owners. Examples include: annual election of all board members, cumulative voting, and incentive plans that are contingent on delivering value to shareholders. Davis Advisors generally opposes proposals that reduce accountability or misalign interests, including but not limited to classified boards, poison pills, excessive option plans, and repricing of options.
(d) Support compensation policies that reward management teams appropriately for performance. Davis Advisors believes that well-thought out incentives are critical to driving long-term shareholder value creation. Management incentives ought to be aligned with the goals of long-term owners. In Davis Advisors’ view, the basic problem of skyrocketing executive compensation is not high pay for high performance, but high pay for mediocrity or worse. In situations where Davis Advisors feels that the compensation practices at companies it owns are not acceptable, Davis Advisors will exercise its discretion to vote against compensation committee members and specific compensation proposals.
Davis Advisors exercises its professional judgment in applying these principles to specific proxy votes. Davis Advisors’ Proxy Procedures and Policies provide additional explanation of the analysis Davis Advisors may conduct when applying these guiding principles to specific proxy votes.
A potential conflict of interest arises when Davis Advisors has business interests that may not be consistent with the best interests of its client. Davis Advisors’ Proxy Oversight Group is charged with resolving material
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potential conflicts of interest it becomes aware of. It is charged with resolving conflicts in a manner that is consistent with the best interests of clients. There are many acceptable methods of resolving potential conflicts, and the Proxy Oversight Group exercises its judgment and discretion to determine an appropriate means of resolving a potential conflict in any given situation including by the following means: (1) Votes consistent with the “General Proxy Voting Policies,” are to be consistent with the best interests of clients; (2) Davis Advisors may disclose the conflict to the client and obtain the client’s consent prior to voting the proxy; (3) Davis Advisors may obtain guidance from an independent third party; (4) the potential conflict may be immaterial; or (5) other reasonable means of resolving potential conflicts of interest to effectively insulate the decision on how to vote client proxies from the conflict.
Sub-Advisor to the Alternative Strategies Fund
BXCSS generally invests in fixed income securities that do not involve proxy votes. However, BXCSS has adopted Proxy Voting Policies and Procedures pursuant to Rule 206(4)-6 under the Advisers Act. When voting proxies on behalf of Clients, BXCSS’s overall objective is to vote proxies in the best interest of the clients and, in so doing, to maximize the value of the investments made by the clients taking into consideration the clients’ investment horizons and other relevant factors.
While BXCSS endeavors to follow these policies and procedures in all situations, special circumstances may arise from time to time that warrant a deviation. In addition, BXCSS will apply its proxy voting policies and procedures to votes cast or other corporate actions with respect to publicly traded companies and, to the extent applicable, to analogous actions taken with respect to investments made in private companies.
Monitoring Corporate Actions. When BXCSS receives proxy voting materials (or similar voting/solicitation notices), they are initially transmitted by the account custodian to the employee who is designated to receive notices in the definitive documentation governing the relevant client’s investment, if any (the “Proxy Recipient”). The Proxy Recipient will consult the relevant portfolio manager(s) of each client that holds the securities that are the subject of the proxy vote. The Proxy Recipient will monitor the voting deadline to confirm that the deadline for the response is met.
Determination of Voting Decisions. Decisions on whether and how to vote a proxy generally are made by the relevant portfolio manager. The portfolio manager and the members of the investment team covering the applicable security often have the most intimate knowledge of both a company’s operations and the potential impact of a proxy vote’s outcome. Where appropriate, the portfolio manager or a member of the investment team may consult with the Chief Compliance Officer or Chief Legal Officer and the members of the applicable Investment Committee regarding decisions and completion of the proxy material. Decisions are based on a number of factors that may vary depending on a proxy’s subject matter, but are guided by the general policies described in this document. In addition, BXCSS may determine not to vote a proxy after consideration of the vote’s expected benefit to clients and the cost of voting the proxy.
Conflicts of Interest. Material conflicts of interest that may arise between BXCSS and the clients when voting proxies will be resolved in accordance with the applicable conflicts of interest policies and procedures.
Communication of Decision. After making a decision to vote a proxy and determining how to vote the proxy, the portfolio manager or a member of the investment team covering the security will then submit the vote. The portfolio manager or such investment team member will send completed copies of the proxy materials to the Proxy Recipient. The procedures for voting proxies may vary, and can include electronic voting, forwarding voting instructions to the custodian or voting proxies forwarded by the custodian.
Providing Proxy Voting Information to Clients. BXCSS acknowledges that its investors have a right to information about how the BXCSS votes client proxies, and BXCSS will make information available on request. BXCSS also will make a copy of these policies and procedures available on request. When an investor makes a
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request about a particular vote, BXCSS usually will provide the following information: (1) the date of the vote; (2) a brief description of the matter voted on; (3) how (or whether) BXCSS cast the vote on the matter; and (4) any other reasonable information an investor might request. Proxy voting information and the procedure for obtaining such information is included in BXCSS’s Form ADV, which is available to each investor.
DOUBLELINE
Sub-Advisor to the Alternative Strategies Fund
DoubleLine determines how to vote proxies relating to portfolio securities pursuant to its written proxy voting policies and procedures, which have been adopted pursuant to Rule 206(4)-6 under the Advisers Act (the “DoubleLine Proxy Policy”). The DoubleLine Proxy Policy also applies to any voting rights and/or consent rights on behalf of the portfolio securities, with respect to debt securities, including but not limited to, plans of reorganization, and waivers and consents under applicable indentures.
The DoubleLine Proxy Policy is designed and implemented in a manner reasonably expected to ensure that voting and consent rights are exercised in the best interests of the funds managed by DoubleLine and their shareholders. Under the DoubleLine Proxy Policy, DoubleLine will review each proxy to determine whether there may be a material conflict between DoubleLine and the fund. If no conflict exists, DoubleLine will vote the proxy on a case-by-case basis in the best interest of each client under the circumstances, taking into account, but not necessarily being bound by, any recommendation made by any third party vendor that has been engaged by DoubleLine to provide recommendations on the voting of proxies.
If a material conflict does exist, DoubleLine will seek to resolve any such conflict in accordance with the DoubleLine Proxy Policy, which seeks to resolve such conflict in the relevant fund’s best interest by pursuing any one of the following courses of action: (i) convening a committee to assess and resolve the conflict; (ii) voting in accordance with the recommendation of an independent third-party service provider; (iii) voting in accordance with the instructions of the relevant fund’s board, or any committee thereof; or (iv) not voting the proxy. In voting proxies, including those in which a material conflict may be determined to exist, DoubleLine may also consider the factors and guidelines included in the DoubleLine Proxy Policy.
In certain limited circumstances, particularly in the area of structured finance, DoubleLine may enter into voting agreements or other contractual obligations that govern the voting of shares and, in such cases, will vote any proxy in accordance with such agreement or obligation.
In addition, where DoubleLine determines that there are unusual costs and/or difficulties associated with voting a proxy, which more typically might be the case with respect to proxies of non-U.S. issuers, DoubleLine reserves the right to not vote a proxy unless it determines that the potential benefits of voting the proxy exceed the expected cost to the relevant fund.
DoubleLine supervises and periodically reviews its proxy voting activities and implementation of the DoubleLine Proxy Policy.
EVERMORE
Sub-Advisor to the International Fund
Evermore has adopted a set of proxy voting policies and procedures (the “Policies”) to ensure that Evermore votes proxies relating to equity securities in the best interest of clients.
In voting proxies, Evermore is guided by general fiduciary principles and seeks to act prudently and solely in the best interest of clients. Evermore attempts to consider all factors that could affect the value of the investment and will vote proxies in the manner that it believes will be consistent with efforts to maximize shareholder values. Evermore may utilize an external service provider to provide it with information and/or a recommendation with regard to proxy votes. However, such recommendations do not relieve Evermore of its responsibility for the proxy vote.
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In the case of a proxy issue for which there is a stated position in the Policies, Evermore generally votes in accordance with such stated position. In the case of a proxy issue for which there is a list of factors set forth in the Policies that Evermore considers in voting on such issue, Evermore votes on a case-by-case basis in accordance with the general principles set forth above and considering such enumerated factors. In the case of a proxy issue for which there is no stated position or list of factors that Evermore considers in voting on such issue, Evermore votes on a case-by-case basis in accordance with the general principles set forth above. Issues for which there is a stated position set forth in the Policies or for which there is a list of factors set forth in the Policies that Evermore considers in voting on such issues fall into a variety of categories, including election of trustees, ratification of auditors, proxy and tender offer defenses, capital structure issues, executive and trustee compensation, mergers and corporate restructurings, and social and environmental issues. The stated position on an issue set forth in the Policies can always be superseded, subject to the duty to act solely in the best interest of the beneficial owners of accounts, by the investment management professionals responsible for the account whose shares are being voted. Issues applicable to a particular industry may cause Evermore to abandon a policy that would have otherwise applied to issuers generally. Evermore’s policy is to vote all proxies from a specific issuer in the same way for each client absent qualifying restrictions from the client.
In furtherance of Evermore’s goal to vote proxies in the best interest of clients, Evermore follows procedures designed to identify and address material conflicts that may arise between Evermore’s interests and those of its clients before voting proxies on behalf of such clients. To seek to identify conflicts of interest, Evermore reviews its relationship with the issuer of each security to determine if Evermore or any of its employees has any financial, business or personal relationship with the issuer. Evermore is also sensitive to the fact that a significant, publicized relationship between an issuer and a non- affiliate might appear to the public to influence the manner in which Evermore decides to vote a proxy with respect to such issuer.
Evermore’s CCO reviews and addresses conflicts of interest brought to his or her attention. A proxy issue that will be voted in accordance with a stated position on an issue is not brought to the attention of the CCO for a conflict of interest review because Evermore’s position is that to the extent a conflict of interest issue exists, it is resolved by voting in accordance with a pre-determined policy. With respect to a conflict of interest brought to its attention, the CCO first determines whether such conflict of interest is material. A conflict of interest is considered material to the extent that it is determined that such conflict is likely to influence, or appear to influence, Evermore’s decision-making in voting proxies.
If it is determined by the CCO that a conflict of interest is not material, Evermore may vote proxies notwithstanding the existence of the conflict. If it is determined by the CCO that a conflict of interest is material, the CCO is responsible for determining an appropriate method to resolve such conflict of interest before the proxy affected by the conflict of interest is voted. Such determination is based on the particular facts and circumstances, including the importance of the proxy issue and the nature of the conflict of interest. Methods of resolving a material conflict of interest may include, but are not limited to, disclosing the conflict to clients and obtaining their consent before voting, or suggesting to clients that they engage another party to vote the proxy on their behalf.
Evermore’s Proxy Voting Policies and Principles
Evermore’s proxy voting positions have been developed based on years of experience with proxy voting and corporate governance issues. These principles have been reviewed by various members of Evermore’s organization, including the investment team, chief operating officer, chief financial officer, chief compliance officer, operations personnel, and outside legal counsel. The Board of Trustees of the Trust will approve the proxy voting policies and procedures annually.
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The following guidelines reflect what Evermore believes to be good corporate governance and behavior:
Board of Directors. The election of directors and an independent board are key to good corporate governance. Directors are expected to be competent individuals and they should be accountable and responsive to shareholders. Evermore supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. Evermore will generally vote against management efforts to classify a board and will generally support proposals to declassify the board of directors. Evermore will consider withholding votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, Evermore will review this issue on a case-by-case basis taking into consideration other factors including the company’s corporate governance guidelines and performance. Evermore evaluates proposals to restore or provide for cumulative voting on a case-by-case basis and considers such factors as corporate governance provisions as well as relative performance. Evermore generally will support non-binding shareholder proposals to require a majority vote standard for the election of directors; however, if these proposals are binding, Evermore will give careful review on a case-by-case basis of the potential ramifications of such implementation.
Ratification of Auditors. Evermore will closely scrutinize the independence, role, and performance of auditors. On a case-by-case basis, Evermore will examine proposals relating to non-audit relationships and non-audit fees. Evermore will also consider, on a case-by-case basis, proposals to rotate auditors, and will vote against the ratification of auditors when there is clear and compelling evidence of a lack of independence, accounting irregularities or negligence attributable to the auditors.
Management & Director Compensation. A company’s equity-based compensation plan should be in alignment with the shareholders’ long-term interests. Evermore believes that executive compensation should be directly linked to the performance of the company. Evermore evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable. Evermore will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment “evergreen” feature. Evermore will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less. Severance compensation arrangements will be reviewed on a case-by-case basis, although Evermore will generally oppose “golden parachutes” that are considered excessive. Evermore will normally support proposals that require that a percentage of directors’ compensation be in the form of common stock, as it aligns their interests with those of the shareholders. Evermore will review non-binding say-on-pay proposals on a case-by-case basis, and will generally vote in favor of such proposals unless compensation is misaligned with performance and/or shareholders’ interests, the company has not provided reasonably clear disclosure regarding its compensation practices, or there are concerns with the company’s remuneration practices.
Anti-Takeover Mechanisms and Related Issues. Evermore generally opposes anti-takeover measures since they tend to reduce shareholder rights. However, as with all proxy issues, Evermore conducts an independent review of each anti-takeover proposal. On occasion, Evermore may vote with management when the investment team has concluded that the proposals are not onerous and would not harm Advisory Clients’ interests as stockholders. Evermore generally supports proposals that require shareholder rights plans (“poison pills”) to be subject to a shareholder vote. Evermore will closely evaluate shareholder rights plans on a case-by-case basis to determine whether or not they warrant support. Evermore will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. In addition, Evermore generally opposes any supermajority voting requirements as well as the payment of “greenmail.” Evermore usually supports “fair price” provisions and confidential voting.
Changes to Capital Structure. Evermore realizes that a company’s financing decisions have a significant impact on its shareholders, particularly when they involve the issuance of additional shares of common or preferred stock or the assumption of additional debt. Evermore will carefully review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase. Evermore will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have
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superior voting rights. Evermore will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable. Evermore will review proposals seeking preemptive rights on a case-by-case basis.
Mergers and Corporate Restructuring. Mergers and acquisitions will be subject to careful review by Evermore to determine whether they would be beneficial to shareholders. Evermore will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring proposals are also subject to a thorough examination on a case-by-case basis.
Environmental, Social and Governance Issues. As a fiduciary, Evermore is primarily concerned about the financial interests of its advisory clients. Evermore will generally give management discretion with regard to social, environmental and ethical issues although Evermore may vote in favor of those issues that are believed to have significant economic benefits or implications. Evermore generally supports the right of shareholders to call special meetings and act by written consent. However, Evermore will review such shareholder proposals on a case-by-case basis in an effort to ensure that such proposals do not disrupt the course of business or waste company resources for the benefit of a small minority of shareholders.
Global Corporate Governance. Evermore manages investments in countries worldwide. Many of the tenets discussed above are applied to Evermore’s proxy voting decisions for international investments. However, Evermore must be flexible in these worldwide markets. Principles of good corporate governance may vary by country, given the constraints of a country’s laws and acceptable practices in the markets. As a result, it is on occasion difficult to apply a consistent set of governance practices to all issuers. As experienced money managers, Evermore’s analysts are skilled in understanding the complexities of the regions in which they specialize and are trained to analyze proxy issues germane to their regions.
Proxy Voting Procedures
Evermore utilizes the Institutional Shareholder Services Inc. (“ISS”) ProxyExchange voting and research platform to access proxy vote recommendations, research reports, execute vote instructions, and run proxy voting reports. Custodians of the Evermore’s client accounts notify ISS of any pending proxies related to such accounts. Evermore’s Investment Team reviews corporate management vote recommendations, ISS vote recommendations, and any other relevant documentation to make a final determination on how to vote for each proposal contained within a given proxy. The final proxy vote is then submitted via the ISS ProxyExchange platform. All proxy votes submitted on the ISS ProxyExchange platform are saved and may be retrieved at a later date.
FMI
Sub-Advisor to the Equity Fund
Policies
FMI will vote proxies in a manner that FMI feels best protects the interests of the common shareholder. FMI will look critically upon any issue or vote that will limit or reduce the prerogatives and/or influence of the common shareholders. To assist in its review of the proxies FMI receives, FMI may refer to the analyses and voting recommendations of an independent, third party proxy service provider (e.g., Glass, Lewis & Co., LLC, Institutional Shareholder Services Inc., etc. (each, a “Proxy Service Provider”)). While FMI may consider the analyses and recommendations provided by a Proxy Service Provider in making a final voting decision, FMI does not consider recommendations from a Proxy Service Provider to be determinative of its ultimate decision. Rather, FMI exercises its independent judgment in making voting decisions (except as discussed below).
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The following statement of policies is couched in terms of FMI’s general posture on various issues, recognizing that there are always exceptions.
Administrative Issues
FMI will generally vote in favor of the re-election of directors and the appointment of actuaries, auditors, and similar professionals. FMI will also vote in favor of programs of indemnification of directors, which are consistent with common practice. The changing of auditors raises a yellow flag, and FMI tries to determine the reasons for any change. If the change results from a dispute between the company and the auditors, and FMI feels the auditor’s position is correct, FMI will vote against making a change.
Management Entrenchment Issues
FMI will generally vote against any proposal or policy that seeks to prevent the takeover of a company that is in receipt of a bona fide offer, whether friendly or otherwise. Such anti-takeover policies may include, but are not limited to, poison pill, super-majority voting, golden parachute arrangements, and staggered board arrangements, where that represents a change from a standard board. FMI will generally vote in favor of maintaining preemptive rights for shareholders, one share/one vote, and cumulative voting rights. Generally FMI will support proposals calling for majority vote for directors and separation of the Chairman and CEO roles.
FMI will tend to vote against creation of classes of stock with superior voting rights, which protect management’s voting control despite reduced financial commitment of management to the company. FMI will evaluate proposals, such as changing state of incorporation, fiscal year, or corporate charter, in light of specific circumstances prompting the proposal, to determine whether the proposed change would reduce shareholders’ rights.
Mergers and Acquisitions
Voting on mergers, acquisitions, or spin-offs requires an evaluation of the impact of those transactions upon the company, and FMI will vote based upon its assessment of what is best for the company and therefore the shareholders. With respect to a proposed takeover of the company, FMI initially evaluates an offer for the company in terms of the fairness of the price. FMI does this in the context of a two- to three-year time horizon to avoid selling at a premium over a temporarily depressed stock price. FMI would generally vote in favor of offers that represent a fair price, paid either in cash or in exchange for liquid securities of strong acquiring firms. FMI will oppose offers which FMI feels represent an unfair price, and FMI will oppose offers where shareholders are asked to finance a takeover by taking back debt or preferred stock of questionable quality. FMI tends to be skeptical of management-led leveraged buyouts, as FMI feels it is very difficult for them to be objective as to the value of the company when they are the purchaser.
Management Incentives
FMI strongly favors programs that encourage outright stock ownership as opposed to conventional option plans. In limited cases, when the options are earmarked for lower level employees and the absolute amount is modest, FMI will vote affirmatively. FMI generally votes against traditional stock option plans. Typical option plans result in a misalignment of management and shareholder interests, due to the asymmetrical risk profile of an option. Since there is no downside risk, management has an incentive to take excessive risk. In short, executives tend to cease thinking like true owners. FMI likes to see senior and executive level managers own stock in multiples of their annual salary.
Ideally FMI prefers to see bonuses and incentive awards paid in stock (with a vesting period), rather than cash or options. FMI looks for stock award plans to be based on tangible operating performance metrics, such as return-on-invested capital or profit margin.
Additionally, when FMI deems management as excessively compensated, FMI will likely vote against any kind of additional reward plan, even if the plan by itself looks reasonable.
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Social Issues
It is FMI’s belief that socially responsible companies have, over time, provided superior investment returns for long-term investors. Fair hiring and inclusiveness with respect to women and minorities create a positive corporate culture that offers greater opportunities for growth for all employees, with concomitant rewards for shareholders of the company. A responsible corporate policy with respect to environmental issues is critical to all of us.
FMI’s general posture with respect to social issues is to support management so long as they are complying with the spirit of the laws and regulations of the United States of America. Shareholder proposals must be considered on a case-by-case basis. The number of specific issues that FMI has seen raised on proxy votes with respect to social and labor issues are increasing. Since there is much “gray” and little “black and white” with respect to the level of corporate commitment to many of the social issues, and since FMI is generally supportive of the goals and policies of the companies that FMI owns, FMI would tend to vote in favor of management on these issues absent evidence that the company is abusing FMI’s trust, or direction from FMI’s clients to the contrary. If it is the desire of a client to provide input and direction on the voting of proxies with respect to certain issues, FMI would be more than happy to advise them when such issues arise and to defer to their wishes in voting on those issues.
Conflicts of Interest
FMI strives to ensure that all conflicts of interest are resolved in the best interests of its clients. When there is an apparent conflict of interest, or the appearance of a conflict of interest (e.g., where FMI may receive fees from a company for advisory or other services at the same time that FMI has investments in the stock of that company), FMI will vote with management on those issues on which brokerage firms are allowed to vote without customer approval under NYSE rules (e.g., directors and auditors). In all other cases involving a conflict or appearance of a conflict, FMI will cause the proxies to be voted in accordance with the recommendations of a Proxy Service Provider.
Procedures
FMI has the responsibility and authority to vote proxies with respect to the securities under its management unless the right to vote proxies is expressly reserved for the client, plan trustees or other plan fiduciary. FMI will advise the pension committee, board of trustees, custodian or client to forward all proxy materials to its offices and will take reasonable steps to ensure that they are received. FMI will review the issues to be voted upon and vote the proxies in accordance with the policies stated above, unless directed otherwise by the client. FMI will maintain and monitor all meeting, ballot, account and vote information, and make this information available to clients upon request.
In situations where securities held in a portfolio are not generally owned “across the board” in all client accounts with the same investment style (i.e., small holdings), FMI will vote those proxies based upon the management’s recommendations.
Proxies cannot be voted on any securities that have been loaned out by the client. Where securities have been loaned out and a vote is required regarding a material event, FMI will attempt to recall the loaned security in order to vote the proxy. This does not apply to “small holdings” as defined above. Please note that in certain circumstances, securities on loan may not be recalled due to circumstances beyond the control of FMI.
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FIRST PACIFIC
Sub-Advisor to the Alternative Strategies Fund
First Pacific has implemented Proxy Voting Policies and Procedures, which underscore First Pacific’s concern that all proxy voting decisions be made in the best interests of the funds it manages and that First Pacific act in a prudent and diligent manner intended to enhance the economic value of the assets of such funds. First Pacific has delegated to Institutional Shareholder Services (“ISS”), an independent service provider, the administration of proxy voting for the portfolio securities held in the accounts managed by First Pacific, including the Alternative Strategies Fund, subject to First Pacific’s continuing oversight.
Where a proxy proposal raises a material conflict between First Pacific’s interests and a fund’s interests, First Pacific will resolve the conflict as follows: First Pacific will convene an internal group of senior First Pacific employees who are independent from the conflict of interest issue and after review of the issue and any associated documentation, the internal group will propose a course of action that they determine is in the best interest of the applicable First Pacific client(s). The internal group may take, but is not limited to, the following courses of action: (i) First Pacific may consult with the board of directors for a course of action; (ii) First Pacific may vote in accordance with the recommendation of its proxy voting service provider; (iii) First Pacific may seek client consent for the vote recommended by the Portfolio Manager; (iv) First Pacific may engage an independent third party to provide a recommendation on how to vote the proxy; or (iv) First Pacific may abstain from voting the proxy. First Pacific will vote the proxy or abstain from voting the proxy pursuant to the internal group’s instructions.
In certain instances, First Pacific may elect not to vote a proxy or otherwise be unable to vote a proxy on a client’s behalf. Such instances may include, but are not limited to: (i) a de minimis number of shares held; (ii) potential adverse impact on the client’s portfolio of voting such proxy (e.g., share blocking or short-term prohibitions on selling the issuer’s shares after the vote); or (iii) logistical or other considerations related to non-U.S. issuers (e.g., where an investment company’s legal structure may not be recognized in the relevant jurisdiction). In addition, First Pacific generally will not seek to recall securities that are out on loan for the purpose of voting the securities unless it is in the Fund’s best interests to do so.
GUGGENHEIM
Sub-Advisor to the High Income Alternatives Fund
Guggenheim’s Proxy Voting Policies and Procedures (in this section, “Procedures”) are designed to ensure that proxies are voted in the best interests of its clients. Where Guggenheim has been delegated the responsibility for voting proxies, it will take reasonable steps under the Procedures to ensure that proxies are received and voted in the best long-term interests of its clients. Guggenheim will consider all relevant factors without giving undue weight to the opinions of other individuals or groups who may have an economic interest in the outcome of the proxy vote.
The financial interest of Guggenheim’s clients is the primary consideration in determining how proxies should be voted. Any material conflicts of interest between Guggenheim and its clients with respect to proxy voting are resolved in the best interests of the clients. Corporate actions, such as rights offerings, tender offers, and stock splits or actions initiated by holders of a security rather than the issuer (such as reset rights for a CLO) or legal actions, such as bankruptcy proceedings or class action lawsuits are outside the scope of the Procedures.
Guggenheim has adopted the proxy voting guidelines of an outside proxy voting firm, ISS, as Guggenheim’s proxy voting guidelines (in this section, “Guidelines”). Guggenheim has also engaged ISS to act as agent for the proxy process, to maintain records on proxy votes for its clients, and to provide independent research on corporate governance, proxy and corporate responsibility issues. At inception, Guggenheim will assess the Procedures to determine which Guidelines will be followed. Guggenheim reviews the Guidelines and conducts a due diligence assessment of ISS and the performance of its duties as agent at least annually. Guggenheim may override the Guidelines recommending a vote on a particular proposal if Guggenheim determines a different vote to be in the best interest of the client or if required to deviate under applicable law, rule or regulation. If a proposal is voted contrary to the ISS Guidelines, the reasons will be documented in writing by Guggenheim. Guggenheim seeks to vote securities in the best interest of clients, and will apply the Guidelines regardless whether the issuer, a third party, or both solicit Guggenheim’s vote.
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In the absence of contrary instructions received from Guggenheim, ISS will vote proxies in accordance with the Guidelines, as such Guidelines may be revised from time to time. Guggenheim will typically vote proxies itself in two scenarios: (1) the Guidelines do not address the proposal; and (2) Guggenheim has decided to vote some or all of the shares contrary to the Guidelines.
Proposals not addressed by Guidelines: ISS will notify Guggenheim of all proxy proposals that do not fall within the Guidelines (i.e., proposals which are either not addressed in the Guidelines or proposals for which Guggenheim has indicated that a decision will be made on a case-by-case basis, such as fixed-income securities). If the investment team(s) responsible, together with the Proxy Voting Advisory Committee (“PVAC”), comprising of representatives from investment management, compliance, risk operations and legal, determines that there are no material conflicts of interest, the proposal will be voted in accordance with the recommendation of said team(s) and approval from the PVAC. If there is a material conflict of interest, Guggenheim will follow the procedures outlined below.
Proposal to be voted contrary to Guidelines: When an investment team decides that a proposal should be voted contrary to the Guidelines, because it believes it is in the best interest of the client to do so, the investment team will consult with the PVAC to determine whether there is a material conflict of interest as to that proposal. If the investment team(s) responsible, together with the PVAC, determines that there is no material conflict of interest, Guggenheim will override the proposal from ISS in accordance with the recommendation of said team(s) and approval from the PVAC. If there is a material conflict of interest, Guggenheim will follow the procedures outlined below.
Guggenheim occasionally will be subject to conflicts of interest in the voting of proxies due to relationships it maintains with persons having an interest in the outcome of particular votes. Common examples of conflicts in the voting of proxies are: (a) Guggenheim or an affiliate of Guggenheim provides or is seeking to provide services to the company on whose behalf proxies are being solicited, (b) an employee of Guggenheim or its affiliate has a personal relationship with the company’s management or another proponent of a proxy issue, or (c) an immediate family member of the employee of Guggenheim or its affiliates is a director or executive officer of the company. Senior members of the investment team(s) responsible for voting the proxy, in consultation with compliance, will decide whether a material conflict of interest exists. If a material conflict of interest exists the investment team(s) will consult with the PVAC to determine how to resolve the conflict consistent with the procedures below. In certain cases, Guggenheim occasionally engages and appoints an independent party to provide independent analysis or recommendations with respect to consents, proxy voting, or other similar shareholder or debt holder rights decision (or a series of consents, votes or similar decisions) pertaining to its clients.
If the Guidelines do not address a proposal, or Guggenheim wishes to vote a proposal contrary to the Guidelines, or ISS does not provide a recommendation on a proposal, and Guggenheim has a material conflict of interest as to the vote, then Guggenheim will seek to resolve the conflict in any of the following ways, as recommended by the PVAC:
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Refer Proposal to the Client - Guggenheim may refer the proposal to the client and obtain instructions from the client on how to vote the proxy relating to that proposal.
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Obtain Client Ratification - If Guggenheim is in a position to disclose the conflict to the client (i.e., such information is not confidential), Guggenheim may determine how it proposes to vote the proposal on which it has a conflict, fully disclose the nature of the conflict to the client, and obtain the client’s consent for how Guggenheim will vote on the proposal (or otherwise obtain instructions from the client on how the proxy on the proposal should be voted).
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Use another Independent Third Party for All Proposals - Subject to any client imposed proxy voting policies, Guggenheim may vote all proposals in a single proxy according to the policies of an independent third party other than ISS (or have the third party vote such proxies).
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Use another Independent Third Party to Vote Only the Specific Proposals that Involve a Conflict-Subject to any client-imposed proxy voting policies, Guggenheim may use an independent third party other than ISS to recommend how the proxy for specific proposals that involve a conflict should be voted (or have the third party vote such proxies).
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The method selected by Guggenheim to resolve the conflict may vary from one instance to another depending upon the facts and circumstances of the situation, but in each case, consistent with its duty of loyalty and care.
Clients may obtain information about how Guggenheim voted proxies on their behalf by contacting Guggenheim.
HARRIS
Sub-Advisor to the Equity Fund and International Fund
Harris believes that proxy voting rights are valuable portfolio assets and an important part of the investment process, and Harris exercises voting responsibilities as a fiduciary solely with the goals of serving the best interests of Harris’ clients in their capacity as shareholders of a company. As an investment manager, Harris is primarily concerned with maximizing the value of its clients’ investment portfolios. Harris has long been active in voting proxies on behalf of shareholders in the belief that the proxy voting process is a significant means of addressing crucial corporate governance issues and encouraging corporate actions that are believed to enhance shareholder value. Harris has a Proxy Voting Committee comprised of investment professionals that reviews and recommends policies and procedures regarding proxy voting and ensures compliance with those policies.
In determining the vote on any proposal, the Proxy Voting Committee will consider the proposal’s expected impact on shareholder value and will not consider any benefit to Harris, its employees, its affiliates or any other person, other than benefits to the owners of the securities to be voted, as shareholders.
Harris considers the reputation, experience and competence of a company’s management when it evaluates the merits of investing in a particular company, and invests in companies in which Harris believes management goals and shareholder goals are aligned. When this happens, by definition, voting with management is generally the same as voting to maximize the expected value of Harris’ investment. Accordingly, on most issues, Harris casts votes in accordance with management’s recommendations. This does not mean that Harris does not care about corporate governance. Rather, it is confirmation that Harris’ process of investing with shareholder aligned management is working. Proxy voting is not always black and white, however, and reasonable people can disagree over some matters of business judgment. When Harris believes management’s position on a particular issue is not in the best interests of its clients, Harris will vote contrary to management’s recommendation.
The proxy voting guidelines below summarize Harris’ position on various issues of concern to investors and give a general indication of how proxies on portfolio securities will be voted on proposals dealing with particular issues. Harris will generally vote proxies in accordance with these guidelines, except as otherwise determined by the Proxy Voting Committee, unless the client has specifically instructed Harris to vote otherwise. Harris’ voting guidelines generally address issues related to boards of directors, auditors, equity based compensation plans, and shareholder rights.
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With respect to a company’s board of directors, Harris believes that boards should have a majority of independent directors and that audit, compensation and nominating committees should generally consist solely of independent directors, and will usually vote in favor of proposals that ensure such independence.
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With respect to auditors, Harris believes that the relationship between an issuer and its auditors should be limited primarily to the audit engagement, although it may include certain closely-related activities such as financial statement preparation and tax-related services that do not raise any appearance of impaired independence.
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With respect to equity based compensation plans, Harris believes that appropriately designed equity-based compensation plans approved by shareholders can be an effective way to align the interests of long-term shareholders and the interests of management, employees and directors. However, Harris is opposed to plans that substantially dilute its clients’ ownership interest in the company, provide participants with excessive awards or have inherently objectionable structural features.
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With respect to corporate structure and shareholder rights, Harris generally believes that all shareholders should have an equal voice and that barriers which limit the ability of shareholders to effect change and to realize full value are not desirable.
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With respect to social responsibility issues, Harris believes that matters related to a company’s day-to-day business operations are primarily the responsibility of management and should be reviewed and supervised solely by the company’s board of directors. Harris is focused on maximizing long-term shareholder value and typically will vote against shareholder proposals requesting that a company disclose or amend certain business practices unless Harris believes the proposal would have a substantial positive economic impact on the company.
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The Proxy Voting Committee, in consultation with Harris’ Legal and Compliance Departments, is responsible for monitoring and resolving any possible material conflicts of interest with respect to proxy voting. A conflict of interest may exist, for example, when: (i) proxy votes regarding non-routine matters are solicited by an issuer who has an institutional separate account relationship with Harris, or Harris is actively soliciting business from the issuer; (ii) when Harris, is aware that a proponent of a proxy proposal has a business relationship with Harris or Harris is actively soliciting such business (e.g., an employee group for which Harris manages money); (iii) when Harris is aware that it has business relationships with participants in proxy contests, corporate directors or director candidates; or (iv) when Harris is aware that a Harris employee has a personal interest in the outcome of a particular matter before shareholders (e.g., a Harris executive has an immediate family member who serves as a director of a company).
Harris is committed to resolving any such conflicts in its clients’ collective best interest, and accordingly, will vote pursuant to the Guidelines set forth in the Proxy Voting Policy when conflicts of interest arise. However, if Harris believes that voting in accordance with a Guideline is not in the best interest of clients under the particular facts and circumstances presented, or if the proposal is not addressed by the Guidelines, then Harris will vote in accordance with the guidance of ISS. If ISS has not provided guidance with respect to the proposal or if Harris believes the recommendation of ISS is not in the best interests of clients, then the Proxy Voting Committee will refer the matter to (1) the Executive Committee of the Board of Trustees of Harris Associates Investment Trust for a determination of how shares held in the Oakmark Funds will be voted, and (2) the Proxy Voting Conflicts Committee consisting of Harris’ General Counsel, Chief Compliance Officer and Chief Financial Officer for a determination of how shares held in all other client accounts will be voted. Each of those committees will keep a written record of the basis for its decision.
LAZARD
Sub-Advisor to the International Fund
Introduction
Lazard is a global investment firm that provides investment management services for a variety of clients. As a registered investment advisor, Lazard has a fiduciary obligation to vote proxies in the best interests of its clients. Lazard’s Proxy Voting Policy has been developed with the goal of maximizing the long term shareholder value.
Lazard does not delegate voting authority to any proxy advisory service, but rather retains complete authority for voting all proxies delegated to it. Lazard’s policy is generally to vote all meetings and all proposals;
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and generally to vote all proxies for a given proposal the same way for all clients. The Proxy Voting Policy is also designed to address potential material conflicts of interest associated with proxy voting, and does so principally in setting approved guidelines for various common proposals.
Proxy Operations Department
Lazard’s proxy voting process is administered by members of its Operations Department (Proxy Administration Team). Oversight of the process is provided by Lazard’s Legal/Compliance Department and Lazard’s Proxy Committee.
Proxy Committee
Lazard’s Proxy Committee is comprised of senior investment professionals, members of the Legal/Compliance Department and other Lazard personnel. The Proxy Committee meets regularly, generally on a quarterly basis, to review this Policy and other matters relating to the firm’s proxy voting functions. Meetings may be convened more frequently (for example, to discuss a specific proxy voting proposal) as needed.
Role of Third Parties
Lazard currently subscribes to advisory and other proxy voting services provided by Institutional Shareholder Services, Inc. and by Glass, Lewis & Co. These proxy advisory services provide independent analysis and recommendations regarding various companies’ proxy proposals. While this research serves to help improve Lazard’s understanding of the issues surrounding a company’s proxy proposals, Lazard’s investment professionals are ultimately responsible for providing the vote recommendation for a given non-routine proposal. Voting for each agenda of each meeting is instructed specifically by Lazard in accordance with the Proxy Voting Policy. ISS also provides administrative services related to proxy voting such as a web-based platform for proxy voting, ballot processing, recordkeeping and reporting.
Voting Process
Lazard votes on behalf of its clients according to proxy voting guidelines approved by the Proxy Committee (the “Approved Guidelines”). The Approved Guidelines determine whether a specific agenda item should be voted ‘For,’ ‘Against,’ or is to be considered on a case-by case basis. The Proxy Administration Team ensures that investment professionals responsible for proxy voting are aware of the Approved Guidelines for each proposal. Voting on a proposal in a manner that is inconsistent with an Approved Guideline requires the approval of the Proxy Committee.
With respect to proposals to be voted on a case-by-case basis, the Proxy Administration Team will consult with relevant investment professionals prior to determining how to vote on a proposal. Lazard generally will treat proxy votes and voting intentions as confidential in the period before votes have been cast, and for appropriate time periods thereafter.
Conflicts of Interest
Meetings that pose a potential material conflict of interest for Lazard are voted in accordance with Approved Guidelines. Where the Approved Guideline is to vote on a case-by-case basis, Lazard will vote in accordance with the majority recommendation of the independent proxy services. Potential material conflicts of interest include:
Lazard manages the company’s pension plan;
The proponent of a shareholder proposal is a Lazard client;
An employee of Lazard (or an affiliate) sits on a company’s board of directors;
An affiliate of Lazard serves as financial advisor or provides other services to the company; or
A Lazard employee has a material relationship with the company.
“Conflict Meetings” are voted in accordance with the Lazard Approved Guidelines. In situations where the Approved Guideline is to vote case-by-case and a material conflict of interest appears to exist, Lazard’s policy is to vote the proxy item according to the majority recommendation of the independent proxy services to which we subscribe.
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Voting Exceptions
It is Lazard’s intention to vote all proposals at every meeting. However, there are instances when voting is not practical or is not, in Lazard’s view, in the best interests of its clients. Lazard does not generally vote proxies for securities loaned by clients through a custodian’s stock lending program.
Environmental, Social and Corporate Governance
Lazard has an Environmental, Social and Corporate Governance (ESG) Policy, which outlines Lazard’s approach to ESG and how Lazard’s investment professionals take ESG issues into account as a part of the investment process. Lazard recognizes that ESG issues can affect the valuation of the companies that it invests in on its clients’ behalf. As a result, Lazard takes these factors into consideration when voting, and, consistent with its fiduciary duty, votes proposals in a way Lazard believes will increase shareholder value.
LOOMIS SAYLES
Sub-Advisor to the Alternative Strategies Fund
Loomis Sayles has adopted and implemented policies and procedures (“Procedures”) to ensure that, where it has voting authority, proxy matters are handled in the best interest of clients, in accordance with Loomis Sayles’ fiduciary duty, and all applicable law and regulations. The Procedures, as implemented by the Loomis Sayles Proxy Committee are intended to support good corporate governance, including those corporate practices that address environmental and social issues (“ESG Matter”), in all cases with the objective of protecting shareholder interests and maximizing shareholder value.
Loomis Sayles uses the services of third parties (“Proxy Voting Services”) to provide research, analysis and voting recommendations and to administer the process of voting proxies for those clients for which Loomis Sayles has voting authority. One of Loomis Sayles’ Proxy Voting Services, Glass, Lewis & Company (“Glass Lewis”) provides vote recommendations and/or analysis to Loomis Sayles based on Glass Lewis’ own research. Loomis Sayles will generally follow its express policy with input from Glass Lewis unless Loomis Sayles’ Proxy Committee (the “Proxy Committee”) determines that the client’s best interests are served by voting otherwise. Loomis Sayles uses the services of Institutional Shareholder Services, Inc. for voting agent services and as a secondary source for research and analysis.
All issues presented for shareholder vote are subject to the oversight of the Proxy Committees either directly or by application of this policy. All non-routine issues will generally be considered directly by the Proxy Committee and, when necessary, the investment professionals responsible for an account holding the security, and will be voted in the best investment interests of the clients. All routine “for” and “against” issues will be voted according to this policy unless special factors require that they be considered by the Proxy Committee and, when necessary, the investment professionals responsible for an account holding the security. Loomis Sayles’ Proxy Committee has established these routine policies in what it believes are the best investment interests of Loomis Sayles’ clients.
The Proxy Committee’s specific responsibilities include the following: (1) the development, authorization, implementation and updating of the Proxy Voting Policies and Procedures (the “Procedures”), including an annual review of the Procedures to ensure consistency with internal policies and regulatory agency policies, to review existing voting guidelines and developing additional voting guidelines to assist in the review of proxy proposals, and to review the proxy voting process and address any general issues that relate to proxy voting, (2) oversight of the proxy voting process including oversight of the vote on proposals according to the predetermined policies in the voting guidelines, directing the vote on proposals where there is reason not to vote according to the predetermined policies in the voting guidelines or where proposals require special consideration, and consultation with the portfolio managers and analysts for the fund holding the security when necessary or appropriate and, (3) engagement and oversight of third-party vendors, including Proxy Voting Services.
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Loomis Sayles has established policies and procedures to ensure that proxies are voted in its clients’ best interest and are not affected by any possible conflicts of interests. First, except in certain limited instances, Loomis Sayles votes in accordance with its pre-determined policies set forth in the Procedures. Second, where these Procedures allow for discretion, Loomis Sayles will generally consider the recommendations of the Proxy Voting Services in making its voting decisions. However, if the Proxy Committee determines that the Proxy Voting Services’ recommendation is not in the best interests of Loomis Sayles’ clients, then the Proxy Committee may use its discretion to vote against the Proxy Voting Services’ recommendation, but only after taking the following steps: (1) conducting a review for any material conflict of interest Loomis Sayles may have; and, (2) if any material conflict is found to exist, excluding anyone at Loomis Sayles who is subject to that conflict of interest from participating in the voting decision in any way. However, if deemed necessary or appropriate by the Proxy Committee after full disclosure of any conflict, that person may provide information, opinions or recommendations on any proposal to the Proxy Committee. In such event, prior to directing any vote, the Proxy Committee will make reasonable efforts to obtain and consider information, opinions and recommendations from or about the opposing position.
NEUBERGER BERMAN
Sub-Advisor to the High Income Alternatives Fund
Neuberger Berman has implemented written Proxy Voting Policies and Procedures (the “Proxy Voting Policy”) that are designed to reasonably ensure that Neuberger Berman votes proxies prudently and in the best interest of its advisory clients for whom Neuberger Berman has voting authority. The Proxy Voting Policy also describes how Neuberger Berman addresses any conflicts that may arise between its interests and those of its clients with respect to proxy voting. The following is a summary of the Proxy Voting Policy.
Neuberger Berman’s Governance and Proxy Committee (“Proxy Committee”) is responsible for developing, authorizing, implementing and updating the Proxy Voting Policy, administering and overseeing the proxy voting process, and engaging and overseeing any independent third-party vendors as voting delegates to review, monitor and/or vote proxies. In order to apply the Proxy Voting Policy noted above in a timely and consistent manner, Neuberger Berman utilizes Glass, Lewis & Co. (“Glass Lewis”) to vote proxies in accordance with Neuberger Berman’s voting guidelines, or in instances where a material conflict has been determined to exist, in accordance with the voting recommendations of an independent third party.
Neuberger Berman retains final authority and fiduciary responsibility for proxy voting. Neuberger Berman believes that this process is reasonably designed to address material conflicts of interest that may arise between Neuberger Berman and a client as to how proxies are voted.
In the event that an investment professional at Neuberger Berman believes that it is in the best interest of a client or clients to vote proxies in a manner inconsistent with Neuberger Berman’s proxy voting guidelines, the Proxy Committee will review information submitted by the investment professional to determine that there is no material conflict of interest between Neuberger Berman and the client with respect to the voting of the proxy in the requested manner.
If the Proxy Committee determines that the voting of a proxy as recommended by the investment professional would not be appropriate. the Proxy Committee shall: (i) take no further action, in which case Glass Lewis shall vote such proxy in accordance with the voting guidelines; (ii) disclose such conflict to the client or clients and obtain written direction from the client as to how to vote the proxy; (iii) suggest that the client or clients engage another party to determine how to vote the proxy; or (iv) engage another independent third party to determine how to vote the proxy.
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NUANCE
Sub-Advisor to the Equity Fund
It is Nuance’s policy, where it has accepted responsibility to vote proxies on behalf a particular client, to vote such proxies in the best interest of its clients and ensure that the vote is not the product of an actual or potential conflict of interest. For client’s that are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), it is Nuance’s policy to follow the provisions of any ERISA plan’s investment policy statement or other documentation that might be provided in the voting of plan securities, unless it determines that to do so would breach its fiduciary duties under ERISA.
Responsibility
Where Nuance has accepted responsibility to vote proxies on behalf a particular client, the Co-Chief Investment Officer is responsible for ensuring that proxies are voted in a manner consistent with the proxy voting guidelines adopted by Nuance (the “Proxy Voting Guidelines”) and Nuance’s policies and procedures.
Procedures
Nuance will vote client proxies where a client requests and Nuance accepts such responsibility, or in the case of an employee benefit plan, as defined by ERISA, where such responsibility has been properly delegated to, and assumed by, Nuance. In such circumstances Nuance will only cast proxy votes in a manner consistent with the best interest of its clients or, to the extent applicable, their beneficiaries. Nuance shall, in its Form ADV, generally disclose to clients information about these policies and procedures and how clients may obtain information on how Nuance voted their proxies when applicable. It is generally the responsibility of the custodian appointed by the client, or the program sponsor in the case of the SMA/UMA Accounts, to ensure ballots are generated sufficiently in advance of the relevant meeting to allow adequate time for the processing of both paper and electronic ballots to be delivered to Nuance’s proxy voting vendor, ISS. Certain custodians provide Nuance with notice of eligible proxy ballots in the aggregate, rather than on the underlying account level. In the case of aggregated ballots, Nuance is not afforded underlying account-level transparency. Nuance undertakes reasonable efforts to reconcile aggregated ballots to the account level but in instances where that is not possible, Nuance’s policy is to vote such ballots in accordance with its policy. At any time, a client may contact Nuance to request information about its proxy voting policies. It is generally Nuance’s policy not to disclose its proxy voting records to unaffiliated third parties or special interest groups.
Nuance’s Trading & Analytics Departments will be responsible for monitoring corporate actions and ensuring that proxies are submitted in a timely manner. Nuance may delegate the responsibility to vote client proxies to one or more persons affiliated with Nuance (such person(s) are hereafter collectively referred to as “Responsible Voting Parties”) consistent with the Proxy Voting Guidelines. Specifically, when Nuance receives proxy proposals where the Proxy Voting Guidelines outline its general position as voting either “for” or “against,” the proxy will be voted by one of the Responsible Voting Parties in accordance with Nuance’s Proxy Voting Guidelines. When Nuance receives proxy proposals where the Proxy Voting Guidelines do not include a recommendation or otherwise outline a general position as voting on a case-by-case basis, the proxy will be forwarded to the portfolio management team, which will review the proposal and either vote the proxy or instruct one of the Responsible Voting Parties on how to vote the proxy.
It is intended that the Proxy Voting Guidelines will be applied with a measure of flexibility. Accordingly, except as otherwise provided in these policies and procedures, the Responsible Voting Parties may vote a proxy contrary to the Proxy Voting Guidelines if the firm has determined that such action is in the best interest of Nuance’s clients. In the exercise of such discretion, the Responsible Voting Parties along with other relevant firm personnel, may take into account a wide array of factors relating to the matter under consideration, the nature of the proposal, and the company involved. Similarly, poor past performance, uncertainties about management and future directions, and other factors may lead to a conclusion that particular proposals by an issuer present unacceptable investment risks and should be voted in accordance with such conclusions. In addition, the proposals should be evaluated in context. Special circumstances or instructions from clients may also justify casting different votes for different clients with respect to the same proxy vote.
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The Responsible Voting Parties will document the rationale for all proxies voted contrary to the Proxy Voting Guidelines. Such information will be maintained as part of Nuance’s recordkeeping process. In performing its responsibilities the firm may consider information from one or more sources including, but not limited to, management of the company presenting the proposal, shareholder groups, legal counsel, and independent proxy research services. In all cases, however, the ultimate decisions on how to vote proxies are made by the Responsible Voting Parties. The Responsible Voting Parties may consult with various members of the firm’s staff including the Portfolio Management Team or the Compliance & Risk Committee.
Retention and Oversight of Proxy Advisory Firms
The firm has retained Institutional Shareholder Service (“ISS”), an independent adviser that specializes in providing a variety of fiduciary-level proxy services to financial service firms. The services provided include substantive, in-depth research, global and domestic issuer analysis, vote and issue recommendations, record retention, reconciliation, and ballot processing. To assist Nuance in facilitating proxy voting, ISS provides company level reports that summarize key data elements contained within an issuers proxy statement and an analysis on vote measures. While Nuance votes all proxies based on its own policies in the best interests of its clients, the firm primarily relies on the ISS recommendations. ISS provides vote execution, reporting and recordkeeping services in addition to vote research.
Nuance monitors its vendor communications to take into account additional information (i.e., subsequent notices or filings) and conducts an additional analysis if the firm determines that information could impact the outcome of the firm’s vote determination.
As part of Nuance’s ongoing oversight of vendors, periodic due diligence is performed on ISS to ensure policies regarding vote recommendation methodologies are understood, to make a reasonable inquiry that conflicts of interest are known and disclosed, and to ensure that the firm can form a reasonable belief that the proxy advisory firm has the capacity and competency to analyze the matters upon which it offers recommendations to Nuance. The Chief Compliance Officer along with the Responsible Voting Parties will ensure that any third party recommendations followed will be consistent with the Proxy Voting Guidelines.
Conflicts of Interest
Nuance may occasionally be subject to conflicts of interest in the voting of proxies due to business or personal relationships it maintains with persons having an interest in the outcome of certain votes. Nuance, along with any affiliates and/or employees, may also occasionally have business or personal relationships with other proponents of proxy proposals, participants in proxy contests, corporate directors, or candidates for directorships.
If the Responsible Voting Parties become aware of any potential or actual conflict of interest relating to a particular proxy proposal, they will promptly report such conflict to the Compliance & Risk Committee. Conflicts of interest will be handled in various ways depending on their type and materiality of the conflict. Nuance will take the following steps to ensure that its proxy voting decisions are made in the best interest of its clients and are not the product of such conflict:
Where the Proxy Voting Guidelines outline Nuance’s voting position, as either “for” or “against” such proxy proposal, voting will be in accordance with the Proxy Voting Guidelines.
Where the Proxy Voting Guidelines outline Nuance’s voting position to be determined on a “case-by-case” basis for such proxy proposal, or such proposal is not contemplated in the Proxy Voting Guidelines, then one of the two following methods will be selected by the Proxy Voting Committee depending upon the facts and circumstances of each situation and the requirements of applicable law:
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Vote the proxy in accordance with the voting recommendation of a non-affiliated third party vendor; or
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Provide the client with sufficient information regarding the proxy proposal and obtain the client’s consent or direction before voting.
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Review of Third Party Research Service Conflicts of Interest
Nuance considers the research of ISS, so the Responsible Vote Parties take reasonable steps to verify that ISS is, in fact, independent based on all of the relevant facts and circumstances. This includes reviewing ISS’s conflict management procedures on an annual basis. When reviewing these conflict management procedures, the firm will consider, among other things, (i) whether ISS has the capacity and competency to adequately analyze proxy issues; (ii) whether ISS can offer research in an impartial manner and in the best interests of the firm’s clients; and (iii) what conflicts ISS has disclosed to the firm.
Special Circumstances
Nuance may choose not to vote proxies in certain situations or for certain accounts, such as: (i) where a client has informed Nuance that they wish to retain the right to vote the proxy; (ii) where Nuance deems the cost of voting the proxy would exceed any anticipated benefit to the client; (iii) where a proxy is received for a client that has terminated Nuance’s services; (iv) where a proxy is received for a security that Nuance no longer manages (i.e., Nuance had previously sold the entire position); and/or (v) where the exercise of voting rights could restrict the ability of an account’s portfolio manager to freely trade the security in question (as is the case, for example, in certain foreign jurisdictions known as “blocking markets”).
In addition, certain accounts over which Nuance has proxy-voting discretion may participate in securities lending programs administered by the custodian or a third party. Because the title to loaned securities passes to the borrower, Nuance will be unable to vote any security that is out on loan to a borrower on a proxy record date. If the Firm has investment discretion, however, the Firm shall reserve the right to instruct the lending agent to terminate a loan in situations where the matter to be voted upon is deemed to be material to the investment and the benefits of voting the security are deemed to outweigh the costs of terminating the loan.
OP
Sub-Advisor to the Oldfield International Value Fund
OP complies with its Proxy Voting Policies and Procedures (the “Procedures”) that are designed to ensure that it votes proxies with respect to client securities in the best interests of its clients. The Procedures also require that OP identify any conflicts of interest between OP and its clients. If a material conflict exists, OP will determine whether voting in accordance with the voting guidelines and factors described in the Procedures is in the best interests of the client or take some other appropriate action.
OP will generally vote in favor of routine corporate housekeeping proposals such as the election of directors where no corporate governance issues are implicated, the reappointment of auditors or increases or reclassification of common stock. Generally, OP will vote against proposals that make it more difficult to replace members of a board of directors, that cause management to be too heavily represented on the board, or that introduce cumulative voting, unequal voting rights or create supermajority voting. For all other proposals, OP will determine whether a proposal is in the best interests of its clients and may take into account, among others, the following factors: whether the proposal was recommended by management and OP’s opinion of management; whether the proposal acts to entrench existing management; whether the proposal fairly compensates management for past and future performance; and whether the proposal is likely to strengthen the issuer’s business franchise and therefore benefit its shareholders over a time frame that is relevant for OP’s clients’ portfolios.
PICTET
Sub-Advisor to the International Fund
Pictet uses the services of third party specialists to assist it in proxy voting, including the provision of background research on corporate governance, voting recommendation and transmission of ballots. Voting recommendations are based on Voting Guidelines defined by Pictet and cover matters that are commonly submitted
111
to shareholders, including but not limited to, issues relating to the board of directors, capital structure, auditors, mergers and corporate restructuring. Pictet always reserves the right to deviate from third-party voting recommendations on a case-by-case basis in order to act in the best interests of its clients. Proxy voting statistics are available upon request.
SANDS CAPITAL
Sub-Advisor to the Equity Fund
Sands’ policies and procedures are designed to ensure that Sands is administering proxy voting matters in a manner consistent with the best interests of client and with the firm’s fiduciary duties under applicable law. Sands seeks to discharge the firm’s fiduciary duty to clients for whom Sands has proxy voting authority by monitoring corporate events and voting proxies solely in the best interests of clients. In voting proxies, Sands is neither an activist in corporate governance nor an automatic supporter of management. However, because Sands believes that the management teams of most companies it invests in generally seek to serve shareholder interests, Sands believes that voting proxy proposals in the client’s best economic interests usually means voting with the recommendations of these management teams. Accordingly, Sands believes that the recommendation of management on any issue should be given substantial weight in determining how proxy issues are resolved.
Sands has established a Proxy Committee that is responsible for (i) the oversight and administration of proxy voting on behalf of Sands’ clients, including developing, authorizing, implementing and updating Sands’ proxy voting policies and procedures; (ii) overseeing the proxy voting process; and (iii) engaging and overseeing any third party service provider as voting agent to receive proxy statements and/or to provide information, research and other services intended to facilitate the proxy voting decisions made by Sands. The Proxy Committee has established guidelines that are applied generally and not absolutely, such that Sands’ evaluation of each proposal will be performed in the context of the guidelines considering the circumstances of the company whose proxy is being voted. In evaluating a proxy proposal, a research team member may consider information from many sources, including management of the company, shareholder groups and independent proxy research services.
For routine matters which generally means that such matter will not measurably change the structure, management, control or operation of the company and are consistent with customary industry standards and practices, as well as the laws of the state of incorporation applicable to the company, Sands will vote in accordance with the recommendation of the company’s management, unless, in Sands’ opinion, such recommendation is not conducive to long term value creation. Non-routine matters involve a variety of issues including, but not limited to, directors’ liability and indemnity proposals, executive compensation plans, mergers, acquisitions, and other restructurings submitted to a shareholder vote, anti-takeover and related provisions and shareholder proposals and will require company specific and a case-by-case review and analysis. With respect to matters that do not fit in the categories stated above, Sands will exercise its best judgment as a fiduciary to vote in accordance with the best interest of its clients.
When a Sands client participates in a securities lending program, Sands will not be able to vote the proxy of the shares out on loan. Sands will generally not seek to recall for voting the client shares on loan. However, under rare circumstances, for voting issues that may have a particularly significant impact on the investment, Sands may request a client to recall securities that are on loan if it is determined that the benefit of voting outweighs the costs and lost revenue to the client and the administrative burden of retrieving the securities. The research team member who is responsible for voting the proxy will notify the Proxy Committee in the event he/she believes a recall of loaned securities is necessary. In determining whether a recall of a security is warranted (“Significant Event”), Sands will take into consideration whether the benefit of the vote would be in the client’s best interest despite the costs and the lost revenue to the client and the administrative burden of retrieving the securities. Sands may utilize third-party service providers to assist it in identifying and evaluating whether an event constitutes a Significant Event. The Proxy Committee will review the proxy proposals that have been determined to be Significant Events from time to time and will adjust the foregoing standard as it deems necessary.
112
For purposes of identifying conflicts, the Proxy Committee will rely on publicly available information about a company and its affiliates, information about the company and its affiliates that is generally known by Sands’ employees and other information known by a member of the Proxy Committee. The Proxy Voting Committee may determine that Sands has a conflict of interest as a result of the following: (1) a significant business relationship which may create an incentive for Sands to vote in favor of management; (2) significant personal or family relationships, meaning those that would be reasonably likely to influence how Sands votes the proxy; and (3) contact with Proxy Committee members for the purpose of influencing how a proxy is to be voted.
In the event that the Proxy Committee determines that Sands has a conflict of interest with respect to a proxy proposal, the Proxy Committee shall also determine whether the conflict is “material” to that proposal. The Proxy Committee may determine on a case-by-case basis that a particular proposal does not involve a material conflict of interest. To make this determination, the Proxy Committee must conclude that the proposal is not directly related to Sands’ conflict with the issuer. If the Proxy Committee determines that a conflict is not material, then Sands may vote the proxy in accordance with the recommendation of the research team member. In the event that the Proxy Committee determines that Sands has a material conflict of interest with respect to a proxy proposal, Sands will vote on the proposal in accordance with the determination of the Proxy Committee. Alternatively, prior to voting on the proposal, Sands may (i) contact an independent third party to recommend how to vote on the proposal and vote in accordance with the recommendation of such third party; or (ii) with respect to client accounts that are not subject to ERISA, fully disclose the nature of the conflict to the client and obtain the client’s consent as to how Sands will vote on the proposal. Sands may not address a material conflict of interest by abstaining from voting, unless the Proxy Committee has determined that abstaining from voting on the proposal is in the best interests of clients.
SBH
Sub-Advisor to the SBH Focused Small Value Fund
SBH has adopted proxy voting policies and procedures that address recordkeeping and include provisions that address material conflicts of interest that arise in the proxy voting process. SBH relies on a third-party vendor, Institutional Shareholder Services (“ISS”), to research, vote and record all proxy ballots for the security positions maintained on clients’ behalf and for which the Adviser has voting authority. Annually, SBH reviews ISS’ independence and its Proxy Voting Guidelines. SBH follows ISS’ General Guidelines on most issues for shareholder votes.
The ISS’ Global Voting Principles were launched in 2013 and provide for four key tenets on accountability, stewardship, independence and transparency. These underlie their approach to developing recommendations on management and shareholder proposals at publicly traded companies.
The principles guiding the policy construction intend to assist institutional investors in meeting their fiduciary requirements, with respect to voting, by aiming to promote long-term shareholder value creation and risk mitigation at their portfolio firms through support of responsible global corporate governance practices.
These practices seek to respect shareholder rights and provide appropriate transparency, taking into account relevant laws, customs, and best practice codes of each market and region, as well as the right and responsibility of shareholders to make informed voting decisions.
In the rare instance when a portfolio manager or analyst believes that an ISS recommendation would be to the detriment of SBH’s investment clients, SBH can and will override ISS’ recommendation through a manual vote. If more than one investment team or wealth management portfolio manager holds the security, the decision to override should be authorized by a member of each investment team or the wealth management portfolio manager. The final authorization to override an ISS recommendation must be approved by the Chief Compliance Officer (CCO) or Chief Executive Officer (CEO) of SBH. A written record supporting the decision to override the ISS recommendation will be maintained.
113
Generally, for stocks traded on foreign exchanges, SBH will exercise its voting authority. However, if SBH believes that by voting, a client will incur excessive expense or that a lack of liquidity of a stock may be an issue or for any other reason that seeks to optimize the benefit to the client, SBH may not exercise its voting authority after considering all relevant factors.
WATER ISLAND
Sub-Advisor to the Alternative Strategies Fund
Water Island takes its fiduciary responsibilities very seriously and believes the right to vote proxies is a significant asset of shareholders and clients. Water Island exercises its voting responsibilities as a fiduciary, solely with the goal of maximizing the value of its shareholders’ and clients’ investments. Water Island has adopted and implemented proxy voting policies and procedures that are designed to reasonably ensure that proxies are voted in the best interests of its clients. The policies and procedures include proxy voting guidelines, address the manner in which material conflicts of interest that may arise in the proxy voting process should be handled, and contain recordkeeping requirements.
Since the quality and depth of management is a primary factor considered when investing in a company, Water Island gives substantial weight to the recommendation of management on any issue. However, Water Island will consider each issue on its own merits, and the position of a company’s management will not be supported in any situation where it is found not to be in the best interests of Water Island’s clients. For example, Water Island generally votes against any management proposals that it believes could prevent companies from realizing their maximum market value or would insulate companies and/or management from accountability to shareholders or prudent regulatory compliance.
Water Island generally will vote in favor of proposals that are a standard and necessary aspect of business operations and that Water Island believes will not typically have a significant effect on the value of the investment. Proposals that change the status of a company, its individual securities, or the ownership status of the securities will be reviewed on a case-by-case basis. Water Island generally will vote against any proposal that attempts to limit shareholder democracy in a way that could restrict the ability of shareholders to realize the value of their investment and generally will support proposals that maintain or expand shareholder democracy. Water Island believes that compensation should be reasonable and used to align the interests of directors, executives, and employees with the long-term financial success of the company. Each compensation proposal is reviewed individually.
Water Island may abstain from voting proxies or deviate from the policies stated above in certain situations, such as when the cost of voting the proxy exceeds the expected benefit to the client or when required under applicable law, rule, or regulation. For example, Water Island may abstain when share blocking is imposed in certain countries, when it may be necessary to hire a translator or travel to vote in person, or when the securities are on loan and the income benefit exceeds the benefit of voting.
Water Island believes that conflicts of interest must be resolved in the way that will most benefit its clients. Water Island recognizes that under certain circumstances it may have a conflict of interest in voting proxies on behalf of its clients. Such circumstances may include, but are not limited to, situations where Water Island or one or more of its affiliates, has or is seeking a client relationship with the issuer of the security that is the subject of the proxy vote or where a portfolio manager has business or personal relationships with an officer or director of the issuer. Water Island shall periodically inform its employees that they are under an obligation to be aware of the potential for conflicts of interest on the part of Water Island with respect to voting proxies on behalf of clients, both as a result of the employee’s personal relationships and due to circumstances that may arise during the conduct of Water Island’s business, and to bring conflicts of interest of which they become aware to the attention of Water Island. Water Island shall not vote proxies relating to such issuers on behalf of its client accounts until it has determined that the conflict of interest is not material or a method of resolving such conflict of interest has been agreed upon by the Board. A conflict of interest will be considered material to the extent that it is determined that
114
such conflict has the potential to influence Water Island’s decision-making in voting a proxy. Materiality determinations will be based upon an assessment of the particular facts and circumstances. If Water Island determines that a conflict of interest is not material, Water Island may vote proxies notwithstanding the existence of a conflict.
MORE INFORMATION ABOUT PROXY VOTING
The actual voting records relating to portfolio securities during the most recent 12-month period ended June 30, are available without charge, upon request, by calling toll-free, 1-800-960-0188 or by accessing the SEC’s website at www.sec.gov. In addition, a copy of the Funds’ proxy voting policies and procedures are also available without charge, upon request, by calling 1-800-960-0188.
ADMINISTRATOR
State Street Bank and Trust Company (“State Street” or the “Administrator”) serves as the Trust’s administrator pursuant to an Administration Agreement dated September 10, 2014 (the “Administration Agreement”). State Street is a wholly owned subsidiary of State Street Corporation, a publicly held bank holding company. State Street is located at One Lincoln Street, Boston, MA 02111. Pursuant to the Administration Agreement with the Trust, the Administrator has agreed to furnish statistical and research data, clerical services, and stationery and office supplies; prepare various reports for filing with the appropriate regulatory agencies; and prepare various materials required by the SEC or any state securities commission having jurisdiction over the Trust. The Administration Agreement provides that the Administrator performing services thereunder shall not be liable under the Administration Agreement except for the negligence or willful misconduct of the Administrator, its officers or employees. As compensation for these services, each Fund pays State Street an annual administration fee based upon a percentage of the average net assets of such Fund.
The following table shows administrative fees paid to the Funds’ administrator during the fiscal years or period ended December 31:
|
|
|
|
|
|
|
|
|
Fund
|
|
Fiscal Year 2020
|
|
Fiscal Year 2019
|
|
Fiscal Year 2018
|
|
Equity Fund
|
|
$55,517
|
|
$68,253
|
|
$61,459
|
|
International Fund
|
|
$67,160
|
|
$77,315
|
|
$114,927
|
|
Smaller Companies Fund*
|
|
$8,074
|
|
$14,042
|
|
$3,157
|
|
Alternative Strategies Fund
|
|
$341,408
|
|
$373,407
|
|
$371,586
|
|
High Income Alternatives Fund
|
|
$33,897
|
|
$29,097
|
|
$4,112
|
|
SBH Focused Small Value Fund**
|
|
$3,074
|
|
N/A
|
|
N/A
|
|
Oldfield International Value Fund***
|
|
$0
|
|
N/A
|
|
N/A
|
|
*
|
The Smaller Companies Fund was reorganized into the SBH Focused Small Value Fund on October 15, 2020.
|
|
**
|
The SBH Focused Small Value Fund commenced operations on July 31, 2020.
|
|
***
|
The Oldfield International Value Fund commenced operations on November 30, 2020.
|
PORTFOLIO TRANSACTIONS AND BROKERAGE
Each Management Agreement states that, with respect to the segment of each Fund’s portfolio allocated to the applicable Sub-Advisor, the Sub-Advisor shall be responsible for broker-dealer selection and for negotiation of brokerage commission rates, provided that the Sub-Advisor shall not direct orders to an affiliated person of the Sub-Advisor without general prior authorization to use such affiliated broker or dealer by the Board. In general, a Sub-Advisor’s primary consideration in effecting a securities transaction will be execution at the most favorable cost or proceeds under the circumstances. In selecting a broker-dealer to execute each particular transaction, a Sub-Advisor may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of each Fund on a continuing basis. The price to each Fund in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered.
115
The aggregate dollar amounts of brokerage commissions paid by the Funds during the last three fiscal years or period are as follows:
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Fund
|
|
Fiscal Year 2020
|
|
Fiscal Year 2019
|
|
Fiscal Year 2018
|
|
Equity Fund
|
|
$114,199
|
|
$88,079
|
|
$123,105
|
|
International Fund
|
|
$284,200
|
|
$240,390
|
|
$362,996
|
|
Smaller Companies Fund*
|
|
$34,624
|
|
$43,170
|
|
$43,572
|
|
Alternative Strategies Fund
|
|
$1,404,892
|
|
$1,100,634
|
|
$1,327,250
|
|
High Income Alternatives Fund
|
|
$39,970
|
|
$38,165
|
|
$32,034
|
|
SBH Focused Small Value Fund**
|
|
$22,526
|
|
N/A
|
|
N/A
|
|
Oldfield International Value Fund***
|
|
$4,195
|
|
N/A
|
|
N/A
|
|
*
|
The Smaller Companies Fund was reorganized into the SBH Focused Small Value Fund on October 15, 2020.
|
|
**
|
The SBH Focused Small Value Fund commenced operations on July 31, 2020.
|
|
***
|
The Oldfield International Value Fund commenced operations on November 30, 2020.
|
Of these amounts, the dollar amount of brokerage commissions paid to the brokers who furnished research services during the last three fiscal years are as follows:
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|
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Fund
|
|
Fiscal Year 2020
|
|
Fiscal Year 2019
|
|
Fiscal Year 2018
|
|
Equity Fund
|
|
$41,694
|
|
$25,688
|
|
$31,989
|
|
International Fund
|
|
$62,347
|
|
$40,552
|
|
$13,076
|
|
Smaller Companies Fund*
|
|
$12,937
|
|
$13,725
|
|
$13,199
|
|
Alternative Strategies Fund
|
|
$906,499
|
|
$702,296
|
|
$956,389
|
|
High Income Alternatives Fund
|
|
$0
|
|
$0
|
|
$0
|
|
SBH Focused Small Value Fund**
|
|
$8,394
|
|
N/A
|
|
N/A
|
|
Oldfield International Value Fund***
|
|
$0
|
|
N/A
|
|
N/A
|
|
*
|
The Smaller Companies Fund was reorganized into the SBH Focused Small Value Fund on October 15, 2020.
|
|
**
|
The SBH Focused Small Value commenced operations on July 31, 2020.
|
|
***
|
The Oldfield International Value Fund commenced operations on November 30, 2020.
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For the fiscal years ended December 31, 2020, 2019 and 2018, the Funds paid no commissions to broker-dealers affiliated with the Advisor or any of the Sub-Advisors.
Subject to such policies as the Advisor and the Board may determine, a Sub-Advisor shall not be deemed to have acted unlawfully or to have breached any duty created by its Management Agreement with a Fund or otherwise solely by reason of its having caused any Fund to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Sub-Advisor a commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Sub-Advisor determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Sub-Advisor’s or Advisor’s overall responsibilities with respect to each Fund or other advisory clients. Each Sub-Advisor is further authorized to allocate the orders placed by it on behalf of each Fund to such brokers or dealers who also provide research or statistical material, or other services, to the Trust, the Advisor or any affiliate of either. Such allocation shall be in such amounts and proportions as the Sub-Advisor shall determine. Each Sub-Advisor shall report on such allocations regularly to the Advisor and the Trust, indicating the broker-dealers to whom such allocations have been made and the basis for such allocations.
116
On occasions when a Sub-Advisor deems the purchase or sale of a security to be in the best interest of a Fund as well as other clients of the Sub-Advisor, the Sub-Advisor, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Sub-Advisor in the manner it considers to be the most equitable and consistent with its fiduciary obligations to each Fund and to such other clients.
The following Funds acquired securities of their regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) during the most recent fiscal year.
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Fund
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Broker
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Amount
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Equity Fund
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Citigroup Global Markets, Inc.
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$2,608,218
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|
Bank of America Securities LLC
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|
$2,697,590
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|
J.P. Morgan Chase & Co.
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|
$1,655,722
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Bank of New York Mellon Corp.
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|
$1,820,039
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Alternative Strategies Fund
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|
Citigroup Global Markets, Inc.
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|
$6,405,857
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|
Bank of America Securities LLC
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|
$1,476,761
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|
Jefferies Financial Group, Inc.
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|
$4,103,083
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|
|
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Morgan Stanley
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|
$116,501
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|
High Income Alternatives Fund
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|
Citigroup Global Markets, Inc.
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|
$102,875
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|
Bank of America Securities LLC
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|
$106,200
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|
|
|
Jefferies Financial Group, Inc.
|
|
$49,937
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Bank of New York Mellon Corp.
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|
$33,159
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|
Oldfield International Value Fund
|
|
Nomura Holdings, Inc.
|
|
$477,240
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Distribution of Fund Shares
The Funds’ principal underwriter is ALPS Distributors, Inc., 1290 Broadway, Suite 1100, Denver, Colorado 80203. The Distributor is engaged on a non-exclusive basis to assist in the distribution of shares in various jurisdictions. The Distributor is compensated for performing this service by the Advisor and is not paid by the Funds.
Distribution Plan
As noted in the prospectus, the Trust has adopted a Distribution and Shareholder Servicing Plan pursuant to Rule 12b-1 under the 1940 Act (the “Distribution Plan”) on behalf of the Investor Class of the Alternative Strategies Fund.
Under the Distribution Plan, the Alternative Strategies Fund is authorized to pay the Distributor for distribution services related to Investor Class shares (the “Distribution Fee”) at an annual rate of 0.25% of the Funds’ average daily net assets attributable to Investor Class shares. The Distribution Plan provides that the Distributor may use all or any portion of such Distribution Fee to finance any activity that is principally intended to result in the sale of the Alternative Strategies Fund’s Investor Class shares, subject to the terms of the Distribution Plan, or to provide certain shareholder services.
The Distribution Fee is payable to the Distributor regardless of the distribution-related expenses actually incurred. Because the Distribution Fee is not directly tied to expenses, the amount of distribution fees paid by the Investor Class of the Alternative Strategies Fund during any year may be more or less than actual expenses incurred pursuant to the Distribution Plan. For this reason, this type of distribution fee arrangement is characterized by the staff of the SEC as a “compensation” plan.
117
The Distributor may use the Distribution Fee to pay for services covered by the Distribution Plan including, but not limited to, advertising, compensating underwriters, dealers and selling personnel engaged in the distribution of the Alternative Strategies Fund’s shares, the printing and mailing of prospectuses, statements of additional information and reports to prospective shareholders, the printing and mailing of sales literature, and obtaining whatever information, analyses and reports with respect to marketing and promotional activities that the Alternative Strategies Fund may, from time to time, deem advisable.
The tables below show the amount of the Distribution Fee for the fiscal year or period ended December 31, 2020.
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Fund
|
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Distribution Fee incurred
by Investor Class Shares
|
|
|
Alternative Strategies Fund
|
|
$
|
237,394
|
|
|
High Income Alternatives Fund†
|
|
$
|
2,468
|
|
|
†
|
Effective December 31, 2020, the Investor Class shares of the High Income Alternatives Fund were converted into Institutional Class shares of the Fund.
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Fund
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|
Advertising
and
Marketing
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|
Printing
and
Postage
|
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|
Payment
to
Distributor
|
|
|
Payment
to
Dealers
|
|
|
Compensation
to Sales
Personnel
|
|
|
Other
Expenses
|
|
|
Alternative Strategies Fund
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
237,394
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
High Income Alternatives Fund†
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,468
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
†
|
Effective December 31, 2020, the Investor Class shares of the High Income Alternatives Fund were converted into Institutional Class Shares of the Fund.
|
Other Shareholder Servicing Expenses Paid by the Funds
The Funds make payments to financial intermediaries for certain sub-recordkeeping, sub-transfer agent or similar services provided by financial intermediaries in amounts determined by the Funds’ Board of Trustees to represent reasonable amounts for those services. These expenses paid by a Fund would remain subject to any overall expense limitation applicable to that Fund. These expenses are in addition to any supplemental amounts the Advisor pays out of its own resources and are in addition to a Fund’s payment of any amounts through the Distribution Plan.
The prospect of receiving, or the receipt of additional payments or other compensation as described above by financial intermediaries may provide financial intermediaries and/or their salespersons with an incentive to favor sales of shares of the Funds, and other mutual funds whose affiliates make similar compensation available, over sale of shares of mutual funds (or non-mutual fund investments) not making such payments. You may wish to take these payment arrangements into account when considering and evaluating any recommendations relating to the Funds’ shares.
The table below identifies the financial intermediaries who received compensation from the Funds for providing sub-recordkeeping, sub-transfer agency or similar services during the calendar year ended December 31, 2020:
Firm
Bank of America Merrill Lynch
Charles Schwab
Fidelity Investments
Great West Financial Services
LPL Financial
118
Massachusetts Mutual
National Financial Services, LLC (Fidelity Brokerage)
Nationwide
Pershing LLC
TD – Ameritrade
Vanguard
Voya Financial
Payments by the Advisor
Set forth below is a list of the member firms of FINRA to which the Advisor, or its affiliates, made payments out of their revenues in connection with the sale and distribution of the Funds’ shares or for services to the Funds and their shareholders for the year ended December 31, 2020. Such payments are in addition to any Distribution Plan amounts paid to such FINRA member firms. Any additions, modifications, or deletions to the FINRA member firms identified in this list since December 31, 2020 are not reflected:
FINRA member firms
Raymond James
The Advisor or its affiliates may also make payments to selling and shareholder servicing agents that are not FINRA member firms and that sell shares of or provide services to the Funds and their shareholders, such as banks, insurance companies and plan administrators. These firms are not included on the list above, although they may be affiliated with companies on the above list.
PORTFOLIO TURNOVER
Although the Funds generally will not invest for short-term trading purposes, portfolio securities may be sold without regard to the length of time they have been held when, in the opinion of a Sub-Advisor, investment considerations warrant such action. Portfolio turnover rate is calculated by dividing (1) the lesser of purchases or sales of portfolio securities for the fiscal year by (2) the monthly average of the value of portfolio securities owned during the fiscal year. A 100% turnover rate would occur if all the securities in a Fund’s portfolio, with the exception of securities whose maturities at the time of acquisition were one year or less, were sold and either repurchased or replaced within one year. A high rate of portfolio turnover (100% or more) generally leads to higher transaction costs and may result in a greater number of taxable transactions as compared to the costs and taxable transactions of an investment company that holds investments for a longer period. The Advisor does not expect each Fund’s portfolio turnover rate (except for the Alternative Strategies Fund) to exceed 150% in most years.
Portfolio turnover rates for the fiscal years or period ended December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
2020
|
|
|
2019
|
|
|
Equity Fund
|
|
|
56.91
|
%
|
|
|
25.02
|
%
|
|
International Fund
|
|
|
59.61
|
%
|
|
|
45.48
|
%
|
|
Smaller Companies Fund*
|
|
|
N/A
|
|
|
|
64.88
|
%
|
|
Alternative Strategies Fund
|
|
|
193.98
|
%
|
|
|
190.21
|
%
|
|
High Income Alternatives Fund
|
|
|
87.63
|
%
|
|
|
90.51
|
%
|
|
SBH Focused Small Value Fund**
|
|
|
27.18
|
%
|
|
|
N/A
|
|
|
Oldfield International Value Fund***
|
|
|
2.51
|
%
|
|
|
N/A
|
|
|
*
|
The Smaller Companies Fund was reorganized into the SBH Focused Small Value Fund on October 15, 2020.
|
|
**
|
The SBH Focused Small Value Fund commenced operations on July 31, 2020.
|
|
***
|
The Oldfield International Value Fund commenced operations on November 30, 2020.
|
119
The Equity Fund’s portfolio turnover rate increased year over year due to a change in portfolio management and portfolio repositioning.
120
NET ASSET VALUE
The NAV of a Fund’s shares will fluctuate and is determined as of the close of trading on the NYSE (currently, 4:00 p.m., Eastern Time) each business day that the NYSE is open for trading. The NYSE annually announces the days on which it will not be open for trading. The most recent announcement indicates that the NYSE will not be open on the following days: New Year’s Day, Martin Luther King’s Birthday, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, the NYSE may close on days not included in that announcement.
The NAV per share is computed by dividing the value of the securities held by a Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares in a Fund outstanding at such time.
Generally, trading in and valuation of foreign securities is substantially completed each day at various times prior to the close of the NYSE. In addition, trading in and valuation of foreign securities may not take place on every day in which the NYSE is open for trading. In that case, the price used to determine a Fund’s NAV on the last day on which such exchange was open will be used, unless the Board determines that a different price should be used. Furthermore, trading takes place in various foreign markets on days in which the NYSE is not open for trading and on which a Fund’s NAV is not calculated. Occasionally, events affecting the values of such securities in U.S. dollars on a day on which a Fund calculates its NAV may occur between the times when such securities are valued and the close of the NYSE which will not be reflected in the computation of a Fund’s NAV unless the Board or its delegates deem that such events would materially affect the NAV, in which case an adjustment would be made.
Generally, a Fund’s investments are valued on the basis of market quotations. Securities or assets for which market quotations are not available, or for which the pricing service approved by the Board does not provide a valuation or provides a valuation that in the judgment of the relevant Sub-Advisor, with the concurrence of the Advisor, is stale or does not represent the fair value of such securities or assets, shall be valued by the Valuation Committee in consultation with the Advisor, the relevant Sub-Advisor, and the Administrator pursuant to procedures approved by the Board.
Each Fund’s securities, including ADRs, EDRs and GDRs, which are traded on securities exchanges, are generally determined on the basis of the last reported sale price on the exchange on which such securities are traded (or the NASDAQ official closing price for NASDAQ-reported securities, if such price is provided by the Funds’ accountant), as of the close of business on the day the securities are being valued or, lacking any reported sales, at the mean between the last available bid and asked price. Securities that are traded on more than one exchange are valued on the exchange determined by the Sub-Advisors to be the primary market. Securities traded in the over-the-counter market are valued at the mean between the last available bid and asked price prior to the time of valuation. Securities and assets for which market quotations are not readily available (including restricted securities, which are subject to limitations as to their sale) are valued at fair value as determined in good faith by or under the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days are valued at current market prices, as discussed above. Short-term securities with 60 days or less remaining to maturity are, unless conditions indicate otherwise, amortized to maturity based on their cost to a Fund if acquired within 60 days of maturity or, if already held by a Fund on the 60th day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed securities held by a Fund are valued on the basis of valuations provided by dealers in those instruments, by an independent pricing service and approved by the Board, or at fair value as determined in good faith by procedures approved by the Board. Any such pricing service, in determining value, will use information with respect to transactions in the securities being valued, quotations from dealers, market transactions in comparable securities, analyses and evaluations of various relationships between securities and yield to maturity information.
121
An option that is written by a Fund is generally valued at the last sale price or, in the absence of the last sale price, the last offer price. An option that is purchased by a Fund is generally valued at the last sale price or, in the absence of the last sale price, the last bid price. The value of a futures contract is the last sale or settlement price on the exchange or board of trade on which the future is traded or, if no sales are reported, at the mean between the last bid and asked price. When a settlement price cannot be used, futures contracts will be valued at their fair market value as determined by or under the direction of the Board. If an options or futures exchange closes after the time at which a Fund’s NAV is calculated, the last sale or last bid and asked prices as of that time will be used to calculate the NAV.
Any assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars at the official exchange rate or, alternatively, at the mean of the current bid and asked prices of such currencies against the U.S. dollar last quoted by a major bank that is a regular participant in the foreign exchange market or on the basis of a pricing service that takes into account the quotes provided by a number of such major banks. If neither of these alternatives is available or both are deemed not to provide a suitable methodology for converting a foreign currency into U.S. dollars, the Board in good faith will establish a conversion rate for such currency.
All other assets of a Fund are valued in such manner as the Board in good faith deems appropriate to reflect their fair value.
TAXATION
The following is a summary of certain material U.S. federal income tax consequences of acquiring, holding and disposing of the interests in the Funds. It is based upon the Code, the U.S. Treasury Regulations promulgated thereunder, published rulings and court decisions, all as in effect on the date hereof and all of which are subject to change or differing interpretations at any time (possibly with retroactive effect). This summary does not purport to deal with all of the U.S. federal income tax consequences applicable to a Fund or to all categories of investors, some of whom may be subject to special rules (including, without limitation, dealers in securities or currencies, financial institutions, life insurance companies, holders of Fund interests held as part of a “straddle,” “hedge” or “conversion transaction” with other investments, persons whose “functional currency” is not the U.S. dollar or persons for whom the Fund interests are not capital assets). This discussion also does not address U.S. federal tax consequences other than income taxes (such as estate and gift tax consequences). In addition, the following discussion generally applies only to “U.S. persons,” as defined for U.S. federal income tax purposes) who are beneficial owners of Fund interests. A “U.S. person” is generally defined as (i) a citizen or resident of the United States, (ii) a corporation (or an entity treated as a corporation for federal income tax purposes) or partnership (or an entity or arrangement treated as a partnership for federal income tax purposes) created or organized in or under the law of the United States or any political subdivision thereof, (iii) an estate whose income is subject to U.S. federal income tax regardless of its source or (iv) a trust if (a) it is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) it has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.
If a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) is an investor in the Funds, the U.S. federal income tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership.
The tax consequences of an investment in the Funds will depend not only on the nature of the Funds’ operations and the then applicable U.S. federal tax principles, but also on certain factual determinations that cannot be made at this time, and upon a particular investor’s individual circumstances. No advance rulings have been sought from the Internal Revenue Service (the “IRS”).
122
IN VIEW OF THE FOREGOING, EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING ALL THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS WITH SPECIFIC REFERENCE TO SUCH INVESTOR’S OWN PARTICULAR TAX SITUATION AND RECENT CHANGES IN APPLICABLE LAW.
Each Fund will be taxed, under the Code, as a separate entity from any other series of the Trust, and each Fund has elected to qualify for treatment as a regulated investment company (“RIC”) under Subchapter M of the Code. In each taxable year that a Fund qualifies, a Fund (but not its shareholders) will be relieved of federal income tax on that part of its investment company taxable income (consisting generally of interest and dividend income, net short term capital gain and net realized gains from currency transactions) and net capital gain that is distributed to shareholders.
In order to qualify for treatment as a RIC, a Fund must distribute annually to shareholders at least 90% of its investment company taxable income and must meet several additional requirements. Among these requirements are the following: (1) at least 90% of a Fund’s gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income derived with respect to its business of investing in securities or currencies; (2) at the close of each quarter of a Fund’s taxable year, at least 50% of the value of its total assets must be represented by cash and cash items (including receivables), U.S. Government securities, securities of other RICs and other securities, limited in respect of any one issuer, to an amount that does not exceed 5% of the value of a Fund and that does not represent more than 10% of the outstanding voting securities of such issuer; and (3) at the close of each quarter of a Fund’s taxable year, not more than 25% of the value of its assets may be invested in (i) securities (other than U.S. Government securities or the securities of other RICs) of any one issuer, (ii) securities (other than the securities of other RICs) of two or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses or related trades or businesses, or (iii) securities of one or more of qualified publicly traded partnerships, as such term is defined under the Code.
Distributions of net investment income and net realized capital gains by a Fund will be taxable to shareholders whether made in cash or reinvested in shares. In determining amounts of net realized capital gains to be distributed, any capital loss carryovers from prior years will be applied against capital gains to the extent permitted under the Code. Shareholders receiving distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the NAV of a share of a Fund on the reinvestment date. Fund distributions also will be included in individual and corporate shareholders’ income on which the alternative minimum tax may be imposed. A Fund may make taxable distributions to shareholders even during periods in which share prices have declined. Tax consequences are not the primary consideration of a Fund in implementing its investment strategy.
Each Fund or any securities dealer effecting a redemption of a Fund’s shares by a shareholder will be required to file information reports with the IRS with respect to distributions and payments made to the shareholder. In addition, under the federal backup withholding rules, a Fund will be required to withhold federal income tax at the current rate of 24% on taxable dividends, redemptions and other payments made to accounts of individual or other non-exempt shareholders who have not furnished their correct taxpayer identification numbers and made certain required certifications on the account application or with respect to which a Fund or the securities dealer has been notified by the IRS that the number furnished is incorrect or that the account is otherwise subject to federal backup withholding.
Each Fund intends to declare and pay dividends and other distributions, as stated in the prospectus. In order to avoid the payment of a 4% non-deductible federal excise tax based on net income, a Fund must declare on or before December 31 of each year, and pay on or before January 31 of the following year, distributions at least equal to 98% of its ordinary income for that calendar year and at least 98.2% of the excess of any capital gains over any capital losses realized in the one-year period ending October 31 of that year, together with any undistributed amounts of ordinary income and capital gains (in excess of capital losses) from the previous calendar year.
123
Certain U.S. shareholders, including individuals and estates and trusts, in the higher income brackets will be subject to an additional 3.8% federal tax on all or a portion of their “net investment income,” which generally will include dividends from the Funds and net gain from the disposition of shares of the Funds. U.S. shareholders are urged to consult their tax advisors regarding the implications of the additional net investment income tax resulting from an investment in the Funds.
Each Fund may receive dividend distributions from U.S. corporations. To the extent that a Fund receives such dividends and distributes them to its shareholders, and meets certain other requirements of the Code, corporate shareholders of a Fund may be entitled to the dividends received deduction, and individual shareholders may, depending on the Fund’s underlying sources of income, have “qualified dividend income,” which would be subject to tax at the shareholder’s maximum federal capital gains tax rate. Availability of the deduction and/or taxation at the maximum federal capital gains tax rate is subject to certain holding period and debt-financing limitations.
The use of hedging strategies, such as entering into futures contracts and forward contracts and purchasing options, involves complex rules that will determine the character and timing of recognition of the income received in connection therewith by a Fund. Income from foreign currencies (except certain gains therefrom that may be excluded by future regulations) and income from transactions in options, futures contracts and forward contracts derived by a Fund with respect to its business of investing in securities or foreign currencies should qualify as permissible income under Subchapter M of the Code.
For accounting purposes, premiums paid by a Fund are recorded as an asset and are subsequently adjusted to the current market value of the option. Any gain or loss realized by the Fund upon the expiration or sale of such options held by the Fund generally will be capital gain or loss.
Any security, option or other position entered into or held by a Fund that substantially diminishes the Fund’s risk of loss from any other position held by that Fund may constitute a straddle for federal income tax purposes. In general, straddles are subject to certain rules that may affect the amount, character and timing of the Fund’s gains and losses with respect to straddle positions by requiring, among other things, that the loss realized on disposition of one position of a straddle be deferred until gain is realized on disposition of the offsetting position; that the Fund’s holding period in certain straddle positions not begin until the straddle is terminated (possibly resulting in the gain being treated as short-term capital gain rather than long-term capital gain); and that losses recognized with respect to certain straddle positions, which would otherwise constitute short-term capital losses, be treated as long-term capital losses. Different elections are available to the Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject to Section 1256 of the Code (“Section 1256 Contracts”) and that are held by a Fund at the end of its taxable year generally will be required to be “marked to market” for federal income tax purposes, that is, deemed to have been sold at market value. Sixty percent of any net gain or loss recognized on these deemed sales and 60% of any net gain or loss realized from any actual sales of Section 1256 Contracts will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain foreign currency transactions that may affect the amount, timing and character of income, gain or loss recognized by a Fund. Under these rules, foreign exchange gain or loss realized with respect to foreign currency-denominated debt instruments, foreign currency forward contracts, foreign currency-denominated payables and receivables and foreign currency options and futures contracts (other than options and futures contracts that are governed by the mark-to-market and 60%/40% rules of Section 1256 of the Code and for which no election is made) is treated as ordinary income or loss. Some part of the Fund’s gain or loss on the sale or other disposition of shares of a foreign corporation may, because of changes in foreign currency exchange rates, be treated as ordinary income or loss under Section 988 of the Code, rather than as capital gain or loss.
124
Redemptions and exchanges of shares of a Fund will result in gains or losses for federal income tax purposes to the extent of the difference between the proceeds and the shareholder’s adjusted tax basis for the shares. Any loss realized (to the extent it is allowed) upon the redemption or exchange of shares within six months from their date of purchase will be treated as a long-term capital loss to the extent of distributions of long-term capital gain dividends with respect to such shares during such six-month period. All or a portion of a loss realized upon the redemption of shares of the Fund may be disallowed to the extent shares of the same Fund are purchased (including shares acquired by means of reinvested dividends) within 30 days before or after such redemption.
During the year or period ended December 31, 2020, the Funds utilized the following amounts of capital loss carry forwards:
|
|
|
|
|
|
|
Fund
|
|
Capital Loss
Carryforwards Utilized
|
|
|
Equity Fund
|
|
$
|
—
|
|
|
International Fund
|
|
$
|
—
|
|
|
Alternative Strategies Fund
|
|
$
|
19,986,550
|
|
|
High Income Alternatives Fund
|
|
$
|
—
|
|
|
SBH Focused Small Value Fund*
|
|
$
|
127,850
|
|
|
Oldfield International Value Fund**
|
|
$
|
—
|
|
The capital loss carryforwards for each Fund were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Fund
|
|
|
International Fund
|
|
|
Alternative
Strategies
Fund
|
|
|
High Income
Alternatives
Fund
|
|
|
SBH
Focused Small
Value Fund*
|
|
|
Oldfield
International
Value
Fund**
|
|
|
Capital Loss Carryforwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual Short-Term
|
|
$
|
—
|
|
|
$
|
(40,538,284
|
)
|
|
$
|
—
|
|
|
$
|
(317,499
|
)
|
|
$
|
(552,542
|
)
|
|
$
|
—
|
|
|
Perpetual Long-Term
|
|
$
|
—
|
|
|
$
|
(22,940,218
|
)
|
|
$
|
—
|
|
|
$
|
(1,794,637
|
)
|
|
$
|
(2,272,018
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
(63,478,502
|
)
|
|
$
|
—
|
|
|
$
|
(2,112,136
|
)
|
|
$
|
(2,824,560
|
)
|
|
$
|
—
|
|
|
*
|
The SBH Focused Small Value Fund commenced operations on July 31, 2020.
|
|
**
|
The Oldfield International Value Fund commenced operations on November 30, 2020.
|
Distributions and redemptions may be subject to state and local taxes, and the treatment thereof may differ from the federal income tax treatment. Foreign taxes may apply to non-U.S. investors.
Nonresident aliens and foreign persons are subject to different tax rules, and may be subject to withholding of up to 30% on certain payments received from a Fund.
Under the Foreign Account Tax Compliance Act (“FATCA”), and subject to any applicable intergovernmental agreements, a 30% withholding tax on each Fund’s distributions generally applies if paid to a foreign entity unless: (i) if the foreign entity is a “foreign financial institution,” it undertakes certain due diligence, reporting, withholding and certification obligations, (ii) if the foreign entity is not a “foreign financial institution,” it identifies certain of its U.S. investors or (iii) the foreign entity is otherwise excepted under FATCA. Under proposed Treasury regulations, which were to take effect on January 1, 2019 and upon which taxpayers may rely unless and until overridden by subsequent regulations, FATCA withholding on gross proceeds from the sale or
125
disposition of Fund shares and capital gain distributions is eliminated. If withholding is required under FATCA on a payment related to your shares, investors that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) on such payment generally will be required to seek a refund or credit from the IRS to obtain the benefits of such exemption or reduction. The Funds will not pay any additional amounts in respect to amounts withheld under FATCA. You should consult your tax advisor regarding the effect of FATCA based on your individual circumstances.
The above discussion and the related discussion in each prospectus are not intended to be complete discussions of all applicable tax consequences of an investment in the Funds. Paul Hastings LLP, counsel to the Trust, has expressed no opinion in respect thereof. Shareholders are advised to consult with their own tax advisers concerning the application of foreign, federal, state and local taxes to an investment in a Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends from a Fund’s investment company taxable income (whether paid in cash or invested in additional shares) will be taxable to shareholders as ordinary income to the extent of the Fund’s earnings and profits. Tax consequences are not the primary consideration of the Funds in implementing their investment strategies. Distributions of a Fund’s net capital gain (whether paid in cash or invested in additional shares) will be taxable to shareholders as long-term capital gain, regardless of how long they have held their Fund shares. A Fund may make taxable distributions to shareholders even during periods in which the share price has declined.
Dividends declared by a Fund in October, November or December of any year and payable to shareholders of record on a date in one of such months will be deemed to have been paid by the Fund and received by the shareholders on December 31 of such year if the dividends are paid by the Fund during the following January. Accordingly, such dividends will be taxed to shareholders for the year in which the record date falls.
The Funds are required to withhold as backup withholding 24% of all dividends, capital gain distributions and redemption proceeds payable to any individuals and certain other non-corporate shareholders who do not provide the Fund with their correct taxpayer identification number. The Funds also are required to withhold 24% of all dividends and capital gain distributions paid to such shareholders who otherwise are subject to federal backup withholding.
ANTI-MONEY LAUNDERING PROGRAM
The Trust has established an Anti-Money Laundering Compliance Program (the “Program”) as required by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”). To ensure compliance with this law, the Trust’s Program provides for the development of internal practices, procedures and controls, designation of anti-money laundering compliance officers, an ongoing training program and an independent audit function to determine the effectiveness of the Program.
Procedures to implement the Program include, but are not limited to, determining that the Distributor and the Funds’ transfer agent have established proper anti-money laundering procedures, reporting suspicious and/or fraudulent activity and conducting a complete and thorough review of all new opening account applications. The Fund will not transact business with any person or entity whose identity cannot be adequately verified under the provisions of the USA PATRIOT Act.
As a result of the Program, the Trust may be required to “freeze” the account of a shareholder if the shareholder appears to be involved in suspicious activity or if certain account information matches information on government lists of known terrorists or other suspicious persons, or the Trust may be required to transfer the account or proceeds of the account to a governmental agency.
126
GENERAL INFORMATION
The Trust is a Delaware statutory trust organized on August 1, 1996. The Equity Fund commenced operations on December 31, 1996. The International Fund commenced operations on December 1, 1997. The Alternative Strategies Fund commenced operations on September 30, 2011. The High Income Alternatives Fund commenced operations on September 28, 2018. The SBH Focused Small Value Fund commenced operations on July 31, 2020. The Oldfield International Value Fund commenced operations on November 30, 2020. The Agreement and Declaration of Trust permits the Trust to issue an unlimited number of full and fractional shares of beneficial interest and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interest in a Fund. Each share represents an interest in a Fund proportionately equal to the interest of each other share. Upon the Trust’s liquidation, all shareholders would share pro rata in the net assets of a Fund available for distribution to shareholders. The Board has created six series of shares, and may create additional series in the future, which have separate assets and liabilities. Income and operating expenses not specifically attributable to a particular Fund will be allocated fairly among the Funds by the Trustees, generally on the basis of the relative net assets of each Fund.
The Trust has adopted a Multiple Class Plan pursuant to Rule 18f-3 under the 1940 Act on behalf of the Funds. Currently, the Alternative Strategies Fund is authorized to issue two classes of shares: Institutional Class shares and Investor Class shares. The Equity Fund, International Fund, High Income Alternatives Fund, SBH Focused Small Value Fund and Oldfield International Value Fund are authorized to issue one class of shares: Institutional Class shares.
Rule 18f-2 under the 1940 Act provides that as to any investment company which has two or more series outstanding and as to any matter required to be submitted to shareholder vote, such matter is not deemed to have been effectively acted upon unless approved by the holders of a “majority” (as defined in the Rule) of the voting securities of each series affected by the matter. Such separate voting requirements do not apply to the election of Trustees or the ratification of the selection of accountants. Rule 18f-2 contains special provisions for cases in which an advisory contract is approved by one or more, but not all, series. A change in investment policy may go into effect as to one or more series whose holders so approve the change even though the required vote is not obtained as to the holders of other affected series.
Each Fund may hold special meetings and mail proxy materials. These meetings may be called to elect or remove Trustees, change fundamental policies, approve an investment advisory contract or for other purposes. Shareholders not attending these meetings are encouraged to vote by proxy. Each Fund will mail proxy materials in advance, including a voting card and information about the proposals to be voted on. The number of votes each shareholder is entitled to is based on the number of shares he or she owns. Shareholders are entitled to one vote for each full share held (and fractional votes for fractional shares) and may vote in the election of Trustees and on other matters submitted to meetings of shareholders. It is not contemplated that regular annual meetings of shareholders will be held.
The Equity Fund, the International Fund, the Alternative Strategies Fund, the High Income Alternatives Fund, the SBH Focused Small Value Fund and the Oldfield International Value Fund are the only operating series of shares of the Trust. The Board may, at its own discretion, create additional series of shares. The Agreement and Declaration of Trust contains an express disclaimer of shareholder liability for the Trust’s acts or obligations and provides for indemnification and reimbursement of expenses out of the Trust’s property for any shareholder held personally liable for its obligations.
The Agreement and Declaration of Trust provides that the shareholders have the right to remove a Trustee. Upon the written request of the record holders of 10% of the Trust’s shares, the Trustees will call a meeting of shareholders to vote on the removal of a Trustee. No amendment may be made to the Agreement and Declaration of Trust that would have a material adverse effect on shareholders without the approval of the holders of more than 50% of the Trust’s shares. Shareholders have no preemptive or conversion rights. Shares when issued are fully paid and non-assessable by the Trust, except as set forth above.
127
The Trust and Litman Gregory have obtained an exemptive order from the SEC, which permits Litman Gregory, subject to certain conditions, to hire, terminate and replace managers with the approval of the Board only and without shareholder approval. Within 60 days of the hiring of any new manager or the implementation of any proposed material change in a sub-advisory agreement with an existing manager, shareholders will be furnished information about the new manager or sub-advisory agreement that would be included in a proxy statement. The order also permits a Fund to disclose sub-advisory fees only in the aggregate in its registration statement. Pursuant to the order, shareholder approval is required before Litman Gregory enters into any sub-advisory agreement with a manager that is affiliated with the Funds or Litman Gregory.
The Trust, the Advisor, the Sub-Advisors and the Distributor have adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act. These codes of ethics permit, subject to certain conditions, personnel of the Advisor, the Sub-Advisors and the Distributor, to invest in securities that may be purchased or held by the Funds.
The Trust’s custodian, State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02111 is responsible for holding the Funds’ assets and acting as the Trust’s accounting services agent. The Trust’s transfer agent, DST Asset Manager Solutions, Inc., is located at 330 West Ninth Street, Kansas City, Missouri, 64105. You may call DST Asset Manager Solutions, Inc. at 1-800-960-0188 if you have questions about your account. The Trust’s independent registered public accounting firm, Cohen & Company, Ltd., 1350 Euclid Avenue, Suite 800, Cleveland, Ohio 44115, also assists with the Funds’ tax returns. The Trust’s legal counsel is Paul Hastings LLP, 101 California Street, 48th Floor, San Francisco, California 94111.
The Funds reserve the right, if conditions exist that make cash payments undesirable, to honor any request for redemption or repurchase order by making payment in whole or in part in readily marketable securities chosen by the Fund and valued as they are for purposes of computing the Fund’s NAV (a redemption in kind). If payment is made in securities, a shareholder may incur transaction expenses in converting these securities into cash.
FINANCIAL STATEMENTS
128
APPENDIX
Description of Ratings
The following terms are generally used to describe the credit quality of debt securities:
Moody’s Investors Service, Inc.: Corporate Bond Ratings
Aaa–Bonds which are rated Aaa are judged to be of the best quality and carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa–Bonds which are rated Aa are judged to be of high quality and are subject to very low credit risk. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities.
Moody’s appends numerical modifiers “1”, “2” and “3” to each generic rating classification from Aa through Caa. Both the Aaa and Aa rating classifications. The modifier “1” indicates that the security ranks in the higher end of its generic rating category; the modifier “2” indicates a mid-range ranking; and the modifier “3” indicates that the issue ranks in the lower end of its generic rating category. Additionally a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
A–Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations and subject to low credit risk. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa–Bonds which are rated Baa are considered as medium grade obligations, subject to moderate credit risk, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great period of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Standard & Poor’s Corporation: Corporate Bond Ratings
AAA–This is the highest rating assigned by Standard & Poor’s to a debt obligation and indicates an extremely strong capacity to pay principal and interest.
AA–Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree.
A–Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB–Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category.
129
Commercial Paper Ratings
Moody’s commercial paper ratings are assessments of the issuer’s ability to repay punctually promissory obligations. Moody’s employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime 1–highest quality; Prime 2–higher quality; Prime 3–high quality.
A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment. Ratings are graded into four categories, ranging from “A” for the highest quality obligations to “D” for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers “1”, “2” and “3” to indicate the relative degree of safety. The designation A-1 indicates that the degree of safety regarding timely payment is either overwhelming or very strong. A “+” designation is applied to those issues rated “A-1” which possess extremely strong safety characteristics. Capacity for timely payment on issues with the designation “A-2” is strong. However, the relative degree of safety is not as high as for issues designated A-1. Issues carrying the designation “A-3” have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effect of changes in circumstances than obligations carrying the higher designations.
130
LITMAN GREGORY FUNDS TRUST
PART C
OTHER INFORMATION
Item 28. Exhibits
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(a)
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Articles of Incorporation.
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(1)
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Agreement and Declaration of Trust is incorporated by reference to the Registrant’s initial Registration Statement on Form N-1A, filed with the U.S. Securities and Exchange Commission (“SEC”) on August 12, 1996
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(A)
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Amendment to Agreement and Declaration of Trust is incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on November 15, 1996
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(B)
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Amendment to Agreement and Declaration of Trust dated December 4, 2008 is incorporated by reference to Post-Effective Amendment No. 50 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on September 2, 2011
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(C)
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Amendment to Agreement and Declaration of Trust dated August 31, 2011 is incorporated by reference to Post-Effective Amendment No. 50 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on September 2, 2011
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(b)
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By-laws are incorporated by reference to Post-Effective Amendment No. 57 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2014
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(c)
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Instruments Defining Rights of Security Holders – See Articles III and V of Agreement and Declaration of Trust and Article II of Third Amended and Restated By-Laws
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(d)
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Investment Advisory Contracts
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(1)
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Unified Investment Advisory Agreement between Litman Gregory Funds Trust and Litman Gregory Fund Advisors, LLC dated April 1, 2013 is incorporated by reference to Post-Effective Amendment No. 54 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on May 1, 2013
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(2)
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Amended Appendix A and Appendix B to the Unified Investment Advisory Agreement dated April 1, 2013, as revised October 30, 2020 – filed herewith
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(3)
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Sub-Advisory Agreements
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(A)
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Equity Fund
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1.
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Investment Management Agreement with Davis Selected Advisers L.P. is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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2.
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Investment Management Agreement with Fiduciary Management, Inc. is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015)
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3.
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Investment Management Agreement with Harris Associates L.P. is incorporated by reference to Post-Effective Amendment No. 46 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2010
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4.
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Investment Management Agreement with Nuance Investments, LLC is incorporated by reference to Post-Effective Amendment No. 87 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2019
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5.
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Investment Management Agreement with Sands Capital Management, LLC is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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(B)
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International Fund
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1.
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Investment Management Agreement with Evermore Global Advisors, LLC is incorporated by reference to Post-Effective Amendment No. 64 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 28, 2017
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1
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2.
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Investment Management Agreement with Harris Associates L.P. is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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3.
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Investment Management Agreement with Lazard Asset Management LLC is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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4.
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Investment Management Agreement with Pictet Asset Management Limited is incorporated by reference to Post-Effective Amendment No. 64 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 28, 2017
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(C)
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Alternative Strategies Fund
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1.
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Investment Management Agreement with Blackstone Credit Systematic Strategies LLC (formerly DCI, LLC) – filed herewith
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2.
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Investment Management Agreement with DoubleLine Capital LP is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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3.
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Investment Management Agreement with First Pacific Advisors, LLC is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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4.
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Investment Management Agreement with Loomis, Sayles & Company, L.P. is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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5.
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Investment Management Agreement with Water Island Capital LLC is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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(D)
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High Income Alternatives Fund
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1.
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Investment Management Agreement with Brown Brothers Harriman & Co. is incorporated by reference to Post-Effective Amendment No. 85 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on September 6, 2018
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2.
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Investment Management Agreement with Guggenheim Partners Investment Management, LLC is incorporated by reference to Post-Effective Amendment No. 87 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2019
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3.
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Investment Management Agreement with Neuberger Berman Investment Advisers LLC is incorporated by reference to Post-Effective Amendment No. 85 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on September 6, 2018
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(E)
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SBH Focused Small Value Fund
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1.
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Investment Management Agreement with Segall Bryant & Hamill, LLC is incorporated by reference to Post-Effective Amendment No. 98 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on July 22, 2020
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(F)
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Oldfield International Value Fund
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1.
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Investment Management Agreement with Oldfield Partners LLP is incorporated by reference to Post-Effective Amendment No. 102 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on November 6, 2020.
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(e)
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Underwriting Contracts
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(1)
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Distribution Agreement with ALPS Distributors, Inc. dated April 26, 2018 is incorporated by reference to Post-Effective Amendment No. 79 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2018
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(2)
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Distribution Letter Agreement with ALPS Distributors, Inc. dated April 16, 2018 is incorporated by reference to Post-Effective Amendment No. 79 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2018.
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(3)
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Amendment No. 3 dated July 31, 2020 to the Distribution Agreement – filed herewith
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(4)
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Amendment No. 4 dated October 15, 2020 to the Distribution Agreement – filed herewith
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(5)
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Amendment No. 5 dated November 30, 2020 to the Distribution Agreement – filed herewith
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2
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(f)
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Bonus or Profit Sharing Contracts – None
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(g)
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Custodian Agreements
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(1)
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Custody Agreement with State Street Bank and Trust Company dated January 2, 1997 is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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(A)
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Amendment dated September 20, 2018 to the Custody Agreement is incorporated by reference to Post-Effective Amendment No. 87 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2019
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(B)
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Amendment dated July 30, 2020 to the Custody Agreement – filed herewith
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(C)
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Amendment dated October 30, 2020 to the Custody Agreement – filed herewith
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(h)
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Other Material Contracts
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(1)
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Administration Agreement with State Street Bank and Trust Company dated September 10, 2014 is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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(A)
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Amendment dated September 20, 2018 to the Administration Agreement is incorporated by reference to Post-Effective Amendment No. 87 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2019
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(B)
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Amendment dated July 30, 2020 to the Administration Agreement – filed herewith
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(C)
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Amendment dated October 30, 2020 to the Administration Agreement – filed herewith
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(2)
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Power of Attorney dated April 30, 2015 is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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(3)
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Restated Contractual Advisory Fee Waiver Agreement is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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(A)
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Amendment dated August 31, 2011 to the Restated Contractual Advisory Fee Waiver Agreement is incorporated by reference to Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2015
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(B)
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Amendment dated May 20, 2013 to the Restated Contractual Advisory Fee Waiver Agreement is incorporated by reference to Post-Effective Amendment No. 56 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on February 26, 2014
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(C)
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Amendment dated January 1, 2017 to the Restated Contractual Advisory Fee Waiver Agreement is incorporated by reference to Post-Effective Amendment No. 64 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 28, 2017
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(D)
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Amendment dated August 28, 2018 to the Restated Contractual Advisory Fee Waiver Agreement is incorporated by reference to Post-Effective Amendment No. 85 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on September 6, 2018
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(E)
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Amendment dated July 31, 2020 to the Restated Contractual Advisory Fee Waiver Agreement is incorporated by reference to Post-Effective Amendment No. 98 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on July 22, 2020
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(F)
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Amendment dated October 30, 2020 to the Restated Contractual Advisory Fee Waiver Agreement – filed herewith
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(4)
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Operating Expenses Limitation Agreement
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(A)
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Operating Expenses Limitation Agreement dated August 28, 2018 for the High Income Alternatives Fund is incorporated by reference to Post-Effective Amendment No. 85 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on September 6, 2018
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3
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(B)
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Operating Expenses Limitation Agreement dated July 31, 2020 for the SBH Focused Small Value Fund is incorporated by reference to Post-Effective Amendment No. 98 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on July 22, 2020
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(C)
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Operating Expenses Limitation Agreement dated October 30, 2020 for the Oldfield International Value Fund – filed herewith
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(i)
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Legal Opinion
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(1)
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Consent of Counsel – filed herewith
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(j)
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Other Opinions
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(1)
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Consent of Independent Registered Public Accounting Firm – filed herewith
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(k)
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Omitted Financial Statements – None
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(l)
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Initial Capital Agreements
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(1)
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Subscription Agreement (initial seed capital only) is incorporated by reference to Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on December 17, 1996
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(m)
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Rule 12b-1 Plan
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(1)
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Distribution and Shareholder Servicing Plan (12b-1 Plan) – filed herewith
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(n)
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Rule 18f-3 Plan
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(1)
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Multiple Class Plan – filed herewith
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(o)
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Reserved
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(p)
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Codes of Ethics
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(1)
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Code of Ethics for Litman Gregory Funds Trust is incorporated by reference to Post-Effective Amendment No. 102 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on November 6, 2020.
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(2)
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Code of Ethics for Litman Gregory Fund Advisors, LLC is incorporated by reference to Post-Effective Amendment No. 102 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on November 6, 2020.
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(3)
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Code of Ethics for ALPS Distributors, Inc. is incorporated by reference to Post-Effective Amendment No. 79 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2018
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(4)
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Codes of Ethics for the Sub-Advisors
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(A)
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Davis Selected Advisers, L.P. is incorporated by reference to Post-Effective Amendment No. 87 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2019
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(B)
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First Pacific Advisors, LLC is incorporated by reference to Post-Effective Amendment No. 92 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 29, 2020
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(C)
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Nuance Investments, LLC is incorporated by reference to Post-Effective Amendment No. 57 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2014
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(D)
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Harris Associates L.P. – filed herewith
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(E)
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Sands Capital Management, LLC – filed herewith
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(F)
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DoubleLine Capital LP is incorporated by reference to Post-Effective Amendment No. 92 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 29, 2020
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(G)
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Loomis, Sayles & Company, L.P. – filed herewith
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(H)
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Water Island Capital, LLC – filed herewith
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(I)
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Lazard Asset Management LLC is incorporated by reference to Post-Effective Amendment No. 79 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2018
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(J)
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Fiduciary Management, Inc. is incorporated by reference to Post-Effective Amendment No. 57 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2014
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(K)
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Pictet Asset Management Limited is incorporated by reference to Post-Effective Amendment No. 102 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on November 6, 2020.
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4
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(L)
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Evermore Global Advisors, LLC is incorporated by reference to Post-Effective Amendment No. 64 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 28, 2017
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(M)
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Blackstone Credit Systematic Strategies LLC (formerly DCI, LLC) – filed herewith
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(N)
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Segall Bryant & Hamill, LLC is incorporated by reference to Post-Effective Amendment No. 87 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on April 30, 2019
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(O)
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Brown Brothers Harriman & Co. is incorporated by reference to Post-Effective Amendment No. 85 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on September 6, 2018
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(P)
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Guggenheim Partners Investment Management, LLC – filed herewith
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(Q)
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Neuberger Berman Investment Advisers LLC – filed herewith
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(R)
|
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Oldfield Partners LLP is incorporated by reference to Post-Effective Amendment No. 102 to the Registrant’s Registration Statement on Form N-1A, filed with the SEC on November 6, 2020.
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EX-101.INS XBRL Instance Document
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EX-101.SCH XBRL Taxonomy Extension Schema Document
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EX-101.CAL XBRL Taxonomy Extension Calculated Linkbase
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EX-101.DEF XBRL Taxonomy Extension Definition Linkbase
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EX-101.LAB XBRL Taxonomy Extension Label Linkbase
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EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
|
Item 29. Persons Controlled by or Under Common Control with the Fund
No person is directly or indirectly controlled by or under common control with the Registrant.
Item 30. Indemnification
Article VI of Registrant’s By-Laws states as follows:
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this Article, “agent” means any person who is or was a Trustee, officer, employee or other agent of this Trust or is or was serving at the request of this Trust as a Trustee, director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise or was a Trustee, director, officer, employee or agent of a foreign or domestic corporation which was a predecessor of another enterprise at the request of such predecessor entity; “proceeding” means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and “expenses” includes without limitation attorney’s fees and any expenses of establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of this Trust) by reason of the fact that such person is or was an agent of this Trust, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if it is determined that person acted in good faith and reasonably believed:
(a) in the case of conduct in his official capacity as a Trustee of the Trust, that his conduct was in the Trust’s best interests, and
(b) in all other cases, that his conduct was at least not opposed to the Trust’s best interests, and
(c) in the case of a criminal proceeding, that he had no reasonable cause to believe the conduct of that person was unlawful.
The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this Trust or that the person had reasonable cause to believe that the person’s conduct was unlawful.
5
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of this Trust to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Trust, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this Trust and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the agent’s office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue, or matter as to which that person shall have been adjudged to be liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person’s official capacity; or
(b) In respect of any claim, issue or matter as to which that person shall have been adjudged to be liable in the performance of that person’s duty to this Trust, unless and only to the extent that the court in which that action was brought shall determine upon application that in view of all the circumstances of the case, that person was not liable by reason of the disabling conduct set forth in the preceding paragraph and is fairly and reasonably entitled to indemnity for the expenses which the court shall determine.
(c) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval, or of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval, unless the required approval set forth in Section 6 of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this Trust has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 of this Article or in defense of any claim, issue or matter therein, before the court or other body before whom the proceeding was brought, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, provided that the Board of Trustees, including a majority who are disinterested, non-party Trustees, also determines that based upon a review of the facts, the agent was not liable by reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this Article, any indemnification under this Article shall be made by this Trust only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article and is not prohibited from indemnification because of the disabling conduct set forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of Trustees who are not parties to the proceeding and are not interested persons of the Trust (as defined in the Investment Company Act of 1940); or
(b) A written opinion by an independent legal counsel.
6
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this Trust before the final disposition of the proceeding upon a written undertaking by or on behalf of the agent, to repay the amount of the advance if it is ultimately determined that he or she is not entitled to indemnification, together with at least one of the following as a condition to the advance: (i) security for the undertaking; or (ii) the existence of insurance protecting the Trust against losses arising by reason of any lawful advances; or (iii) a determination by a majority of a quorum of Trustees who are not parties to the proceeding and are not interested persons of the Trust, or by an independent legal counsel in a written opinion, based on a review of readily available facts that there is reason to believe that the agent ultimately will be found entitled to indemnification. Determinations and authorizations of payments under this Section must be made in the manner specified in Section 6 of this Article for determining that the indemnification is permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which persons other than Trustees and officers of this Trust or any subsidiary hereof may be entitled by contract or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made under this Article, except as provided in Sections 5 or 6 in any circumstances where it appears:
(a) that it would be inconsistent with a provision of the Agreement and Declaration of Trust of the Trust, a resolution of the shareholders, or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or
(b) that it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the Board of Trustees of this Trust to purchase such insurance, this Trust shall purchase and maintain insurance on behalf of any agent of this Trust against any liability asserted against or incurred by the agent in such capacity or arising out of the agent’s status as such, but only to the extent that this Trust would have the power to indemnify the agent against that liability under the provisions of this Article and the Agreement and Declaration of Trust of the Trust.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply to any proceeding against any Trustee, investment manager or other fiduciary of an employee benefit plan in that person’s capacity as such, even though that person may also be an agent of this Trust as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a Trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article.
In addition to the indemnification provisions provided for in the Registrant’s By-Laws, the Registrant has also entered into indemnification agreements (the “Indemnification Agreements”) with each of the Trustees and with its Chief Compliance Officer (collectively, the “Indemnitees”). The Indemnification Agreements set forth the procedure by which Indemnitees are to request and receive advancement of expenses and indemnification. The Indemnification Agreements provide that, in any determination for advancement of expenses or indemnification, the Indemnitees are entitled to a rebuttable presumption that they did not engage in conduct that would disqualify them from eligibility to receive advancement of expenses or for indemnification. The Indemnification Agreements also set forth the procedure by which an independent counsel may be chosen if independent counsel is to make a determination of any Indemnitee’s qualification for advancement of expenses or indemnification.
7
Item 31. Business and Other Connections of the Investment Adviser
The information required by this item is contained in the Form ADVs of the following entities and is incorporated herein by reference:
|
|
|
|
|
Name of Investment Adviser
|
|
File No.
|
|
Litman Gregory Fund Advisors, LLC
|
|
801-52710
|
|
|
|
|
Name of Sub-Advisors
|
|
|
Blackstone Credit Systematic Strategies LLC
(formerly DCI, LLC)
|
|
801-63857
|
|
Brown Brothers Harriman & Co.
|
|
801-60256
|
|
Davis Selected Advisors, L.P.
|
|
801-31648
|
|
DoubleLine Capital LP
|
|
801-70942
|
|
Evermore Global Advisors, LLC
|
|
801-70645
|
|
Fiduciary Management, Inc.
|
|
801-15164
|
|
First Pacific Advisors, LLC
|
|
801-67160
|
|
Guggenheim Partners Investment Management, LLC
|
|
801-66786
|
|
Harris Associates L.P.
|
|
801-50333
|
|
Lazard Asset Management LLC
|
|
801-61701
|
|
Loomis, Sayles & Company, L.P.
|
|
801-170
|
|
Neuberger Berman Investment Advisers LLC
|
|
801-61757
|
|
Nuance Investments, LLC
|
|
801-69682
|
|
Oldfield Partners LLP
|
|
801-72023
|
|
Pictet Asset Management Limited
|
|
801-15143
|
|
Sands Capital Management, LLC
|
|
801-64820
|
|
Segall Bryant & Hamill, LLC
|
|
801-47232
|
|
Water Island Capital, LLC
|
|
801-57341
|
Item 32. Principal Underwriters
(a) ALPS Distributors, Inc., the Registrant’s principal underwriter, acts as principal underwriter for the following investment companies:
|
|
|
1 WS Credit Income Fund
1290 Funds
|
|
Aberdeen Standard Investments ETFs
|
|
ALPS Series Trust
|
|
Alternative Credit Income Fund
The Arbitrage Funds
|
|
AQR Funds
|
|
Axonic Alternative Income Fund
|
|
Axonic Funds
|
|
Barings Funds Trust
|
|
BBH Trust
|
|
Bluerock Total Income + Real Estate Fund
Brandes Investment Trust
|
|
Bridge Builder Trust
|
|
Broadstone Real Estate Access Fund
|
|
Brown Advisory Funds
|
|
Brown Capital Management Mutual Funds
|
|
Cambria ETF Trust
|
|
CC Real Estate Income Fund
Centre Funds
CIM Real Assets & Credit Fund
CIO Ares Diversified Credit Fund
Columbia ETF Trust
|
|
Columbia ETF Trust I
|
|
Columbia ETF Trust II
|
|
CRM Mutual Fund Trust
|
|
Cullen Funds Trust
|
8
|
|
|
DBX ETF Trust
|
|
ETF Series Solutions
|
|
Flat Rock Opportunity Fund
|
|
Financial Investors Trust
|
|
Firsthand Funds
|
|
FS Credit Income Fund
|
|
FS Energy Total Return Fund
|
|
FS Series Trust
|
|
FS Multi-Alternative Income Fund
Goehring & Rozencwajg Investment Funds
|
|
Goldman Sachs ETF Trust
|
|
Griffin Institutional Access Credit Fund
|
|
Griffin Institutional Access Real Estate Fund
|
|
Hartford Funds Exchange-Traded Trust
Hartford Funds NextShares
|
|
Heartland Group, Inc.
|
|
IndexIQ ETF Trust
|
|
IndexIQ Active ETF Trust
|
|
Infusive US Trust
|
|
James Advantage Funds
|
|
Janus Detroit Street Trust
|
|
Lattice Strategies Trust
|
|
Litman Gregory Funds Trust
|
|
Longleaf Partners Funds Trust
|
|
M3Sixty Funds Trust
|
|
Mairs & Power Funds Trust
|
|
Meridian Fund, Inc.
|
|
Natixis ETF Trust
Natixis ETF Trust II
PRIMECAP Odyssey Funds
|
|
Principal Exchange-Traded Funds
|
|
Reality Shares ETF Trust
|
|
RiverNorth Funds
|
|
RiverNorth Opportunities Fund, Inc.
Sierra Total Return Fund
|
|
SPDR Dow Jones Industrial Average ETF Trust
|
|
SPDR S&P 500 ETF Trust
|
|
SPDR S&P MidCap 400 ETF Trust
|
|
Sprott Funds Trust
|
|
Stadion Investment Trust
|
|
Stone Harbor Investment Funds
|
|
Stone Ridge Residential Real Estate Income Fund I, Inc.
|
|
Stone Ridge Trust
|
|
Stone Ridge Trust II
|
|
Stone Ridge Trust III
|
|
Stone Ridge Trust IV
|
|
Stone Ridge Trust V
|
|
Stone Ridge Trust VI
|
|
USCF ETF Trust
|
|
Wasatch Funds Trust
|
|
WesMark Funds
|
|
Wilmington Funds
|
|
XAI Octagon Credit Trust
|
|
X-Squared Balanced Fund, LLC
YieldStreet Prism Fund
|
9
(b) To the best of Registrant’s knowledge, the directors and executive officers of ALPS Distributors, Inc. are as follows:
|
|
|
|
|
|
|
Name and Principal
Business Address*
|
|
Positions and Offices with
ALPS Distributors, Inc.
|
|
Positions and Offices
with Registrant
|
|
Bradley J. Swenson
|
|
Director, President, Chief Operating Officer, Director
|
|
None
|
|
|
|
|
|
Robert J. Szydlowski
|
|
Senior Vice President, Chief Technology Officer
|
|
None
|
|
|
|
|
|
Eric T. Parsons
|
|
Vice President, Controller and Assistant Treasurer
|
|
None
|
|
|
|
|
|
Joseph J. Frank**
|
|
Secretary
|
|
None
|
|
|
|
|
|
Patrick J. Pedonti**
|
|
Vice President, Treasurer and Assistant Secretary
|
|
None
|
|
|
|
|
|
Richard C. Noyes
|
|
Senior Vice President, General Counsel, Assistant Secretary
|
|
None
|
|
|
|
|
|
Liza Orr
|
|
Vice President, Senior Counsel
|
|
None
|
|
|
|
|
|
Jed Stahl
|
|
Vice President, Senior Counsel
|
|
None
|
|
|
|
|
|
James Stegall
|
|
Vice President
|
|
None
|
|
|
|
|
|
Gary Ross
|
|
Senior Vice President
|
|
None
|
|
|
|
|
|
Kevin Ireland
|
|
Senior Vice President
|
|
None
|
|
|
|
|
|
Stephen J. Kyllo
|
|
Vice President, Chief Compliance Officer
|
|
None
|
|
|
|
|
|
Hilary Quinn
|
|
Vice President
|
|
None
|
|
|
|
|
|
Jennifer Craig
|
|
Assistant Vice President
|
|
None
|
|
*
|
Except as otherwise noted, the principal business address for each of the above directors and executive officers is 1290 Broadway, Suite 1100, Denver, Colorado 80203.
|
|
**
|
The principal business address for Messrs. Pedonti and Frank is 333 W. 11th Street, 5th Floor, Kansas City, Missouri 64105.
|
Item 33. Location of Accounts and Records
All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), and the rules thereunder are maintained at the following locations:
|
|
|
|
|
Records Relating to:
|
|
Are located at:
|
|
Registrant’s Investment Adviser
|
|
Litman Gregory Fund Advisors, LLC
1676 N. California Blvd., Suite 500
Walnut Creek, CA 94596
|
|
|
|
|
Registrant’s Fund Administrator
|
|
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02116
|
|
|
|
|
Registrant’s Custodian/Fund Accountant
|
|
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, MA 02171
|
|
|
|
|
Registrant’s Distributor
|
|
ALPS Distributors, Inc.
1290 Broadway, Suite 1100
Denver, CO 80203
|
|
|
|
|
Registrant’s Transfer Agent
|
|
DST Asset Manager Solutions, Inc. (formerly, Boston Financial Data Services, Inc.)
330 West 9th Street
Kansas City, MO 64105
|
10
The documents required to be maintained by paragraphs (5), (6), (10) and (11) of Rule 31a-1(b) under the 1940 Act will be maintained by the Registrant’s respective Sub-Advisors:
|
|
|
Blackstone Credit Systematic Strategies LLC
(formerly, DCI, LLC)
201 Spear Street, Suite 250
San Francisco, CA 94105
|
|
|
|
Brown Brothers Harriman & Co.
140 Broadway
New York, NY 10005
|
|
|
|
Davis Selected Advisers, L.P.
2949 E. Elvira Rd. Suite 101
Tucson, AZ, 85756
|
|
|
|
DoubleLine Capital LP
333 South Grand Avenue, Suite 1800
Los Angeles, CA 90071
|
|
|
|
Evermore Global Advisors, LLC
89 Summit Avenue
Summit, NJ 07901
|
|
|
|
Fiduciary Management, Inc.
100 East Wisconsin Avenue, Suite 2200
Milwaukee, WI 53202
|
|
|
|
First Pacific Advisors, LLC
11601 Wilshire Boulevard, Suite 1200
Los Angeles, CA 90025
|
|
|
|
Guggenheim Partners Investment Management, LLC
100 Wilshire Boulevard, 5th Floor
Santa Monica, CA 90401
|
|
|
|
Harris Associates L.P.
111 S. Wacker Drive, Suite 4600
Chicago, IL 60606
|
|
|
|
Lazard Asset Management LLC
30 Rockefeller Plaza
New York, NY 10112
|
|
|
|
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, MA 02111
|
|
|
|
Neuberger Berman Investment Advisers LLC
1290 Avenue of the Americas
New York, NY 10104
|
|
|
|
Nuance Investments, LLC
4900 Main Street, Suite 220
Kansas City, MO 64112
|
|
|
|
Oldfield Partners LLP
11 Grosvenor Place
London SW1X 7HH – United Kingdom
|
|
|
|
Pictet Asset Management Limited
Moor House, 120 London Wall
London EC2Y 5ET – United Kingdom
|
|
|
|
Sands Capital Management, LLC
1000 Wilson Boulevard, Suite 3000
Arlington, VA 22209
|
|
|
|
Segall Bryant & Hamill, LLC
540 West Madison Street, Suite 1900
Chicago, IL 60661
|
|
|
|
Water Island Capital, LLC
41 Madison Avenue, 42nd Floor
New York, NY 10010
|
11
Item 34. Management Services
The Registrant has disclosed all management-related service contracts in Parts A and B.
Item 35. Undertakings
Registrant hereby undertakes to:
|
(1)
|
Furnish each person to whom a Prospectus is delivered a copy of Registrant’s latest annual report to shareholders, upon request and without charge.
|
|
(2)
|
If requested to do so by the holders of at least 10% of the Trust’s outstanding shares, call a meeting of shareholders for the purposes of voting upon the question of removal of a trustee and assist in communications with other shareholders.
|
12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended and the Investment Company Act of 1940, as amended, the Registrant certifies that this Post-Effective Amendment No. 103 to the Registration Statement meets all the requirements for effectiveness pursuant to Rule 485(b) of the Securities Act of 1933, as amended, and the Registrant has duly caused this Post-Effective Amendment No. 103 and Amendment No. 104 under the Investment Company Act of 1940, as amended, to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Walnut Creek, and State of California, on the 29th day of April, 2021.
|
|
|
|
|
|
|
LITMAN GREGORY FUNDS TRUST
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jeremy L. DeGroot
|
|
|
|
|
|
Jeremy L. DeGroot
|
|
|
|
|
|
President
|
Pursuant to the requirements of the Securities Act of 1933, as amended, this Post-Effective Amendment No. 103 to its Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Julie Allecta*
|
|
Trustee
|
|
April 29, 2021
|
|
Julie Allecta
|
|
|
|
|
|
|
|
|
|
/s/ Jeremy L. DeGroot
Jeremy L. DeGroot
|
|
Trustee and President
(Principal Executive Officer)
|
|
April 29, 2021
|
|
|
|
|
|
/s/ Frederick A. Eigenbrod, Jr.*
|
|
Trustee
|
|
April 29, 2021
|
|
Frederick A. Eigenbrod, Jr.
|
|
|
|
|
|
|
|
|
|
/s/ Harold M. Shefrin*
|
|
Trustee
|
|
April 29, 2021
|
|
Harold M. Shefrin
|
|
|
|
|
|
|
|
|
|
/s/ John M. Coughlan
John M. Coughlan
|
|
Treasurer
(Principal Financial Officer)
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April 29, 2021
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* By: /s/ John M. Coughlan
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John M. Coughlan, Attorney-in-Fact
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13
INDEX TO EXHIBITS
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(d)
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(2)
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Amended Appendix A and Appendix B dated October 30, 2020 to the Unified Investment Advisory Agreement
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(d)
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(3)
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(C)(1)
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Investment Management Agreement with Blackstone Credit Systematic Strategies LLC (formerly DCI, LLC)
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(e)
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(3)
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Amendment No. 3 dated July 31, 2020 to the Distribution Agreement
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(e)
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(4)
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Amendment No. 4 dated October 15, 2020 to the Distribution Agreement
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(e)
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(5)
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Amendment No. 5 dated November 30, 2020 to the Distribution Agreement
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(g)
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(1)
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(B)
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Amendment dated July 30, 2020 to the Custody Agreement
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(g)
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(1)
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(C)
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Amendment dated October 30, 2020 to the Custody Agreement
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(h)
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(1)
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(B)
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Amendment dated July 30, 2020 to the Administration Agreement
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(h)
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(1)
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(C)
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Amendment dated October 30, 2020 to the Administration Agreement
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(h)
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(3)
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(F)
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Amendment dated October 30, 2020 to the Restated Contractual Advisory Fee Waiver Agreement
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(h)
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(4)
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(C)
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Operating Expenses Limitation Agreement dated October 30, 2020 for the Oldfield International Value Fund
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(i)
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(1)
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Consent of Counsel
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(j)
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(1)
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Consent of Independent Registered Public Accounting Firm
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(m)
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(1)
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Distribution and Shareholder Servicing Plan
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(n)
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(1)
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Multiple Class Plan
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(p)
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(4)
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(D)
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Code of Ethics of Harris Associates L.P.
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(p)
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(4)
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(E)
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Code of Ethics of Sands Capital Management, LLC
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(p)
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(4)
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(G)
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Code of Ethics of Loomis, Sayles & Company, L.P.
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(p)
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(4)
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(H)
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Code of Ethics of Water Island Capital, LLC
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(p)
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(4)
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(M)
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Code of Ethics of Blackstone Credit Systematic Strategies LLC (formerly DCI, LLC)
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(p)
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(4)
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(P)
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Code of Ethics of Guggenheim Partners Investment Management, LLC
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(p)
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(4)
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(Q)
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Code of Ethics of Neuberger Berman Investment Advisers LLC
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EX-101.INS XBRL Instance Document
EX-101.SCH XBRL Taxonomy Extension Schema Document
EX-101.CAL XBRL Taxonomy Extension Calculated Linkbase
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase
EX-101.LAB XBRL Taxonomy Extension Label Linkbase
EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
14
Exhibit (d)(2)
Appendix A to Unified Investment Advisory Agreement
(October 30, 2020)
FUND SCHEDULE – LITMAN GREGORY FUNDS TRUST
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Fund
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Effective Date
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• PartnerSelect Equity Fund
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April 1, 2013
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• PartnerSelect International Fund
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April 1, 2013
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• PartnerSelect Smaller Companies Fund
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April 1, 2013
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• PartnerSelect Alternative Strategies Fund
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April 1, 2013
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• PartnerSelect High Income Alternatives Fund
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August 28, 2018
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• PartnerSelect SBH Focused Small Value Fund
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July 31, 2020
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• PartnerSelect Oldfield International Value Fund
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October 30, 2020
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LITMAN GREGORY FUNDS TRUST,
on
behalf of its series listed above
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LITMAN GREGORY FUND ADVISORS, LLC
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By:
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/s/ Jeremy L. DeGroot
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By:
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/s/ John Coughlan
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Name:
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Jeremy L. DeGroot
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Name:
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John Coughlan
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Title:
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President
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Title:
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Chief Operating Officer
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Appendix B to Unified Investment Advisory Agreement
(October 30. 2020)
FEE SCHEDULE – LITMAN GREGORY FUNDS TRUST
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Fund
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Fee Rate
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• PartnerSelect Equity Fund
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1.10% of the Fund’s daily net assets up to $750 million
1.00% of the Fund’s daily net assets in excess of $750 million
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• PartnerSelect International Fund
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1.10% of the Fund’s daily net assets up to $1 billion
1.00% of the Fund’s daily net assets in excess of $1 billion
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• PartnerSelect Smaller Companies Fund
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1.14% of the Fund’s daily net assets up to $450 million
1.04% of the Fund’s daily net assets in excess of $450 million
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• PartnerSelect Alternative Strategies Fund
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1.40% of the Fund’s daily net assets up to $2 billion
1.30% of the Fund’s daily net assets between $2 billion and $3 billion
1.25% of the Fund’s daily net assets between $3 billion and $4 billion
1.20% of the Fund’s daily net assets in excess of $4 billion
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• PartnerSelect High Income Alternatives Fund
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0.95% of the Fund’s daily net assets up to $1 billion
0.925% of the Fund’s daily net assets between $1 billion and $2 billion
0.90% of the Fund’s daily net assets between $2 billion and $3 billion
0.875% of the Fund’s daily net assets between $3 billion and $4 billion
0.85% of the Fund’s daily net assets in excess of $4 billion
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• PartnerSelect SBH Focused Small Value Fund
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1.00% of the Fund’s daily net assets
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• PartnerSelect Oldfield International Value Fund
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0.70% of the Fund’s daily net assets
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LITMAN GREGORY FUNDS TRUST,
on
behalf of its series listed above
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LITMAN GREGORY FUND ADVISORS, LLC
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By:
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/s/ Jeremy L. DeGroot
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By:
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/s/ John Coughlan
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Name:
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Jeremy L. DeGroot
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Name:
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John Coughlan
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Title:
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President
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Title:
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Chief Operating Officer
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Exhibit (d)(3)(C)(1)
PARTNERSELECT ALTERNATIVE STRATEGIES FUND
LITMAN GREGORY FUNDS TRUST
INVESTMENT SUB-ADVISORY AGREEMENT
THIS INVESTMENT SUB-ADVISORY AGREEMENT is made as of the 18th day of December 2020 by and between LITMAN/GREGORY FUND ADVISORS, LLC (the “Advisor”) and DCI, LLC (the “Sub-Advisor”).
WITNESSETH:
WHEREAS, the
Advisor has been retained as the investment adviser to the PartnerSelect Alternative Strategies Fund (the “Fund”), a series of the Litman Gregory Funds Trust (the “Trust”), an open-end
management investment company, registered as such under the Investment Company Act of 1940, as amended (the “Investment Company Act”); and
WHEREAS, the Advisor has been authorized by the Trust to retain one or more investment advisers (each an “investment manager”) to
serve as portfolio managers for a specified portion of the Fund’s assets (the “Allocated Portion”); and
WHEREAS, the Sub-Advisor is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), and is engaged in the business of supplying investment advisory
services as an independent contractor; and
WHEREAS, the Fund and the Advisor desire to retain the
Sub-Advisor as an investment manager to render portfolio advice and services to the Fund pursuant to the terms and provisions of this Agreement, and the Sub-Advisor
desires to furnish said advice and services; and
WHEREAS, the Trust and the Fund are third party beneficiaries of such arrangements;
NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, which shall
include the Trust on behalf of the Fund for purposes of the indemnification provisions of section 11 hereof, intending to be legally bound hereby, mutually agree as follows:
1. Appointment of Sub-Advisor.
(a) The Advisor hereby employs the Sub-Advisor, and the
Sub-Advisor hereby accepts such employment, to render investment advice and related services with respect to the Allocated Portion of the assets of the Fund for the period and on the terms set forth in this
Agreement, subject to the supervision and direction of the Advisor and the Trust’s Board of Trustees.
(b) The Sub-Advisor’s employment shall be solely
with respect to an Allocated Portion of the Fund’s assets, such Allocated Portion to be specified by the Advisor and subject to periodic increases or decreases at the Advisor’s sole discretion.
(c) Nature of Fund. The Sub-Advisor and the Advisor both acknowledge that the Fund is a mutual
fund that operates as a series of an open-end series investment company under the plenary authority of the Trust’s Board of Trustees. In managing the Allocated Portion, the
Sub-Advisor shall do so subject always to the plenary authority of the Board of Trustees.
2.
Duties of Sub-Advisor.
(a) General Duties. The
Sub-Advisor shall act as one of several investment managers to the Fund and shall invest the Sub-Advisor’s Allocated Portion of the assets of the Fund in accordance
with the investment objectives, policies and restrictions of the Fund as set forth in the Fund’s and the Trust’s governing documents, including, without limitation, the Trust’s Agreement and Declaration of Trust and By-Laws; the Fund’s prospectus, statement of additional information and undertakings; and such other limitations, policies and procedures as the Advisor or the Trustees of the Trust may impose from time to time
in writing to the Sub-Advisor. In providing such services, the Sub-Advisor shall at all times adhere to the provisions and restrictions contained in the federal
securities laws, applicable state securities laws, the Internal Revenue Code, and other applicable law. Advisor shall provide to the Sub-Advisor such information with respect to the Fund such that the Sub-Advisor will be able to maintain compliance with applicable regulations, laws, policies, and restrictions with respect to the Sub-Advisor’s Allocated Portion.
Without limiting the generality of the foregoing, the Sub-Advisor shall: (i) furnish the Fund
with advice and recommendations with respect to the investment of the Sub-Advisor’s Allocated Portion of the Fund’s assets; (ii) effect the purchase and sale of portfolio securities for the Sub-Advisor’s Allocated Portion; (iii) determine that portion of the Sub-Advisor’s Allocated Portion that will remain uninvested, if any; (iv) manage and
oversee the investments of the Sub-Advisor’s Allocated Portion, subject to the ultimate supervision and direction of the Trust’s Board of Trustees; (v) vote proxies, file required ownership
reports, and take other actions with respect to the securities in the Sub-Advisor’s Allocated Portion; (vi) maintain the books and records required to be maintained with respect to the securities in
the Sub-Advisor’s Allocated Portion; (vii) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Fund’ assets which the
Advisor, the Trustees, or the officers of the Trust may reasonably request; and (viii) render to the Trust’s Board of Trustees such periodic and special reports with respect to the Sub-Advisor’s
Allocated Portion as the Board may reasonably request.
(b) Brokerage. With respect to the
Sub-Advisor’s Allocated Portion, the Sub-Advisor shall be responsible for broker-dealer selection and for negotiation of brokerage commission rates. The Sub-Advisor may direct orders to an affiliated person of the Sub-Advisor or to any other broker-dealer who has been identified by the Advisor to the Sub-Advisor as an
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affiliate of any other investment manager without prior authorization to use such affiliated broker or dealer by the Trust’s Board of Trustees, provided that the Sub-Advisor does so in a manner consistent with Sections 17(a) and 17(e) of the Investment Company Act, Rule 17e-1 thereunder and the Rule
17e-1 procedures adopted by the Trust (a copy of which shall by provided by the Advisor). The Sub-Advisor’s primary consideration in effecting a securities
transaction will be best execution. In selecting a broker-dealer to execute each particular transaction, the Sub-Advisor may take the following into consideration: the best net price available; the
reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Fund on a continuing basis.
The price to the Fund in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of the Trust may determine, the
Sub-Advisor shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Sub-Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction, if the Sub-Advisor determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular transaction or the Sub-Advisor’s or the Advisor’s overall responsibilities with respect to the Fund. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Fund to such brokers or dealers who also provide research or statistical material, or other services, to the Trust, the Advisor,
any affiliate of either, or the Sub-Advisor. Such allocation shall be in such amounts and proportions as the Sub-Advisor shall determine, and the Sub-Advisor shall report on such allocations regularly to the Advisor and the Trust, indicating the broker-dealers to whom such allocations have been made and the basis therefor.
On occasions when the Sub-Advisor deems the purchase or sale of a security to be in the best interest
of the Fund as well as other clients of the Sub-Advisor, the Sub-Advisor, to the extent permitted by applicable laws and regulations, may aggregate the securities to be
so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction,
will be made by the Sub-Advisor in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients.
(c) Proxy Voting. The Advisor hereby delegates to the Sub-Advisor, the Advisor’s
discretionary authority to exercise voting rights with respect to the securities and other investments in the Allocated Portion. The Sub-Advisor’s proxy voting policies shall comply with any rules or
regulations promulgated by the SEC. The Sub-Advisor shall maintain and preserve a record, in an easily-accessible place for a period of not less than three (3) years
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(or longer, if required by law), of the Sub-Advisor’s voting procedures, of the Sub-Advisor’s actual
votes, and such other information required for the Fund to comply with any rules or regulations promulgated by the SEC. The Sub-Advisor shall supply updates of this record to the Advisor or any authorized
representative of the Advisor, or to the Fund on a quarterly basis (or more frequently, if required by law). The Sub-Advisor shall provide the Advisor and the Fund with information regarding the policies and
procedures that the Sub-Advisor uses to determine how to vote proxies relating to the Allocated Portion. The Fund may request that the Sub-Advisor vote proxies for the
Allocated Portion in accordance with the Fund’s proxy voting policies.
(d) Books and Records. In compliance with the
requirements of Rule 31a-3 under the Investment Company Act, the Sub-Advisor hereby agrees that all records which it maintains for the Fund are the property of the Fund
and further agrees to surrender promptly to the Fund copies of any of such records upon the Fund’s request. The Sub-Advisor further agrees to preserve for the periods prescribed by Rule 31a-2 under the Investment Company Act the records required to be maintained by Rule 31a-1 under the Investment Company Act with respect to the Fund and to preserve the
records required by Rule 204-2 under the Advisers Act with respect to the Fund for the period specified in the Rule.
(e) Custody. Title to all investments shall be made in the name of the Fund, provided that for convenience in buying, selling, and
exchanging securities (stocks, bonds, commercial paper, etc.), title to such securities may be held in the name of the Fund’s custodian bank, or its nominee or as otherwise provided in the Fund’s custody agreement. The Fund shall notify
the Sub-Advisor of the identity of its custodian bank and shall give the Sub-Advisor fifteen (15) days’ written notice of any changes in such custody
arrangements. Neither the Sub-Advisor, nor any parent, subsidiary or related firm, shall take possession of or handle any cash or securities, mortgages or deeds of trust, or other indicia of ownership of the
Fund’s investments, or otherwise act as custodian of such investments. All cash and the indicia of ownership of all other investments shall be held by the Fund’s custodian bank. The Fund shall instruct its custodian bank to (a) carry
out all investment instructions as may be directed by the Sub-Advisor with respect thereto (which may be orally given if confirmed in writing); and (b) provide the
Sub-Advisor with all operational information necessary for the Sub-Advisor to trade on behalf of the Fund.
(f) (1) Consulting with Certain Affiliated Sub-Advisors. With respect to any transaction the
Fund enters into with an affiliated sub-advisor (or an affiliated person of such sub-advisor) in reliance on Rule 10f-3, Rule 17a-10 or Rule 12d3-1 under the Investment Company Act, the Sub-Advisor agrees that it will not consult with the affiliated sub-advisor concerning such transaction, except to the extent necessary to comply with the percentage limits of paragraphs (a) and (b) of Rule 12d3-1.
(2) Transactions Among Sub-Advisors of the Fund. In any case in which there are two or more sub-advisors responsible for providing investment advice to the Fund, the Sub-Advisor may enter into a transaction on behalf of the Fund with another sub-advisor of the
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Fund (or an affiliated person of such sub-advisor) in reliance on Rule 10f-3, Rule
17a-10 or Rule 12d3-1 under the Investment Company Act, only if (i) the Sub-Advisor, under the terms of this Agreement, is
responsible for providing investment advice with respect to its Allocated Portion, and (ii) the other sub-advisor is responsible for providing investment advice with respect to a separate portion of the
portfolio of the Fund.
3. Representations of Sub-Advisor.
(a) Sub-Advisor shall use its best judgment and efforts in rendering the advice and services to the
Fund as contemplated by this Agreement.
(b) Sub-Advisor shall maintain all licenses and
registrations necessary to perform its duties hereunder in good order.
(c) Sub-Advisor shall
conduct its operations at all times in conformance with the Investment Advisers Act, the Investment Company Act and any other applicable state and/or self-regulatory organization regulations.
(d) Sub-Advisor shall be covered by errors and omissions insurance. The company self-retention or
deductible shall not exceed reasonable and customary standards, and Sub-Advisor agrees to notify Advisor in the event the aggregate coverage of such insurance in any annual period is reduced below $10,000,000.
(e) The Sub-Advisor represents and warrants to the Advisor and the Fund that (i) the
retention of the Sub-Advisor as contemplated by this Agreement is authorized by the Sub-Advisor’s governing documents; (ii) the execution, delivery and
performance of this Agreement does not violate any obligation by which the Sub-Advisor or its property is bound, whether arising by contract, operation of law or otherwise; and (iii) this Agreement has
been duly authorized by appropriate action of the Sub-Advisor and when executed and delivered by the Sub-Advisor will be the legal, valid and binding obligation of the Sub-Advisor, enforceable against the Sub-Advisor in accordance with its terms hereof, subject, as to enforcement, to applicable bankruptcy, insolvency and similar laws
affecting creditors’ rights generally and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or law).
4. Independent Contractor. The Sub-Advisor shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Trust, the Fund, or the Advisor in any way, or in any way be deemed an agent for the Trust, the Fund, or
the Advisor. It is expressly understood and agreed that the services to be rendered by the Sub-Advisor to the Fund under the provisions of this Agreement are not to be deemed exclusive, and the Sub-Advisor shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby.
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5. Sub-Advisor’s Personnel. The Sub-Advisor shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its
obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Sub-Advisor shall be deemed to include persons employed or retained by the Sub-Advisor to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such
other information, advice, and assistance as the Sub-Advisor, the Advisor or the Trust’s Board of Trustees may desire and reasonably request.
6. Expenses.
(a) The Sub-Advisor shall be responsible for (i) providing the personnel, office space, and equipment reasonably necessary to fulfill its obligations under this Agreement.
(b) In the event this Agreement is terminated by an assignment in the nature of a change of control as contemplated by Section 14(b)
hereof, and the parties agree to enter into a new agreement, the Sub-Advisor shall be responsible for (i) the costs of any special notifications to the Fund’s shareholders and any special meetings of
the Trust’s Board of Trustees convened for the primary benefit of the Sub-Advisor, or (ii) its fair share of the costs of any special meetings required for the benefit of the Sub-Advisor as well as for other purposes.
(c) The Sub-Advisor
may voluntarily absorb certain Fund expenses or waive some or all of the Sub-Advisor’s own fee.
(d) To the extent the Sub-Advisor incurs any costs by assuming expenses which are an obligation of the
Advisor or the Fund, the Advisor or the Fund shall promptly reimburse the Sub-Advisor for such costs and expenses. To the extent the Sub-Advisor performs services for
which the Fund or the Advisor is obligated to pay, the Sub-Advisor shall be entitled to prompt reimbursement in such amount as shall be negotiated between the
Sub-Advisor and the Advisor but shall, under no circumstances, exceed the Sub-Advisor’s actual costs for providing such services.
(e) For the avoidance of doubt, the Fund will pay credit intermediation fees, clearing fees, brokerage fees and commissions in connection with
the purchase and sale of portfolio securities for the Allocated Portion of the assets of the Fund.
7. Investment Sub-Advisory Fee.
(a) The Advisor shall pay to the
Sub-Advisor, and the Sub-Advisor agrees to accept, as full compensation for all investment advisory services furnished or provided to the Fund pursuant to this
Agreement, an annual sub-advisory fee based on the Sub-Advisor’s Allocated Portion, as such Allocated Portion may be adjusted from time to time. Such fee shall be
paid at the annual rate specified on Exhibit A attached hereto on the net assets of the Fund attributable to the Sub-Advisor’s Allocated Portion, computed on the value of such net assets as of the close
of business each day.
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(b) The sub-advisory fee shall be paid by the Advisor to Sub-Advisor monthly in arrears on the tenth business day of each month.
(c) The initial fee under this
Agreement shall be payable on the tenth business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Sub-Advisor shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which
the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination.
(d) The fee payable to the Sub-Advisor under this Agreement will be reduced to the extent of any
receivable owed by the Sub-Advisor to the Advisor or the Fund.
(e) The Sub-Advisor voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility
of the Advisor of the Fund under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Sub-Advisor hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis.
(f) The Sub-Advisor may agree not to require payment of any portion of the compensation or
reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future
compensation or reimbursement due to the Sub-Advisor hereunder.
8. No Shorting; No
Borrowing. The Sub-Advisor agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Fund. This prohibition shall not prevent the purchase of such
shares by any of the officers or employees of the Sub-Advisor or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value
thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Sub-Advisor agrees that neither it nor any of its officers or employees shall borrow from the
Fund or pledge or use the Funds assets in connection with any borrowing not directly for the Fund’s benefit.
9. Conflicts with
Trust’s Governing Documents and Applicable Laws. Nothing herein contained shall be deemed to require the Trust or the Fund to take any action contrary to the Trust’s Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of the Trust of its responsibility for and
-7-
control of the conduct of the affairs of the Trust and the Fund. In this connection, the Sub-Advisor acknowledges that the Advisor and the Trust’s
Board of Trustees retain ultimate plenary authority over the Fund, including the Allocated Portion, and may take any and all actions necessary and reasonable to protect the interests of shareholders.
10. Reports and Access. The Sub-Advisor agrees to supply such information to the Advisor and to
permit such compliance inspections by the Advisor or the Fund as shall be reasonably necessary to permit the administrator to satisfy its obligations and respond to the reasonable requests of the Trustees.
11. Standard of Care, Liability and Indemnification.
(a) The Sub-Advisor shall exercise reasonable care and prudence in fulfilling its obligations under
this Agreement.
(b) The Sub-Advisor shall have responsibility for the accuracy and completeness
(and liability for the lack thereof) of the statements furnished by the Sub-Advisor for use by the Advisor in the Fund’s offering materials (including the prospectus, the statement of additional
information, advertising and sales materials) that pertain to the Sub-Advisor and the investment of the Sub-Advisor’s Allocated Portion of the Fund. The Sub-Advisor shall have no responsibility or liability with respect to other disclosures.
(c) The Sub-Advisor shall be liable to the Fund for any loss (including brokerage charges) incurred by the Fund as a result of any investment made by the Sub-Advisor in violation of
Section 2 hereof.
(d) Except as otherwise provided in this Agreement, in the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the obligations or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be subject to liability to the
Advisor, the Trust, or the Fund or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by
the Fund.
(e) Except as otherwise provided in this Agreement, including without limitation paragraphs (c) and (d) above, each, party
to this Agreement (as an “Indemnifying Party”), including the Trust on behalf of the Fund, shall indemnify and hold harmless the other party and the shareholders, directors, officers, and employees of the other party (any such person, an
“Indemnified Party”) against any loss, liability, claim, damage, or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage, or expense and reasonable counsel fees incurred in
connection therewith) arising out of the Indemnifying Party’s performance or non-performance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any
Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith, or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations
and duties under this Agreement.
-8-
If indemnification is to be sought hereunder, then the Indemnified Party shall promptly notify
the Indemnifying Party of the assertion of any claim or the commencement of any action or proceeding in respect thereof; provided, however, that the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party from any
liability that it may otherwise have to the Indemnified Party provided such failure shall not affect in a material adverse manner the position of the Indemnifying Party or the Indemnified Party with respect to such claim. Following such
notification, the Indemnifying Party may elect in writing to assume the defense of such action or proceeding and, upon such election, it shall not be liable for any legal costs incurred by the Indemnified Party (other than reasonable costs of
investigation previously incurred) in connection therewith, unless (i) the Indemnifying Party has failed to provide counsel reasonably satisfactory to the Indemnified Party in a timely manner or (ii) counsel which has been provided by the
Indemnifying Party reasonably determines that its representation of the Indemnified Party would present it with a conflict of interest.
The provisions of this paragraph 11(e) shall not apply in any action where the Indemnified Party is the party adverse, or one of the parties
adverse, to the other party.
(f) No provision of this Agreement shall be construed to protect any Trustee or officer of the Trust, or
officer of the Advisor or the Sub-Advisor, from liability in violation of Sections 17(h) and (i) of the Investment Company Act.
12. Non-Exclusivity; Trading for Sub-Advisor’s Own
Account; Code of Ethics. The Advisor’s employment of the Sub-Advisor is not an exclusive arrangement. The Advisor anticipates that it will employ other individuals or entities to furnish it with the
services provided for herein. Likewise, the Sub-Advisor may act as investment adviser for any other person, and shall not in any way be limited or restricted from buying, selling, or trading any securities for
its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Sub-Advisor expressly represents that it will undertake no activities which will adversely
affect the performance of its obligations to the Fund under this Agreement; and provided further that the Sub-Advisor will adhere to a code of ethics governing employee trading and trading for proprietary
accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act, a copy of which has been provided to the Board of Trustees of the Trust.
The Sub-Advisor will make such reports to the Advisor and the Fund as are required by Rule 17j-1 and Rule 38a-1 under the Investment Company Act. The Sub-Advisor agrees to provide the Advisor and the Fund with any information
required to satisfy the compliance program, code of ethics reporting or disclosure requirements of the Sarbanes-Oxley Act and any rules or regulations promulgated by the SEC. To the extent the Sub-Advisor
adopts or has adopted a separate code of ethics or amends or has amended its code of ethics to comply with such rules or regulations, the Sub-Advisor shall provide the Advisor with a copy of such code of
ethics and any amendments thereto.
-9-
13. Term.
(a) This Agreement shall become effective upon approval by the Board of Trustees of the Trust and shall remain in effect for a period of two
(2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Fund at least annually by
(i) the Board of Trustees of the Trust or by the vote of a majority of the outstanding voting securities of the Fund and (ii) the vote of a majority of the Trustees of the Trust who are not parties to this Agreement nor interested persons
thereof, cast in person at a meeting called for the purpose of voting on such approval, and (iii) the Advisor. The terms “majority of the outstanding voting securities” and “interested persons” shall have the meanings as set
forth in the Investment Company Act.
(b) The Fund and its distributor may use the
Sub-Advisor’s trade name or any name derived from the Sub-Advisor’s trade name only in a manner consistent with the nature of this Agreement for so long as
this Agreement or any extension, renewal, or amendment hereof remains in effect. Within sixty (60) days from such time as this Agreement shall no longer be in effect, the Fund shall cease to use such a name or any other name connected with Sub-Advisor.
14. Termination; No Assignment.
(a) This Agreement may be terminated at any time without payment of any penalty, by: the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Fund, upon sixty (60) days’ written notice to the Sub-Advisor and the Advisor. This Agreement also may be terminated at any time, without the
payment of any penalty, by the Advisor or the Sub-Advisor upon sixty (60) days’ written notice to the Trust and the other party. In the event of a termination,
Sub-Advisor shall cooperate in the orderly transfer of the Fund’s affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Fund maintained by Sub-Advisor on behalf of the Fund.
(b) This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the Investment Company Act.
15. Severability. If any provision of this Agreement
shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby.
16. Captions. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
17. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without giving effect to the conflict of laws
-10-
principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the
Investment Advisers Act and any rules and regulations promulgated thereunder.
18. Nonpublic Personal Information. Notwithstanding
any provision herein to the contrary, the Sub-Advisor hereto agrees on behalf of itself and its directors, trustees, shareholders, officers, and employees (1) to treat confidentially and as proprietary
information of the Advisor (on behalf of itself and the Fund) and the Trust (a) all records and other information relative to the Fund’s prior, present, or potential shareholders (and clients of said shareholders) and (b) any
Nonpublic Personal Information, as defined under Section 248.3(t) of Regulation S-P (“Regulation S-P”), promulgated under the Gramm-Leach-Bliley Act (the “G-L-B Act”), and (2) except after prior notification to and approval in writing by the Advisor or the Trust, not to use such records and information for any
purpose other than the performance of its responsibilities and duties hereunder, or as otherwise permitted by Regulation S-P or the
G-L-B Act, and if in compliance therewith, the privacy policies adopted by the Advisor and the Fund and communicated in writing to the
Sub-Advisor. Such written approval shall not be unreasonably withheld by the Advisor or the Trust and may not be withheld where the Sub-Advisor may be exposed to civil
or criminal contempt or other proceedings for failure to comply after being requested to divulge such information by duly constituted authorities.
19. Anti-Money Laundering Compliance. The Sub-Advisor acknowledges that, in compliance with the
Bank Secrecy Act, as amended, the USA PATRIOT Act, and any respective implementing regulations (together, “AML Laws”), the Fund has adopted an Anti-Money Laundering Policy. The Sub-Advisor agrees to
comply with the Fund’s Anti-Money Laundering Policy and the AML Laws, as the same may apply to the Sub-Advisor, now and in the future. The Sub-Advisor further
agrees to provide to the Fund and/or the Advisor such reports, certifications and contractual assurances as may be requested by the Fund or the Advisor. The Advisor may disclose information respecting the
Sub-Advisor to governmental and/or regulatory or self-regulatory authorities to the extent required by applicable law or regulation and may file reports with such authorities as may be required by applicable
law or regulation.
20. Certifications; Disclosure Controls and Procedures. The Sub-Advisor
acknowledges that, in compliance with the Sarbanes-Oxley Act, and the implementing regulations promulgated thereunder, the Fund is required to make certain certifications and has adopted disclosure controls and procedures. To the extent reasonably
requested by the Advisor, the Sub-Advisor agrees to use its best efforts to assist the Advisor and the Fund in complying with the Sarbanes-Oxley Act and implementing the Fund’s disclosure controls and
procedures. The Sub-Advisor agrees to inform the Fund of any material development related to the Allocated Portion that the Sub-Advisor reasonably believes is relevant
to the Fund’s certification obligations under the Sarbanes-Oxley Act.
21. Provision of Certain Information by the Sub-Advisor. The Sub-Advisor will promptly notify the Advisor in writing of the occurrence of any of the following events:
-11-
(a) the Sub-Advisor fails to be registered as investment
adviser under the Advisers Act or under the laws of any jurisdiction in which the Sub-Advisor is required to be registered as investment adviser in order to perform its obligations under this Agreement;
(b) the Sub-Advisor is served or otherwise receives notice of any action, suit, proceeding, inquiry,
or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Advisor or the Fund;
(c) the Sub-Advisor suffers financial impairment which materially interferes with its ability to
manage the Allocated Portion or otherwise fulfill its duties under this Agreement;
(d) the
Sub-Advisor, its principal officers or its controlling stockholders are the subject of a government investigation or inquiry, administrative proceeding or any other type of legal action which, under the
Investment Company Act, would make it ineligible to serve as an investment adviser to an investment company;
(e) a change in the Sub-Advisor’s personnel materially involved in the management of the Allocated Portion; or
(f) a
change in control or management of the Sub-Advisor.
22. Confidentiality. The parties to
this Agreement shall not, directly or indirectly, permit their respective affiliates, directors, trustees, officers, members, employees, or agents to, in any form or by any means, use, disclose, or furnish to any person or entity, records or
information concerning the business of any of the other parties except as necessary for the performance of duties under this Agreement or as required by law, without prior written notice to and approval of the relevant other parties, which approval
shall not be unreasonably withheld by such other parties. Sub-Advisor may communicate (a) that the Sub-Advisor acts as investment manager for the Fund, and
(b) the performance history of the Allocated Portion.
23. Counterparts. This Agreement may be executed in counterparts and by
the different parties hereto on separate counterparts, each of which when so executed and delivered, shall be deemed an original and all of which counterparts shall constitute but one and the same agreement.
-12-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their
duly authorized officers, all on the day and year first above written.
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LITMAN/GREGORY FUND ADVISORS, LLC
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DCI, LLC
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By:
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/s/ John M. Coughlan
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By:
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/s/ Richard Donick
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Name:
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John M. Coughlan
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Name:
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Richard Donick
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Title:
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Chief Operating Officer
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Title:
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President
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As a Third Party Beneficiary,
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LITMAN GREGORY FUNDS TRUST
on
behalf of
PARTNERSELECT ALTERNATIVE STRATEGIES FUND
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By:
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/s/ Jeremy DeGroot
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Name:
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Jeremy DeGroot
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Title:
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President
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-13-
Exhibit (e)(3)
AMENDMENT 3
This amendment (the
“Amendment”) between the parties signing below (“Parties”) amends the Existing Agreement as of July 31, 2020:
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Term
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Means
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“Existing Agreement”
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The Distribution Letter Agreement between ALPS and Client dated April 16, 2018, as amended
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“ALPS”
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ALPS Distributors, Inc.
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“Client”
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Litman Gregory Fund Advisors, LLC
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Except as amended hereby, all terms of the Existing Agreement remain in full force and effect. This Amendment includes the
amendments in Schedule A and general terms in Schedule B.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly
authorized representatives.
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ALPS Distributors, Inc.
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Litman Gregory Fund Advisors, LLC
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By:
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/s/ Bradley J. Swenson
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By:
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/s/ John Coughlan
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Name:
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Bradley J. Swenson
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Name:
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John Coughlan
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Title:
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President
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Title:
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Chief Operating Officer
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Schedule A to this Amendment
Amendments
The Existing Agreement is
amended as follows:
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1.
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The current Exhibit A is deleted in its entirety and replaced with the following:
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“EXHIBIT A: FUNDS
PartnerSelect
Equity Fund
PartnerSelect International Fund
PartnerSelect
Smaller Companies Fund
PartnerSelect Alternative Strategies Fund
PartnerSelect High Income Alternatives Fund
PartnerSelect SBH
Focused Small Value Fund”
Schedule B to this Amendment
General Terms
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1.
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Capitalized terms not defined herein shall have the meanings given to them in the Existing Agreement.
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2.
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The Parties’ duties and obligations are governed by and limited to the express terms and conditions of
this Amendment, and shall not be modified, supplemented, amended or interpreted in accordance with, any industry custom or practice, or any internal policies or procedures of any Party. This Amendment (including any attachments, schedules and
addenda hereto), along with the Existing Agreement, as amended, contains the entire agreement of the Parties with respect to the subject matter hereof and supersedes all previous communications, representations, understandings and agreements, either
oral or written, between the Parties with respect thereto.
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3.
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This Amendment may be executed in counterparts, each of which when so executed will be deemed to be an
original. Such counterparts together will constitute one agreement. Signatures may be exchanged via facsimile or electronic mail and signatures so exchanged shall be binding to the same extent as if original signatures were exchanged.
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4.
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This Amendment and any dispute or claim arising out of or in connection with it, its subject matter or its
formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the laws of the same jurisdiction as the Existing Agreement.
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Exhibit (e)(4)
AMENDMENT 4
This amendment (the
“Amendment”) between the parties signing below (“Parties”) amends the Existing Agreement as of October 15, 2020:
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Term
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Means
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“Existing Agreement”
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The Distribution Letter Agreement between ALPS and Client dated April 16, 2018, as amended
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“ALPS”
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ALPS Distributors, Inc.
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“Client”
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Litman Gregory Fund Advisors, LLC
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Except as amended hereby, all terms of the Existing Agreement remain in full force and effect. This Amendment includes the
amendments in Schedule A and general terms in Schedule B.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly
authorized representatives.
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ALPS Distributors, Inc.
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Litman Gregory Fund Advisors, LLC
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By:
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/s/ Bradley J. Swenson
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By:
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/s/ John Coughlan
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Name:
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Bradley J. Swenson
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Name:
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John Coughlan
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Title:
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President
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Title:
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Chief Operating Officer
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Schedule A to this Amendment
Amendments
The Existing Agreement is
amended as follows:
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1.
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The current Exhibit A is deleted in its entirety and replaced with the following:
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“EXHIBIT A: FUNDS
PartnerSelect
Equity Fund
PartnerSelect International Fund
PartnerSelect
Alternative Strategies Fund
PartnerSelect High Income Alternatives Fund
PartnerSelect SBH Focused Small Value Fund”
Schedule B to this Amendment
General Terms
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1.
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Capitalized terms not defined herein shall have the meanings given to them in the Existing Agreement.
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2.
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The Parties’ duties and obligations are governed by and limited to the express terms and conditions of
this Amendment, and shall not be modified, supplemented, amended or interpreted in accordance with, any industry custom or practice, or any internal policies or procedures of any Party. This Amendment (including any attachments, schedules and
addenda hereto), along with the Existing Agreement, as amended, contains the entire agreement of the Parties with respect to the subject matter hereof and supersedes all previous communications, representations, understandings and agreements, either
oral or written, between the Parties with respect thereto.
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3.
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This Amendment may be executed in counterparts, each of which when so executed will be deemed to be an
original. Such counterparts together will constitute one agreement. Signatures may be exchanged via facsimile or electronic mail and signatures so exchanged shall be binding to the same extent as if original signatures were exchanged.
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4.
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This Amendment and any dispute or claim arising out of or in connection with it, its subject matter or its
formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the laws of the same jurisdiction as the Existing Agreement.
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Exhibit (e)(5)
AMENDMENT 5
This amendment (the
“Amendment”) between the parties signing below (“Parties”) amends the Existing Agreement as of November 30, 2020:
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Term
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Means
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“Existing Agreement”
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The Distribution Letter Agreement between ALPS and Client dated April 16, 2018, as amended
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“ALPS”
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ALPS Distributors, Inc.
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“Client”
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Litman Gregory Fund Advisors, LLC
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Except as amended hereby, all terms of the Existing Agreement remain in full force and effect. This Amendment includes the
amendments in Schedule A and general terms in Schedule B.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly
authorized representatives.
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ALPS Distributors, Inc.
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Litman Gregory Fund Advisors, LLC
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By:
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/s/ Bradley J. Swenson
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By:
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/s/ John Coughlan
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Name:
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Bradley J. Swenson
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Name:
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John Coughlan
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Title:
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President
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Title:
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Chief Operating Officer
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Schedule A to this Amendment
Amendments
The Existing Agreement is
amended as follows:
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1.
|
The current Exhibit A is deleted in its entirety and replaced with the following:
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“EXHIBIT A: FUNDS
PartnerSelect
Equity Fund
PartnerSelect International Fund
PartnerSelect
Alternative Strategies Fund
PartnerSelect High Income Alternatives Fund
PartnerSelect SBH Focused Small Value Fund
PartnerSelect
Oldfield International Value Fund”
Schedule B to this Amendment
General Terms
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1.
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Capitalized terms not defined herein shall have the meanings given to them in the Existing Agreement.
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2.
|
The Parties’ duties and obligations are governed by and limited to the express terms and conditions of
this Amendment, and shall not be modified, supplemented, amended or interpreted in accordance with, any industry custom or practice, or any internal policies or procedures of any Party. This Amendment (including any attachments, schedules and
addenda hereto), along with the Existing Agreement, as amended, contains the entire agreement of the Parties with respect to the subject matter hereof and supersedes all previous communications, representations, understandings and agreements, either
oral or written, between the Parties with respect thereto.
|
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3.
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This Amendment may be executed in counterparts, each of which when so executed will be deemed to be an
original. Such counterparts together will constitute one agreement. Signatures may be exchanged via facsimile or electronic mail and signatures so exchanged shall be binding to the same extent as if original signatures were exchanged.
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4.
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This Amendment and any dispute or claim arising out of or in connection with it, its subject matter or its
formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the laws of the same jurisdiction as the Existing Agreement.
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Exhibit (g)(1)(B)
PartnerSelect Funds
Litman Gregory
July 30, 2020
State Street Bank and Trust Company
Channel Center
1 Iron Street
Boston, MA, 02210
Attention: Danielle J. Adamson, Managing
Director
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Re:
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Litman Gregory PartnerSelect SBH Focused Small Value Fund
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Ladies and Gentlemen:
This is to advise that the Litman
Gregory Funds Trust (the “Fund”) has established a new series of shares to be known as the Litman Gregory PartnerSelect SBH Focused Small Value Fund (the “Portfolio”). In accordance with the Additional Funds provision of
Section 17 of the Custodian Contract dated January 2, 1997 between the Fund and State Street Bank and Trust Company (as amended, the “Contract”), the Fund hereby requests that you act as Custodian for the Portfolio under the
terms of the Contract.
Please indicate your acceptance of the foregoing by executing the two copies of this letter agreement, returning one to the Fund
and retaining one copy for your records.
Sincerely,
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LITMAN GREGORY FUNDS TRUST
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By:
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/s/ John Coughlan
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Name:
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John Coughlan
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Title:
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Treasurer, Duly Authorized
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Agreed and Accepted:
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STATE STREET BANK AND TRUST COMPANY
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By:
|
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/s/ Suzanne M. Hinckley
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Name:
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Suzanne M. Hinckley
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Title:
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Sr. Vice President, Duly Authorized
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Effective Date: July 30, 2020
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Exhibit (g)(1)(C)
PartnerSelect Funds
Litman Gregory
October 30, 2020
State Street Bank and Trust Company
Channel Center
1 Iron Street
Boston, MA, 02210
Attention: Danielle J. Adamson, Managing
Director
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Re:
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Litman Gregory PartnerSelect Oldfield International Value Fund
|
Ladies and Gentlemen:
This is to advise that the Litman
Gregory Funds Trust (the “Fund”) has established a new series of shares to be known as the Litman Gregory PartnerSelect Oldfield International Value Fund (the “Portfolio”). In accordance with the Additional Funds provision of
Section 17 of the Custodian Contract dated January 2, 1997 between the Fund and State Street Bank and Trust Company (as amended, the “Contract”), the Fund hereby requests that you act as Custodian for the Portfolio under the
terms of the Contract.
Please indicate your acceptance of the foregoing by executing the two copies of this letter agreement, returning one to the Fund
and retaining one copy for your records.
Sincerely,
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LITMAN GREGORY FUNDS TRUST
|
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|
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Name:
|
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John Coughlan
|
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|
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Title:
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Treasurer, Duly Authorized
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Agreed and Accepted:
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STATE STREET BANK AND TRUST COMPANY
|
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By:
|
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/s/ Suzanne M. Hinckley
|
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Name:
|
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Suzanne M. Hinckley
|
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Title:
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Sr. Vice President, Duly Authorized
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Effective Date: October 30, 2020
Exhibit (h)(1)(B)
PartnerSelectFunds
Litman Gregory
July 30, 2020
State Street Bank and Trust Company
Channel Center
1 Iron Street
Boston, MA, 02210
Attention: Danielle J. Adamson, Managing
Director
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Re:
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LITMAN GREGORY PARTNERSELECT SBH
FOCUSED SMALL VALUE FUND
|
Ladies and Gentlemen:
Please be advised that LITMAN GREGORY FUNDS TRUST (the “Fund”) has established a new
series of shares to be known as LITMAN GREGORY PARTNERSELECT SBH FOCUSED SMALL VALUE FUND (the “Portfolio”), which is
expected to become effective on July 31, 2020.
In accordance with the Section 1, the Appointment of Administrator provision, of the
Administration Agreement dated as of September 10, 2014 by and among State Street Bank and Trust Company (“State Street”) and the Fund (as amended, modified, or supplemented from time to time, the “Agreement”), the
undersigned Fund hereby requests that State Street act as Administrator for the new Portfolio under the terms of the Agreement. In connection with such request, the undersigned Fund hereby confirms to State Street, as of the date hereof, its
representations and warranties set forth in Section 4 of the Agreement.
Please indicate your acceptance of the foregoing by executing two copies of
this letter agreement, returning one to the Fund and retaining one for your records.
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Sincerely,
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LITMAN GREGORY FUNDS TRUST
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By:
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/s/ John Coughlan
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Name:
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John Coughlan
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Title:
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Treasurer, Duly Authorized
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Agreed and Accepted:
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STATE STREET BANK AND TRUST COMPANY
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By:
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/s/ Suzanne M. Hinckley
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Name:
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Suzanne M. Hinckley
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Title:
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Sr. Vice President, Duly Authorized
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Effective Date:
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July 30, 2020
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Exhibit (h)(1)(C)
PartnerSelectFunds
Litman Gregory
October 30, 2020
State Street Bank and Trust Company
Channel Center
1 Iron Street
Boston, MA, 02210
Attention: Danielle J. Adamson, Managing
Director
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Re:
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LITMAN GREGORY PARTNERSELECT
OLDFIELD INTERNATIONAL VALUE FUND
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Ladies and Gentlemen:
Please be advised that LITMAN GREGORY FUNDS TRUST (the “Fund”) has established a
new series of shares to be known as LITMAN GREGORY PARTNERSELECT OLDFIELD INTERNATIONAL VALUE FUND (the “Portfolio”),
which is expected to become effective on October 30, 2020.
In accordance with the Section 1, the Appointment of Administrator provision, of the
Administration Agreement dated as of September 10, 2014 by and among State Street Bank and Trust Company (“State Street”) and the Fund (as amended, modified, or supplemented from time to time, the “Agreement”), the
undersigned Fund hereby requests that State Street act as Administrator for the new Portfolio under the terms of the Agreement. In connection with such request, the undersigned Fund hereby confirms to State Street, as of the date hereof, its
representations and warranties set forth in Section 4 of the Agreement.
Please indicate your acceptance of the foregoing by executing two copies of
this letter agreement, returning one to the Fund and retaining one for your records.
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Sincerely,
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LITMAN GREGORY FUNDS
TRUST
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By:
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/s/ John Coughlan
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Name:
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John Coughlan
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Title:
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Treasurer, Duly Authorized
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Agreed and Accepted:
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STATE STREET BANK AND TRUST COMPANY
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By:
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/s/ Suzanne M. Hinckley
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Name:
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Suzanne M. Hinckley
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Title:
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Sr. Vice President, Duly Authorized
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Effective Date:
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July 30, 2020
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Exhibit (h)(3)(F)
LITMAN GREGORY FUNDS TRUST
Fifth Amendment to Restated Contractual Advisory Fee Waiver Agreement
THIS FIFTH AMENDMENT TO RESTATED CONTRACTUAL ADVISORY FEE WAIVER AGREEMENT (this “Amendment”), effective as of
October 30, 2020, is entered into by and between LITMAN GREGORY FUNDS TRUST (the “Trust”), a Delaware statutory trust, and LITMAN GREGORY FUND ADVISORS, LLC, a California limited liability company (the “Advisor,” together
with the Trust, the “Parties”).
RECITALS
WHEREAS, the Trust has retained the Advisor to provide investment management advice and services to each series of the Trust (each, a
“Fund,” and collectively, the “Funds”) pursuant to the Unified Investment Advisory Agreement, dated as of April 1, 2013, as amended, by and between the Trust and the Advisor (the “Investment Advisory Agreement”);
WHEREAS, the Parties have entered into the Restated Contractual Advisory Fee Waiver Agreement, dated as of January 1, 2006, as
amended (the “Agreement”), pursuant to which the Adviser waives a portion of the advisory fees it is entitled to receive under the Investment Advisory Agreement with respect to certain Funds; and
WHEREAS, the Parties wish to amend the fee waiver rates with respect to the PartnerSelect Equity Fund, PartnerSelect Smaller Companies
Fund, PartnerSelect International Fund, PartnerSelect Alternative Strategies Fund, PartnerSelect High Income Alternatives Fund, PartnerSelect SBH Focused Small Value Fund, and PartnerSelect Oldfield International Value Fund as set forth in
Appendix A of the Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein set forth, and for other good
and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, the Parties agree as follows:
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1.
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Appendix A to the Agreement is hereby suspended and replaced in its entirety with Appendix A
attached to this Amendment.
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2.
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Except as expressly amended by this Fifth Amendment, the Agreement shall remain unchanged and in full force and
effect.
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IN WITNESS WHEREOF, the Parties have caused this Fifth Amendment to be duly executed by their duly
authorized officers on one or more counterparts, all on the date and year first above written.
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LITMAN GREGORY FUNDS TRUST
on
behalf of its series listed on Appendix A
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LITMAN GREGORY FUND ADVISORS, LLC
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By:
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/s/ John M. Coughlan
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By:
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/s/ John M. Coughlan
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Name:
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John M. Coughlan
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Name:
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John M. Coughlan
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Title:
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Chief Operating Officer
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Title:
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Chief Operating Officer
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Appendix A
FUND AND WAIVER SCHEDULE – LITMAN GREGORY FUNDS TRUST
(updated October 30, 2020)
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Fund
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Fee Waiver Rate
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• PartnerSelect Equity Fund
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Such percentage rate of the daily net assets of the Fund so that after payment of all sub-advisory fees, the net advisory fee retained by the Advisor is 0.40% of the first $750 million of
the daily net assets of the Fund and 0.30% of Fund Assets in excess of $750 million.
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• PartnerSelect International Fund
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Such percentage rate of the daily net assets of the Fund so that after payment of all sub-advisory fees, the net advisory fee retained by the Advisor is 0.40% of the daily net assets of the
Fund on the first $1 billion of daily net assets and 0.30% of Fund assets in excess of $1 billion.
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• PartnerSelect Smaller Companies Fund
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Such percentage rate of the daily net assets of the Fund so that after payment of all sub-advisory fees, the net advisory fee retained by the Advisor is 0.26% of the daily net assets of the
Fund
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• PartnerSelect Alternative Strategies Fund
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Such percentage rate of the daily net assets of the Fund so that after payment of all sub-advisory fees, the net advisory fee retained by the Advisor is 0.50% of the first $2 billion of
daily net assets, 0.40% of the next $1 billion of daily net assets, 0.35% of the next $1 billion of daily net assets and 0.30% of Fund assets in excess of $4 billion.
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• PartnerSelect High Income Alternatives Fund
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Such percentage rate of the daily net assets of the Fund so that after payment of all sub-advisory fees, the net advisory fee retained by the Advisor is 0.40% on the first $1 billion of
daily net assets, 0.375% on the next $1 billion of daily net assets, 0.35% on the next $1 billion of daily net assets, 0.325% on the next $1 billion of daily net assets and 0.30% of Fund assets in excess of
$4 billion.
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• PartnerSelect SBH Focused Small Value Fund
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Such percentage rate of the daily net assets of the Fund so that after payment of all sub-advisory fees, the net advisory fee retained by the Advisor is 0.35% of the daily net assets of the
Fund
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• PartnerSelect Oldfield International Value Fund
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Such percentage rate of the daily net assets of the Fund so that after payment of all sub-advisory fees, the net advisory fee retained by the Advisor is 0.35% of the daily net assets of the
Fund
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LITMAN GREGORY FUNDS TRUST
on
behalf of its series listed above
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LITMAN GREGORY FUND ADVISORS, LLC
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By:
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John M. Coughlan
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By:
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John M. Coughlan
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Name:
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John M. Coughlan
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Name:
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John M. Coughlan
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Title:
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Chief Operating Officer
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Title:
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Chief Operating Officer
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Exhibit (h)(4)(C)
LITMAN GREGORY FUNDS TRUST
Operating Expenses Limitation Agreement
This Operating Expenses Limitation Agreement (this “Agreement”) is effective as of October 30, 2020, by and between Litman
Gregory Funds Trust (the “Trust”), a Delaware statutory trust, on behalf of the PartnerSelect Oldfield International Value Fund, a series of the Trust (the “Fund”), and the investment advisor to the Fund, Litman Gregory Fund
Advisors, LLC, a California limited liability company (the “Advisor”).
WITNESSETH:
WHEREAS, the Advisor renders advice and services to the Fund pursuant to the terms and provisions of a Unified Investment Advisory Agreement
between the Trust and the Advisor dated April 1, 2013, as such agreement may be amended from time to time (the “Investment Advisory Agreement”);
WHEREAS, the Fund is responsible for, and has assumed the obligation for, payment of certain expenses pursuant to the Investment Advisory
Agreement; and
WHEREAS, the Advisor desires to limit the Fund’s Operating Expenses (as that term is defined in Paragraph 2 of this
Agreement) pursuant to the terms and provisions of this Agreement, and the Trust (on behalf of the Fund) desires to allow the Advisor to implement such limit;
NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties, intending to be legally bound
hereby, mutually agree as follows:
1. Limit on Operating Expenses. The Advisor hereby agrees to limit the Fund’s Operating
Expenses to an annual rate, expressed as a percentage of such Fund’s average annual net assets, as shown on Schedule A of this Agreement (the “Expense Cap”). In the event that the current Operating Expenses of the Fund, as accrued
daily, exceeds its Expense Cap, the Advisor will pay to the Fund, on a monthly basis, the excess expense within 30 days of being notified that an excess payment is due.
Page 1 of 5
2. Definition. For purposes of this Agreement, the term “Operating Expenses”
with respect to the Fund is defined to include all expenses necessary or appropriate for the operation of the Fund, including the Advisor’s investment advisory or management fee under Paragraph 7 of the Investment Advisory Agreement and other
expenses described in Paragraph 6 of the Investment Advisory Agreement, but does not include any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, borrowing costs (including commitment fees),
dividend expenses, acquired fund fees and expenses or any extraordinary expenses such as but not limited to litigation.
3.
Reimbursement of Fees and Expenses. The Advisor, under Paragraph 7(e) of the Investment Advisory Agreement, retains its right to receive reimbursement of reductions of its investment management fee and of Operating Expenses paid by it that it
is not responsible for under Paragraph 6 of the Investment Advisory Agreement.
4. Recoupment Balance. Any fee reduced by the
Advisor, or Operating Expenses paid by it (collectively, “subsidies”), pursuant to this Agreement may be reimbursed by the Fund to the Advisor no later than the end of the third fiscal year following the year to which the subsidy relates
(subsidies available for reimbursement to the Advisor under this Paragraph are collectively referred to as the “Recoupment Balance”), and any such reimbursement must be approved by the Board of Trustees of the Trust (the
“Board”). For example, subsidies relating to the period January 1, 2020 through December 31, 2020 would no longer be eligible for reimbursement after January 1, 2024. The Advisor generally seeks reimbursement on a rolling three-year
basis whereby the oldest subsidies are recouped first. The Advisor may not request or receive reimbursement of the Recoupment Balance before payment of the Fund’s Operating Expenses for the current year and cannot cause the Fund to exceed the
Expense Cap or any other agreed upon expense limitation for that year in making such reimbursement. The Advisor agrees not to request or seek reimbursement of subsidies that are no longer eligible for reimbursement.
Page 2 of 5
5. Term. This Agreement shall become effective on the date specified herein and shall
remain in effect until April 30, 2022 unless sooner terminated as provided in Paragraph 6 of this Agreement. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation
is approved for the Fund at least annually by the Board (and separately by a majority of the Trustees who are not “interested persons” of the Trust as such term is defined in the Investment Company Act of 1940, as amended (the
“Investment Company Act”)).
6. Termination. This Agreement may be terminated at any time by the Board, on behalf of the
Fund, upon sixty (60) days’ written notice to the Advisor without payment of any penalty. The Advisor may decline to renew this Agreement by written notice to the Trust at least thirty (30) days before its renewal date. This Agreement
will automatically terminate if the Investment Advisory Agreement is terminated with respect to the Fund, with such termination effective upon the effective date of the Investment Advisory Agreement’s termination with respect to the Fund.
7. Assignment. This Agreement and all rights and obligations hereunder may not be assigned without the written consent of the other
party.
8. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or
shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby.
9. Captions. The captions in
this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction of effect.
Page 3 of 5
10. Governing Law. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the
Investment Company Act and the Investment Advisers Act of 1940, as amended, and any rules and regulations promulgated thereunder.
11.
Notice of Limited Liability. The Advisor agrees that the Trust’s obligations under this Agreement shall be limited to the Fund and to its assets, and that the Advisor shall not seek satisfaction of any such obligation from the
shareholders of the Fund nor from any Trustee, officer, employee or agent of the Trust or the Fund.
IN WITNESS WHEREOF, the parties
hereto have caused this Agreement to be duly executed by their duly authorized officers on one or more counterparts, all on the date and year first above written.
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LITMAN GREGORY FUNDS TRUST,
on
behalf of the PartnerSelect Oldfield International Value Fund
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LITMAN GREGORY FUND ADVISORS, LLC
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By:
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By:
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Name:
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John Coughlan
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|
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Name:
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John Coughlan
|
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Title:
|
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Treasurer
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Title:
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Chief Operating Officer
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Date:
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October 31, 2020
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Date:
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October 31, 2020
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Page 4 of 5
Schedule A
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Series of Litman Gregory Funds Trust
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Operating Expense Limit
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PartnerSelect Oldfield International Value Fund
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Institutional Class
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0.94% of average daily net assets
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Page 5 of 5
Exhibit (i)(1)
Paul Hastings LLP
101
California Street, 48th Floor
San Francisco, California 94111
1(415) 856-7007
davidhearth@paulhastings.com
April 29, 2021
VIA EDGAR
Litman Gregory Funds Trust
1676 N. California Blvd., Suite 500
Walnut Creek, California
94596
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Re:
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Litman Gregory Funds Trust - File Nos. 333-10015 and 811-07763
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Ladies and Gentlemen:
We hereby consent to the inclusion of our law firm’s name as counsel to the Litman Gregory Funds Trust (the “Registrant”), as shown in
Post-Effective Amendment No. 103 to the Registrant’s Registration Statement on Form N-1A.
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Very truly yours,
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/s/ David A. Hearth
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David A. Hearth
for PAUL HASTINGS LLP
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Exhibit (j)(1)
Cohen & Co.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated
March 1, 2021, relating to the financial statements and financial highlights of PartnerSelect Equity Fund (formerly known as Litman Gregory Masters Equity Fund), PartnerSelect International Fund (formerly known as Litman Gregory Masters
International Fund), PartnerSelect Alternative Strategies Fund (formerly known as Litman Gregory Masters Alternative Strategies Fund), PartnerSelect High Income Alternatives Fund (formerly known as Litman Gregory Masters High Income Alternatives
Fund), Partner Select SBH Focused Small Value Fund and PartnerSelect Oldfield International Value Fund, each a series of Litman Gregory Funds Trust, for the year or period ended December 31, 2020, and to the references to our firm under the
headings “Financial Highlights” in the Prospectus and “General Information” and “Financial Statements” in the Statement of Additional Information.
/s/ Cohen & Company, Ltd.
COHEN & COMPANY,
LTD.
Cleveland, Ohio
April 26, 2021
Exhibit (m)(1)
LITMAN GREGORY FUNDS TRUST
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
(12b-1 Plan)
The
following Distribution Plan (the “Plan”) has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the “Act”), by Litman Gregory Funds Trust f/k/a The Masters’ Select Funds Trust (the
“Trust”), a Delaware statutory trust, on behalf of the Funds listed on Appendix B (the “Funds”), each a series of the Trust. The Plan has been approved by a majority of the Trust’s Board of Trustees, including a majority of
the Trustees who are not “interested persons” of the Trust, as such term is defined in Section 2(a)(19) of the Act, and who have no direct or indirect financial interest in the operation of the Plan or in any Rule 12b-1 Agreement (as
defined below) (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such Plan.
In
approving the Plan, the Board of Trustees determined that adoption of the Plan would be prudent and in the best interests of each Fund and its shareholders. Such approval by the Board of Trustees included a determination, in the exercise of its
reasonable business judgment and in light of its fiduciary duties, that there is a reasonable likelihood that the Plan will benefit each Fund and the shareholders of each class of shares covered by the Plan (the “Covered Shares”).
The provisions of the Plan are as follows:
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1.
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PAYMENTS BY THE FUND TO PROMOTE THE SALE OF FUND SHARES
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The Trust, on behalf of each Fund, will pay ALPS Distributors, Inc. (the “Distributor”), as principal distributor of the Fund’s
shares, a distribution and shareholder servicing fee as shown on Appendix B in connection with the promotion and distribution of Fund shares and the provision of personal services to shareholders, including, but not necessarily limited to,
advertising, compensation to underwriters, dealers and selling personnel, the printing and mailing of prospectuses to other than current Fund shareholders, and the printing and mailing of sales literature. The Distributor may pay all or a portion of
these fees to any registered securities dealer, financial institution or any other person (the “Recipient”) who renders assistance in distributing or promoting the sale of shares, or who provides certain shareholder services, pursuant to a
written agreement (the “Rule 12b-1 Agreement”), a form of which is attached hereto as Appendix A with respect to the Fund. To the extent not so paid by the Distributor such amounts may be retained by the Distributor. Payment of these fees
shall be made monthly promptly following the close of the month.
(a) No Rule 12b-1 Agreement shall be entered into with respect to a Fund and no payments shall be made pursuant to any Rule 12b-1
Agreement, unless such Rule 12b-1 Agreement is in writing and the form of which has first been delivered to and approved by a vote of a majority of the Trust’s Board of Trustees, and of the Independent Trustees, cast in person at
a meeting called for the purpose of voting on such Rule 12b-1 Agreement. The form of Rule 12b-1 Agreement relating to the Fund attached hereto as Appendix A has been approved by the Trust’s
Board of Trustees as specified above.
(b) Any Rule 12b-1 Agreement shall describe the services to be performed by the Recipient and shall
specify the amount of, or the method for determining, the compensation to the Recipient.
(c) No Rule 12b-1 Agreement may be entered into
unless it provides (i) that it may be terminated with respect to each Fund at any time, without the payment of any penalty, by vote of a majority of the shareholders of each Fund’s Covered Shares, or by vote of a majority of the
Independent Trustees, on not more than 60 days’ written notice to the other party to the Rule 12b-1 Agreement, and (ii) that it shall automatically terminate in the event of its assignment (as defined in the Act and related rules and
Securities and Exchange Commission interpretations thereof).
(d) Any Rule 12b-1 Agreement shall continue in effect for a period of more
than one year from the date of its execution only if such continuance is specifically approved at least annually by a vote of a majority of the Board of Trustees, and of the Independent Trustees, cast in person at a meeting called for the purpose of
voting on such Rule 12b-1 Agreement.
The Distributor shall provide to the Board of Trustees, and the Trustees shall review at least quarterly, a written report of all amounts
expended pursuant to the Plan. This report shall include the identity of the Recipient of each payment and the purpose for which the amounts were expended and such other information as the Board of Trustees may reasonably request.
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4.
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EFFECTIVE DATE AND DURATION OF THE PLAN
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The Plan shall become effective immediately upon approval by the vote of a majority of the Board of Trustees, and of the Independent Trustees,
cast in person at a meeting called for the purpose of voting on the approval of the Plan. The Plan shall continue in effect with respect to the Fund for a period of one year from its effective date unless terminated pursuant to its terms.
Thereafter, the Plan shall continue with respect to the Fund from year to year, provided that such continuance is approved at least annually by a vote of a majority of the Board of Trustees, and of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan, or any Rule 12b-1 agreement, may be terminated with respect to the Fund at any time, without penalty, on not more than sixty (60) days’ written notice by a majority
vote of the shareholders of each Fund’s Covered Shares, or by vote of a majority of the Independent Trustees.
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5.
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SELECTION OF INDEPENDENT TRUSTEES
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During the period in which the Plan is effective, the selection and nomination of those Trustees who are Independent Trustees of the Trust
shall be committed to the discretion of the Independent Trustees.
All material amendments of the Plan shall be in writing and shall be approved by a vote of a majority of the Board of Trustees, and of the
Independent Trustees, cast in person at a meeting called for the purpose of voting on such amendment. In addition, the Plan may not be amended to increase materially the amount to be expended by each Fund hereunder without the approval by a majority
vote of the shareholders of each Fund’s Covered Shares.
The Trust shall preserve copies of the Plan, any Rule 12b-1 Agreement and all reports made pursuant to Section 3 for a period of not less
than six years from the date of this Plan, any such Rule 12b-1 Agreement or such reports, as the case may be, the first two years in an easily accessible place.
Adopted: February 25, 2009
Amended:
August 31, 2011
September 4, 2014
August 28, 2018
April 29, 2019
August 29, 2019
October 30, 2020
APPENDIX A TO
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
OF
LITMAN GREGORY FUNDS
TRUST
Rule 12b-1 Related Agreement
ALPS DISTRIBUTORS, INC.
1290 Broadway, Suite 1100
Denver,
CO 80203
Re: Litman Gregory Funds Trust
Ladies and Gentlemen:
This letter will confirm
our understanding and agreement with respect to payments to be made to you pursuant to a Distribution and Shareholder Servicing Plan (the “Plan”) adopted by Litman Gregory Funds Trust (the “Trust”), on behalf of the Funds listed
on Schedule A (the “Funds”), a series of the Trust, pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the “Act”). The Plan and this related agreement (the “Rule 12b-1 Agreement”) have been
approved by a majority of the Board of Trustees of the Trust, including a majority of the Board of Trustees who are not “interested persons” of the Trust, as defined in the Act, and who have no direct or indirect financial interest in the
operation of the Plan or in this or any other Rule 12b-1 Agreement (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting thereon. Such approval included a determination by the Board of Trustees that, in
the exercise of its reasonable business judgment and in light of its fiduciary duties, there is a reasonable likelihood that the Plan will benefit the holders of the shares of each Fund covered by the Plan (the “Covered Shares”).
1. To the extent you provide distribution and marketing services in the promotion of the Fund’s Covered Shares and/or services to the
holders of Covered Shares, including furnishing services and assistance to your customers who invest in and own Covered Shares, including, but not limited to, answering routine inquiries regarding the Fund and assisting in changing account
designations and addresses, we shall pay you a fee as described on Schedule A. We reserve the right to increase, decrease or discontinue the fee at any time in our sole discretion upon written notice to you.
You agree that all activities conducted under this Rule 12b-1 Related Agreement will be conducted in accordance with the Plan, as well as all
applicable state and federal laws, including the Act, the Securities Exchange Act of 1934, the Securities Act of 1933, the U.S. Patriot Act of 2001 and any applicable rules of the National Association of Securities Dealers, Inc.
2. You shall furnish us with such information as shall reasonably be requested either by the Trustees of the Fund or by us with respect to the
services provided and the fees paid to you pursuant to this Rule 12b-1 Agreement.
3. We shall furnish to the Board of Trustees, for its review, on a quarterly basis, a written
report of the amounts expended under the Plan by us and the purposes for which such expenditures were made.
4. This Rule 12b-1 Agreement
may be terminated by the vote of (a) a majority of the holders of Covered Shares, or (b) a majority of the Independent Trustees, on 60 days’ written notice, without payment of any penalty. In addition, this Rule 12b-1 Agreement will
be terminated by any act which terminates the Plan or the Distribution Agreement between the Trust and us and shall terminate immediately in the event of its assignment. This Rule 12b-1 Agreement may be amended by us upon written notice to you, and
you shall be deemed to have consented to such amendment upon effecting any purchases of Covered Shares for your own account or on behalf of any of your customer’s accounts following your receipt of such notice.
5. This Rule 12b-1 Agreement shall become effective on the date accepted by you and shall continue in full force and effect so long as the
continuance of the Plan and this Rule 12b-1 Agreement are approved at least annually by a vote of the Board of Trustees of the Trust and of the Independent Trustees, cast in person at a meeting called for the purpose of voting thereon. All
communications to us should be sent to the above address. Any notice to you shall be duly given if mailed or faxed to you at the address specified by you below.
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ALPS Distributors, Inc.
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By:
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(Name and Title)
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Accepted:
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(Dealer or Service Provider Name)
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(Street Address)
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(City)(State)(ZIP)
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(Telephone No.)
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(Facsimile No.)
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By:
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(Name and Title)
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Schedule A
to the
Rule 12b-1
Related Agreement
For all services rendered pursuant to the Rule 12b-1 Agreement, we shall pay you a fee calculated as follows:
Fee of 0.25% of the average daily net assets of each Fund covered by the Plan (computed on an annual basis) which are owned of record by your firm as nominee
for your customers or which are owned by those customers of your firm whose records, as maintained by the Trust or its agent, designate your firm as the customer’s dealer or service provider of record.
We shall make the determination of the net asset value, which determination shall be made in the manner specified in the Fund’s current prospectus, and
pay to you, on the basis of such determination, the fee specified above, to the extent permitted under the Plan.
APPENDIX B TO
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
OF
LITMAN GREGORY FUNDS
TRUST
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FUNDS
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CLASSES
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12b-1 Fee (as a %
of Avg. Net Assets
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PartnerSelect Equity Fund
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Institutional Class Shares
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NONE
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PartnerSelect International Fund
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Institutional Class Shares
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NONE
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PartnerSelect Alternative Strategies Fund
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Institutional Class Shares
Investor Class
Shares*
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NONE
0.25%
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PartnerSelect High Income Alternatives Fund
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Institutional Class Shares
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NONE
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PartnerSelect SBH Focused Small Value Fund
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Institutional Class Shares
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NONE
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PartnerSelect Oldfield International Value Fund
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Institutional Class Shares
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NONE
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Exhibit (n)(1)
LITMAN GREGORY FUNDS TRUST
MULTIPLE CLASS PLAN
This
Multiple Class Plan (this “Plan”) is adopted pursuant to Securities and Exchange Commission Rule 18f–3 promulgated under the Investment Company Act of 1940, as amended (the “1940 Act”).
This Plan shall govern the terms and conditions under which Litman Gregory Funds Trust f/k/a The Masters’ Select Funds Trust (the
“Trust”) may issue separate classes of shares representing interests in the Funds listed in Appendix B, all series of the Trust (each a “Fund” and together the “Funds”). To the extent that a subject matter herein is
covered by the Trust’s Agreement and Declaration of Trust or Bylaws, the Agreement and Declaration of Trust and Bylaws will control in the event of any inconsistencies with the descriptions herein.
SECTION 1. Rights and Obligations.
Except as set forth herein, all classes of shares issued by a Fund shall have identical voting, dividend, liquidation and other rights,
preferences, powers, restrictions, limitations, qualifications, designations, and terms and conditions. The only differences among the various classes of shares shall relate solely to the following: (a) each class may be subject to different
class expenses as discussed under Section 3 of this Plan; (b) each class may bear a different identifying designation; (c) each class shall have exclusive voting rights with respect to matters solely affecting such class;
(d) each class may have different exchange privileges; and (e) each class may be offered to different types of investors.
SECTION 2. Classes
of Shares and Designation Thereof.
Each Fund may offer any or all of the following classes of shares:
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(a)
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Institutional Class Shares. “Institutional Class Shares” will be
offered with no sales charges, transaction fees, shareholder service fees or distribution (Rule 12b-1) fees. Institutional Class Shares do not automatically convert into shares of any other class.
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(b)
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Investor Class Shares. “Investor Class Shares” will be offered with no
sales charges, shareholder service fees, or transaction fees. Investor Class Shares will be subject to distribution (12b-1) fees at an annual rate of up to 0.25% of average daily net assets attributable
to the Investor Class Shares. Investor Class Shares do not automatically convert into shares of any other class.
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SECTION
3. Allocation of Expenses.
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(a)
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Class Expenses. Each class of shares may be subject to different class expenses
consisting of: (1) shareholder service fees, if applicable to a particular class; (2)
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1
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transfer agency and other recordkeeping costs to the extent allocated to a particular class; (3) Securities and Exchange Commission (“SEC”) and blue sky registration fees incurred
separately by a particular class; (4) litigation or other legal expenses relating solely to a particular class; (5) printing and postage expenses related to the preparation and distribution of class-specific materials such as shareholder
reports, prospectuses and proxies to shareholders of a particular class; (6) expenses of administrative personnel and services as required to support the shareholders of a particular class; (7) audit or accounting fees or expenses relating
solely to a particular class; (8) Trustee fees and expenses incurred as a result of issues relating solely to a particular class; (9) distribution (Rule 12b-1) fees, if applicable to a particular
class; and (10) any other expenses subsequently identified that should be properly allocated to a particular class, which shall be approved by the Board of Trustees (collectively, the “Class Expenses”).
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(b)
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Other Expenses. Except for the Class Expenses discussed above (which will be allocated to the
appropriate class), all expenses incurred by each Fund will be allocated in accordance with Rule 18f-3 (c).
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(c)
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Waivers and Reimbursements of Expenses. Litman/Gregory Fund Advisors, LLP (the “Adviser”) and
any other provider of services to the Funds may waive or reimburse the expenses of a particular class or classes, provided, however, that such waiver shall not result in cross–subsidization among classes.
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SECTION 4. Allocation of Income.
The
Funds will allocate income and realized and unrealized capital gains and losses in accordance with Rule 18f-3 (c).
SECTION 5. Exchange Privileges.
A class
of shares of a Fund may be exchanged only for the same class of shares of another Fund. All exchanges will be subject to such conditions as may be imposed from time to time as disclosed in Appendix A.
SECTION 7. Effective Date.
This Plan
shall not take effect with respect to a Fund until (a) a majority of the Trustees of the Trust, including a majority of the Trustees who are not “interested persons” of the Trust (as defined in the 1940 Act), find that the Plan, as
proposed and including the expense allocations, is in the best interests of each Institutional Class individually and the Trust as a whole, and (b) an amendment to the Trust’s registration statement under the 1940 Act and the
Securities Act of 1933, as amended, with respect to multiple classes of the Fund has become effective.
2
SECTION 8. Amendments.
This Plan may not be amended to materially change the provisions of this Plan unless such amendment is approved in the manner specified in item
(a) of Section 7 above.
3
APPENDIX A TO
MULTIPLE CLASS PLAN
OF
LITMAN GREGORY FUNDS TRUST
EXCHANGE PRIVILEGES
SECTION 1. TERMS
AND CONDITIONS OF EXCHANGES.
Shareholders of the Funds may participate in exchanges as described below. An exchange is permitted only
in the following circumstances:
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(a)
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the exchange must be between the same class of shares (e.g., Institutional Class Shares of one Fund
cannot be exchanged for Investor Class Shares of another Fund, nor can Institutional Class Shares of one Fund be exchanged for Investor Class Shares of that same Fund);
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(b)
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the dollar amount of the exchange must be at least equal to the minimum investment applicable to the shares of
the Fund acquired through such exchange;
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(c)
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the shares of the Fund acquired through exchange must be qualified for sale in the state in which the
shareholder resides;
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(d)
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the exchange must be made between accounts having identical registrations and addresses;
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(e)
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the full amount of the purchase price for the shares being exchanged must have already been received by the
Trust;
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(f)
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the account from which shares have been exchanged must be coded as having a certified taxpayer identification
number on file or, in the alternative, an appropriate IRS Form W–8 (certificate of foreign status) or Form W–9 (certifying exempt status) must have been received by the Trust;
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(g)
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newly acquired shares (through either an initial or subsequent investment) must be held in an account for at
least ten days, and all other shares are held in an account for at least one day, prior to the exchange; and
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(h)
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certificates (if any) representing shares must be returned before shares can be exchanged.
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Because excessive exchanges can harm a Fund’s performance, the Trust does not accommodate frequent purchases and
redemptions of Fund shares and reserves the right to restrict, reject or cancel, without any prior notice, any purchase or exchange order, including
A-1
transactions representing excessive trading (accounts under common ownership or control and accounts with the same taxpayer identification number will be counted together). The Adviser and the
Trust’s transfer agent currently monitor for various patterns in trading activity in client accounts, including omnibus accounts, such as a purchase and sale of approximately the same amount of shares of a Fund (a “round trip”) more
than twice in any twelve month period. These parameters are subject to change. The Trust reserves the right to refuse exchanges by any person or group if, in the Adviser’s judgment, a Fund would be unable effectively to invest the money in
accordance with its investment objective and policies, or would otherwise be potentially adversely affected. A shareholder’s exchanges may be restricted or refused if a Fund receives, or the Adviser anticipates, simultaneous orders affecting
significant portions of that Fund’s assets and, in particular, a pattern of exchanges coinciding with a “market timing” strategy. Although the Trust attempts to provide prior notice to affected shareholders when it is reasonable to do
so, it may impose these restrictions at any time. The Trust reserves the right to terminate or modify the exchange privileges of Fund shareholders in the future.
THE EXCHANGE PRIVILEGE IS NOT AN OPTION OR RIGHT TO PURCHASE SHARES BUT IS PERMITTED UNDER THE RESPECTIVE POLICIES OF THE PARTICIPATING FUNDS,
AND MAY BE MODIFIED OR DISCONTINUED BY THE TRUST OR BY THE ADVISER OR DISTRIBUTOR OF THE FUNDS AT ANY TIME, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, WITHOUT NOTICE.
Shares to be exchanged will be redeemed at their net asset value as determined at the close of business on the day that an exchange request in
proper form is received, as described in the applicable prospectus. Exchange requests received after the required time will result in the redemption of shares at their net asset value as determined at the close of business on the next business day.
In the event of unusual market conditions, the Trust reserves the right to reject any exchange request if, in the judgment of the
Adviser, the number of requests or the total value of the shares that are the subject of the exchange are likely to place a material burden on a Fund. For example, the number of exchanges by investment managers making market–timing exchanges
may be limited.
SECTION 2. FEES.
There is no fee for exchanges between the Funds.
SEE THE APPLICABLE PROSPECTUS FOR MORE INFORMATION ABOUT SHARE EXCHANGES.
A-2
APPENDIX B TO
MULTIPLE CLASS PLAN
OF
LITMAN GREGORY FUNDS TRUST
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FUNDS
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CLASSES
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PartnerSelect Equity Fund
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Institutional Class Shares
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PartnerSelect International Fund
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Institutional Class Shares
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PartnerSelect Alternative Strategies Fund
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Institutional Class Shares
Investor
Class Shares
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PartnerSelect High Income Alternatives Fund
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Institutional Class Shares
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PartnerSelect SBH Focused Small Value Fund
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Institutional Class Shares
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PartnerSelect Oldfield International Value Fund
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Institutional Class Shares
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B-1
Harris Associates L.P., Harris Associates Securities L.P. and Harris Associates Investment
Trust Code of Ethics and Statement on Insider Trading
As Amended, Effective as of September 30, 2020
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A.
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Firm or Harris. The term “Firm” or “Harris” shall include Harris Associates L.P.
(“HALP”) and Harris Associates Securities L.P. (“HASLP”).
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B.
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Trust. The term “Trust” shall mean Harris Associates Investment Trust, including any series
of shares of beneficial interest of the Trust (each, a “Fund”).
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C.
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Employee. The term “Employee” shall include any person employed by the Firm, whether on
a full or part-time basis and all partners, officers, shareholders and directors (other than Non-Access Directors (as defined below)) of the Firm.
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D.
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Access Person. The term “Access Person” shall have the meanings set forth in Section 17j-1(a)(1) of the Investment Company Act of 1940 and rules thereunder (the “Act”) and Section 204A-1(e)(1) of the Investment Advisers Act of 1940
(the “Advisers Act”).
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Accordingly, Access Person includes any director, officer, partner (or managing member)
or Advisory Person (as defined below) of the Trust or HALP, and any director, officer or partner of the Trust, HALP or HASLP who has access to nonpublic information regarding any Client’s purchase or sale of securities, or nonpublic information
regarding the portfolio holdings of any Reportable Fund or who is involved in making securities recommendations to a Client, or who has access to such recommendations that are non-public, but shall not include
(1) any trustee of the Trust who is not an “interested person” of the Trust1; (2) any trustee of the Trust who is designated an “interested person”, as defined in
Section 2(a)(19) of the Investment Company Act of 1940, but who is not a director, officer, general partner or Advisory Person of HALP, HASLP or Harris Associates, Inc.; and (3) any Non-Access
Director.
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E.
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Advisory Person. The term “Advisory Person” shall have the meaning set forth in Section 17j-1(a)(2) of the Act. Accordingly, Advisory Person includes any Employee of the Firm, who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding
the purchase or sale of Covered Securities (as defined below) by a Client (as defined below), or whose functions relate to the making of any recommendations with respect to purchases and sales, and any natural person in a control relationship to a
Fund or HALP who obtains information concerning recommendations made to a Fund with regard to the purchase or sale of Covered Securities by the Fund. For the purpose of this Code, each Employee of the Firm with an office at the Firm’s principal
place of
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1
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Independent trustees of the Trust are subject to a separate code of ethics.
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1
business shall be deemed to be an Advisory Person. In addition, the term “Advisory
Person” shall include any contractor, consultant, temporary employee or intern (or similar person) engaged by the Firm or employed by the Trust who is designated as an Advisory Person by the Chief Compliance Officer2 as a result of such person’s access to information regarding the purchase or sale of Covered Securities.
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F.
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Persons Subject to this Code. Each Employee, Access Person and such other individuals as are
specifically identified in writing by the Trust’s or HALP’s Chief Compliance Officer as being subject to this Code will be subject to this Code. Non-Access Directors are subject to the following
provisions of this Code: II.A, II.B, II.C.i., II.J, and III (except for III.B.3 and the last sentence of III.B.4).
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G.
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Covered Security. The term “Covered Security” shall have the same meaning as
“security” that is set forth in Section 2(a)(36) of the Act,3 including any right to acquire such security, except that it shall not include securities which are direct
obligations of the Government of the United States, bankers’ acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments (including repurchase agreements), and shares issued by open-end investment companies other than Reportable Funds and ETFs (defined below).
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Securities which are direct obligations of the national government of any country other than the United States shall be treated as Covered
Securities for reporting purposes only (“Reportable Government Bonds”).
All exchange-traded funds (“ETFs”) and
Reportable Funds, whether registered as open-end management companies or unit investment trusts, shall be treated as Covered Securities for reporting purposes only. Derivative instruments where the reference
asset(s) is a broad-based securities index or an ETF shall be treated as Covered Securities for reporting purposes only.
Digital currency
shall be treated as Covered Securities when and only when they are to be purchased in an initial offering. For the avoidance of doubt, neither the holding of digital currency nor secondary trading in digital currency implicates this Code.4 Derivative instruments where the reference asset(s) is a digital currency shall be treated as Covered Securities for reporting purposes only.
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2
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The Chief Compliance Officer may delegate any responsibilities assigned to him or her hereunder to one or more
delegates.
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3
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Sec. 2(a)(36) “Security” means any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre- organization certificate or subscription, transferable share, investment
contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on
any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any
interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the
foregoing.
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4
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Given the evolving regulatory environment around digital currency generally, Persons Subject to this Code
should contact the Compliance Department before trading in digital currency if they are unsure about how such trading is treated under this Code.
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2
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H.
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Reportable Fund. The term “Reportable Fund” shall have the meaning set forth in Section 204A-1(e)(9) of the Advisers Act. Reportable Fund means any investment company registered under the Act that is advised or sub-advised or distributed by the Firm or any
entity that controls HALP, that is controlled by HALP or that is under common control with HALP (e.g. Natixis Asset Management Advisers, Loomis Sayles) other than money market funds. A current list of Reportable Funds is maintained on the Compliance
page of the Firm’s intranet site.
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I.
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Beneficial Interest or Ownership. The term “beneficial interest or ownership” shall be
interpreted in the same manner as it would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 in determining whether a person is subject to the provisions of Section 16 of the
Securities Exchange Act of 1934 and rules thereunder, which includes any interest in which a person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary
interest.
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A pecuniary interest is the opportunity, directly or indirectly, to profit or share in any profit derived from
any transaction.
You will be presumed, unless such presumption is determined to have been rebutted by the Firm’s General Counsel and
Chief Compliance Officer (or their designee(s)), to have a pecuniary interest, and therefore, beneficial interest or ownership, in all securities held by you or by a member of your “immediate family” (which shall include any of your
children, stepchildren, grandchildren, parents, stepparents, grandparents, siblings, sons-in-law,
daughters-in-law, brothers-in-law, or sisters-in-law and your spouse, mother-in-law,
father-in-law, and shall include adoptive relationships) with whom you share the same household and in all accounts through which any such person or you obtain the
substantial equivalent of ownership, such as trusts in which he or she is a trustee or beneficiary, partnerships in which he or she is the general partner, corporations in which he or she is a controlling shareholder or any other similar
arrangement. For these purposes, the term “spouse” includes any live-in/domestic partner who shares your household and who combines his or her financial resources with you in a manner similar to that
of married persons.
Any questions an Employee may have about whether an interest in a security or an account constitutes beneficial
interest or ownership should be directed to the Firm’s General Counsel or Compliance Department. Non-exhaustive examples of beneficial interest or ownership are attached as Appendix A.
Note: if an Access Person is authorized to trade in a brokerage account where there is no beneficial interest to the Access Person (e.g.,
trading in a person’s account (related or not) who does not reside with the Access Person), please contact the Firm’s General Counsel or Compliance Department for further guidance and disclosure. Depending on what is traded in these
accounts, certain transactions can appear to bypass the restrictions of the Code of Ethics and present potential conflicts of interest.
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J.
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Client. The term “Client” shall mean any client of HALP, including any Fund.
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3
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K.
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Non-Access Director. The term
“Non-Access Director” shall mean any person who is a Director of Harris Associates, Inc., the corporate general partner of HALP and HASLP, but who is not an officer or employee of any of HALP,
HASLP or Harris Associates, Inc. and who meets all of the following conditions:
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i.
|
He or she, in connection with his or her regular functions or duties, does not make, participate in or obtain
information regarding the purchase or sale of Covered Securities by a registered investment company, and whose functions do not relate to the making of recommendations with respect to such purchases or sales;
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ii.
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He or she does not have access to nonpublic information regarding any Client’s purchases or sales of
securities (other than information contained in standard account statements or reports that the Firm may furnish to such person in his or her capacity as a Client), or nonpublic information regarding the portfolio holdings of any Reportable Fund;
and
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iii.
|
He or she is not involved in making securities recommendations to Clients, and does not have access to such
recommendations that are nonpublic (other than information contained in standard account statements or reports that the Firm may furnish to such person in his or her capacity as a Client).
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L.
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Discretionary Accounts. The term “Discretionary Account” shall mean any account in
which you have a beneficial interest or ownership, but over which you have no direct or indirect influence or control. You may be deemed to have direct or indirect influence or control over an account if your adviser consults you, or seeks your
input, regarding potential or current investments in the account or if you suggest investments to the individual or institution with influence or control.
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Persons Subject to this Code should obtain the written approval of the Chief Compliance Officer regarding a Discretionary Account before
relying on the reporting and other exceptions provided herein for the Discretionary Account.
Exceptions: Notwithstanding the
above, a “Discretionary Account” shall not include any account in which a Person Subject to this Code has delegated investment discretion to any other Person(s) Subject to this Code.
Assessment of Discretionary Accounts: The Chief Compliance Officer may make inquiries to a Person Subject to this
Code and/or such person’s investment professional at any time (including before or after any approval of the Discretionary Account has been provided) in its assessment of whether an account should be treated as, or remains, a Discretionary
Account. In doing so, the Chief Compliance Officer may request such person and/or such person’s adviser to certify that such person has no direct or indirect influence or control over the account. Such person shall respond to, or, as requested,
arrange for such person’s adviser to respond to, any such inquiries and shall make, or, as requested, arrange for such person’s adviser to make, any such certifications.
4
Harris seeks to foster a reputation for integrity and professionalism. That reputation is a vital business asset. The confidence and trust
placed in us by Clients is something that is highly valued and must be protected. The Firm owes a fiduciary duty to its Clients, and the fundamental principle of the Firm is that the Firm should not inappropriately put its interests ahead of its
Clients.
The Investment Company Act and rules make it illegal for any person covered by the Code, directly or indirectly, in connection
with the purchase or sale of a security held or to be acquired by a registered investment company that is advised or sub-advised by the Firm (a “RIC”) to:
i.) employ any device, scheme, or artifice to defraud a RIC;
ii.) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of
circumstances under which they are made, not misleading or in any way mislead a RIC regarding a material fact;
iii.) engage in any act,
practice, or course of business which operates or would operate as a fraud or deceit upon a RIC; or
iv.) engage in any manipulative
practice with respect to a RIC.
The restrictions on personal securities transactions contained in this Code are intended to help the Firm
monitor for compliance with these prohibitions. To attempt to ensure that each Person Subject to this Code satisfies this Code and the Firm satisfies the relevant record keeping obligations, the Firm has developed the following rules relating to
personal securities trading, outside employment, personal investments with external investment managers and confidentiality.
The General
Counsel and Chief Compliance Officer, acting in concert, have the authority to grant written waivers of the provisions of this Code in instances they determine appropriate in their discretion.5
The Firm expects all Persons Subject to this Code to comply with the spirit of the Code as well as the specific rules contained in the
Code. Any violations of the Code must be reported promptly to the Firm’s Chief Compliance Officer.
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5
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In performing their various responsibilities under this Code, the General Counsel, Chief Compliance Officer,
and others assigned powers and/or duties under this Code may consult with the Firm’s President to the extent they deem necessary or desirable.
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5
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B.
|
COMPLIANCE WITH FEDERAL SECURITIES LAWS
|
More generally, Persons Subject to this Code are required to comply with applicable federal securities laws at all times. Examples of
applicable federal securities laws include:
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i.)
|
the Securities Act of 1933, Securities Act of 1934, Sarbanes-Oxley Act of 2002 and Securities and Exchange
Commission (“SEC”) rules thereunder;
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ii.)
|
the Investment Advisers Act of 1940 and SEC rules thereunder; iii.) the Investment Company Act of 1940 and SEC
rules thereunder;
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iv.)
|
Title V of the Gramm-Leach-Bliley Act of 1999 (privacy and security of client
non-public information); and
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v.)
|
the Bank Secrecy Act, as it applies to mutual funds and investment advisers, and SEC and Department of the
Treasury rules thereunder.
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C.
|
RESTRICTIONS ON TRADING
|
It is desirable for Persons Subject to this Code to avoid a transaction in any Covered Security which is also the subject of a Client portfolio
purchase or sale if that transaction would be to the disadvantage of that Client. To seek to effect that result, the following specific restrictions apply to all trading activity in Covered Securities and Corporate Bonds in accounts in which a
Person Subject to this Code has a beneficial interest or ownership other than Discretionary Accounts:
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i.)
|
Any transaction in a Covered Security in anticipation of Client orders (“frontrunning”) is
prohibited;
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ii.)
|
Any transaction in a Covered Security which is the subject of approval by one of the Firm’s stock
selection groups for addition to an approved list is prohibited until the tenth business day following the dissemination of that recommendation, or any longer period specified in this Code;
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iii.)
|
Any transaction in a Covered Security which the Person Subject to this Code knows or has reason to believe is
being purchased or sold or considered for purchase or sale6 by the Firm on behalf of any Client is prohibited until, subject to extension under II.E., the transaction by such Client has been
completed or consideration of such transaction has been abandoned;
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iv.)
|
Any transaction in a security within two business days after any Client has a pending or actual transaction is
prohibited. Additionally, if an Access Person places an order for a security prior to a Portfolio Manager or Fund Manager placing a Client order for the same security that day, the Access Person’s order may be cancelled if practicable after
notice and if, in the judgment of the General Counsel or Chief Compliance Officer, such cancellation will prevent Client harm;
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6
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A security is “being considered for purchase or sale” when the earlier of, a recommendation to
purchase or sell has been made and communicated to SSG or the security is placed on the research project list and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation.
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6
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v.)
|
Any transaction in derivative instruments that are Covered Securities other than where the reference
asset(s) (i) includes only one or more equity securities with a de minimis market capitalization7, (ii) is a broad-based securities index or an ETF or (iii) is a digital
currency (together “Permissible Derivative Investments”);
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vi.)
|
The purchase of any Covered Security in an initial public offering;
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vii.)
|
Any transaction in Corporate Bonds8; and
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viii.)
|
Such other transactions in Covered Securities as the Chief Compliance Officer or General Counsel shall
determine in each of their discretion from time to time to effect the purposes of this Code of Ethics.
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Additionally, no
Person Subject to this Code shall knowingly sell to or purchase from the Funds any security or other property except, in the case of the Funds, securities issued by the Funds. Neither shall the Firm nor any Person Subject to this Code share in the
profits or losses in any account of a Client carried by the Firm or any other FINRA member, except to the extent provided for by Rule 205-3 of the Investment Advisers Act of 1940 and/or FINRA Rule 2150, as
applicable.
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D.
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PRIVATE INVESTMENT POOLS AND OTHER PRIVATE PLACEMENTS.
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No non-Discretionary Account in which an Access Person has a beneficial interest or ownership shall
acquire any security issued by a private investment pool (such as a hedge fund, commodity pool, or private equity fund), including by committing capital to an external investment manager’s investment vehicle, or invest in any other limited
offering (i.e., a securities offering exempt from registration pursuant to Section 4(a)(2) or 4(a)(5) of the Securities Act of 1933 or Rules 504 or 506 thereunder) without the prior approval of the Firm’s Chief Compliance Officer. For the
avoidance of doubt, this prohibition shall not apply to non-securities offerings, such as (i) direct investments or holdings in real estate (buildings, apartments, residences, or other similar
investments that are not securities), (ii) a note secured by a mortgage on a home, (iii) a short-term note secured by a lien on a small business or some of its assets or (iv) an ownership interest in an enterprise whose profits, if any,
will come primarily from the Access Person’s own efforts.
In deciding whether to grant approval to a request to purchase a private
investment pool or other private placement, consideration will be given to whether the investment (i) is consistent with the Firm’s investment philosophy and guidelines, (ii) is a Firm opportunity that is appropriate for and should be
offered to Clients and (iii) creates an actual conflict or the appearance of a conflict of interest for the Firm with respect to its Client(s). An Access Person who holds a security acquired in a private investment pool or in another private
placement must disclose that investment to the Firm’s Chief Compliance Officer if such Access Person later participates in the consideration of that issuer for inclusion on any list of securities approved for purchase or sale by Clients.
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7
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An issuer of an equity security has a de minimis market capitalization if the issuer has a market
capitalization below the level at which Harris ordinarily invests for client accounts.
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8
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With the exception of purchases of deeply distressed corporate bonds that are priced and trade at 20% or less
of par value (and the subsequent sale of such), and sales of corporate bonds received as inherited assets; these may be traded after obtaining a Code Waiver.
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7
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E.
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ADDITIONAL RESTRICTION ON FUND MANAGERS OF INVESTMENT COMPANY ACCOUNTS.
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Any Access Person who is a fund manager of any RIC is, to the extent the trade is otherwise permitted under this Code, prohibited from buying
or selling a covered security for an account in which he or she has a beneficial interest or ownership or as to which he or she has investment discretion within fifteen calendar days before and after the investment company that he/she manages trades
in that security. Any profits realized on trades effected within the proscribed periods in violation of this Code shall be required to be disgorged. Any losses realized on a sale within the proscribed periods where the sale is required by the Firm
because the purchase was in violation of this Code shall be borne by the fund manager if it was the fund manager’s actions which caused the violation.9
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F.
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CLIENT ACCOUNTS EXEMPT FROM REQUIREMENTS OF CODE.
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Any Client accounts (including open-end investment companies and limited partnerships) for which the
Firm acts as investment adviser or general partner shall be managed in accordance with the Firm’s trading procedures for a Client account. Any account owned in whole or in part by Persons Subject to this Code shall nonetheless be a Client
account and exempt from the provisions of Sections C, D, E and G of Part II of this Code if: (1) the account has been seeded by the Firm or affiliated persons of the Firm and is being managed in anticipation of investments by persons not
affiliated with the Firm; or (2) unaffiliated persons of the Firm are also invested in the account; or (3) the account is operated as a model portfolio in contemplation of management of Client accounts in the same or a similar strategy.
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G.
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REQUIREMENTS AND PROCEDURES TO IMPLEMENT TRADING RESTRICTIONS AND REPORTING OBLIGATIONS.
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1.
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Trading in Non-Discretionary Accounts in which an Advisory Person
has a Beneficial Interest or Ownership.
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Limitation on Non-Discretionary
Accounts. All Advisory Persons who have non-Discretionary Accounts that hold or can hold Covered Securities and in which the Advisory Person has a beneficial interest or ownership may maintain such
accounts at Pershing LLC (“Pershing”, the Firm’s prime broker) or at any other approved broker-dealer or bank (Approved Firms”).10
Transactions in Covered Securities, other than mutual funds, ETFs, and Reportable Government Bonds (see below), in any non-Discretionary Account in which an Advisory Person has a beneficial interest or ownership (other than accounts held with Pershing) are permitted only after the Advisory Person has (i) obtained the written pre-approval of the Chief Compliance Officer to open the account or place an initial order in the account with such other broker-dealer or bank and (ii) provided such other broker-dealer or bank with a written
notice of the Advisory Person’s affiliation with Harris and secured the obligation of such other broker-dealer or bank to send copies of confirmations and all periodic statements to the Compliance Department if information is not received
through a direct broker feed.
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9
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Any profits required to be disgorged hereunder shall be donated to a charity designated by the Firm or as
otherwise directed by the Chief Compliance Officer
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|
10
|
Contact Compliance for the list of approved firms. As a general matter trading through non-Approved Firms is not permitted except in unusual cases, such as when a new employee is hired and cannot practically move an account to an Approved Firm
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8
Pre-Approval of Transactions in Covered
Securities. Except for those transactions listed below, you must receive pre-approval for every transaction in a Covered Security in any account in which you have a beneficial interest. This
requirement applies to purchases, sales, short sales and exposures obtained through entering into derivative instruments where a Covered Security is a reference asset.
Notwithstanding the above, transactions in the following do not require pre-approval:
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|
•
|
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Derivative instruments where the reference asset(s) is a broad-based securities index;
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•
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Reportable Government Bonds;
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•
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Discretionary Accounts11;
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•
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|
Digital currencies unless it is a purchase in an initial offering;
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•
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|
Dividend reinvestment plans or systematic purchase plans; or
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•
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|
Securities, or options on securities, of an issuer at which an immediate family member is (or was) employed and
that such immediate family member receives as compensation as part of his or her employment, when such transaction is conducted pursuant to a plan specified under Rule 10b5-1(c) under the Securities Exchange
Act of 1934 (or similar plan) (“Employee Compensation Plans”)12
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Required Provision of Confirmation. If an Advisory Person has obtained approval to open or hold a
non-Discretionary Account at a broker-dealer or bank other than with Pershing or another Approved Firm, the Advisory Person must also, after each transaction in that account in Covered Securities other than
Reportable Funds, ETFs or Reportable Government Bonds, promptly present Compliance with a confirmation reflecting the details of the transaction completed. Compliance will reconcile the trade confirmations it receives with the pre-clearance requests processed within the automated personal trading system.
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11
|
Discretionary Accounts must be pre-approved before relying on any
exception for Discretionary Accounts. See the definition of “Discretionary Account” above.
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12
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Such transactions are also not subject to the Restrictions on Trading in Section II.C. Persons subject to this
Code are encouraged to provide the Firm’s Chief Compliance Officer with advance notice of any participation of an Immediate Family Member in an Employee Compensation Plan.
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9
9
Discretionary Application of Pre-Approval Requirement
to Non-Advisory Persons. In addition to requiring pre-approval for transactions in Covered Securities by Advisory Persons (as described above), Compliance may
require any trade by a Person Subject to this Code to be pre-cleared if such a trade could reasonably be viewed to give rise to, or appear to give rise to, any breach of fiduciary duty owed to any Client or
create any actual or potential conflict of interest, or the appearance thereof, between any Client, on the one hand, and the Firm or any Person Subject to this Code, on the other hand.
Transactions for an account of an Advisory Person that are executed through the Firm’s trading desk are to be monitored by Compliance and
reviewed against pre-approval requests processed by the Chief Compliance Officer (or such party to whom he or she delegates). These transactions are non-discretionary
transactions for the trading desk, but may not be executed if the trading desk believes they are in conflict with Harris’ discretionary orders for Clients.
The Firm’s Compliance Department obtains and monitors a daily data feed of trade information from Pershing and Approved Firms (including
the title and exchange ticker symbol or CUSIP number of each Covered Security, the date of the transaction, the interest rate and maturity rate (if applicable), the number of shares and principal amount of each Covered Security involved, the nature
of the transaction (i.e. buy/sell), the price at which the transaction was effected, and the name of any broker-dealer or bank through which the transaction was effected).
Transactions in non-discretionary accounts at brokers or banks other than Pershing and Approved Firms
are to be monitored by the Compliance Department. To accomplish this, all Advisory Persons shall submit to the Compliance Department within thirty days after the month end in which any transaction occurred a statement which includes the title and
exchange ticker or CUSIP number of the Covered Security, Reportable Fund, ETF, the date of the transaction, the interest rate and maturity rate (if applicable), the number of shares and principal amount of each Covered Security, Reportable Fund,
ETF, or Reportable Government Bond involved, the nature of the transaction (i.e. buy/sell), the price at which the transaction was effected, the name of any broker-dealer or bank through which the transaction was effected and the date on which the
report is submitted. This requirement may be satisfied by opening or maintaining the account(s) at Pershing or an Approved Firm or by having the broker-dealer or bank send the Firm duplicate copies of trade confirmations and all periodic statements,
provided that such confirmations and periodic statements contain all of the information required to be provided in the report. The Compliance Department will maintain copies of all such transaction reports.
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3.
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Cancellation of Trades.
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Any transaction for an account of an Advisory Person is subject to cancellation or reversal if it is determined by the Chief Compliance Officer
(or such party to whom he or she delegates) – in his or her absolute discretion – that the transaction is or was in conflict with the Code or any applicable trade restriction. A trader may also prevent the execution of orders for an
Advisory Person’s account if it appears to the trader that the trade may have to be cancelled or reversed for failure to comply with this Code.
10
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4.
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Participation in Dividend Reinvestment Plans and Systematic Purchase Plans.
|
Advisory Persons may purchase Covered Securities through dividend reinvestment plans or systematic purchase plans without processing such
transactions through the Firm’s automated personal trading system or obtaining pre-approval. Purchases through such plans are permitted only if the Advisory Person properly obtained any necessary
approvals under the Code prior to opening the relevant account and placing the initial purchase of the Covered Security.
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5.
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Reporting of Securities Transactions Not Otherwise Reported.
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Any transaction in a Covered Security through a non-Discretionary Account in which an Access Person has
any beneficial interest or ownership, other than a transaction effected pursuant to a dividend reinvestment plan or systematic purchase plan, must be reported to the Compliance Department. Where such a transaction is effected through neither
(i) Pershing or an Approved Firm for which the Firm receives a daily data feed of trade information nor (ii) a broker-dealer or bank that sends the Firm duplicate copies of trade confirmations and all periodic statements (e.g., the
transaction is in Covered Securities held at stock transfer companies such as Computershare), the Access Person shall submit to the Compliance Department a report within thirty days after the end of each calendar quarter and include: the title and
exchange ticker symbol or CUSIP number of each Covered Security involved, the date of the transaction, the interest rate and maturity rate (if applicable), the number of shares and principal amount of each Covered Security involved, the nature of
the transaction (i.e. buy/sell), the price at which the transaction was effected, the name of any broker-dealer or bank through which the transaction was effected, and the date on which the report is submitted. This report may be in any form,
including a copy of a confirmation or monthly or other periodic statement.
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|
6.
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Initial, Quarterly and Annual Reporting Requirements; Questionnaires.
|
Each Access Person shall initially disclose in writing to the Compliance Department within ten days of becoming an Access Person, and annually
thereafter, within forty-five days after each calendar year-end, the title and exchange ticker or CUSIP number, type of security, number of shares and principal amount13of all Covered Securities beneficially owned by such Access Person in a non-Discretionary Account, and the date the Access Person submits the report, with
information as of a date that is no more than forty-five days from the date of becoming a Access Person, or as of the preceding December 31 for annual reporting, and the name of each broker-dealer or bank with whom the Access Person maintains
an account in which he or she has beneficial ownership of any security.
Additionally, each Access Person shall submit responses to
quarterly questionnaires requested by Compliance no later than 30 days after the end of each calendar quarter. The questionnaires are intended to satisfy the reporting requirements of Rule 17j-1(d)(ii) under
the Act and Rule 204A-1(b)(2) under the Advisers Act by requiring each Access Person to confirm and, as necessary, supplement the information that the Firm receives from Pershing and Approved Firms through a
daily data feed of trade information and from other broker-dealers and banks through the duplicate copies of trade confirmations and periodic statements. Quarterly transaction reports and responses to quarterly questionnaires need not include
transactions effected pursuant to a dividend reinvestment plan or systematic purchase plan.
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13
|
It shall not be deemed a violation of this Code for any report required hereunder not to include the principal
amount of a Covered Security; provided, however, that the Compliance Department may request or require such information where it determines that it is necessary to effect the purposes of this Code.
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11
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H.
|
CONFIDENTIALITY & OBLIGATIONS OF EMPLOYEES
|
During the period of employment with the Firm an Employee will have access to certain “confidential information” concerning the Firm
and its Clients. This information is a valuable asset and the sole property of the Firm and may not be misappropriated and used outside of the Firm by an Employee or former Employee. “Confidential Information”, defined as all information
not publicly available about the business of the Firm, may include, but is not limited to, Client and prospect names and records, research, trading and portfolio information and systems, information concerning externally managed entities or accounts
which have been considered or made on behalf of fee paying Clients, and the financial records of the Firm and/or its Employees. In order to protect the interests of the Firm, an Employee or ex-Employee shall
not, without the express written consent of the Firm’s Chief Compliance Officer or General Counsel, disclose directly or indirectly confidential information to anyone outside of the Firm other than as necessary or appropriate to carry out the
Firm’s normal business operations (e.g., disclosure to a third-party vendor of the Firm or a Fund). An Employee should be extremely careful to avoid inadvertent disclosures and to exercise maximum effort to keep confidential information
confidential. Any questions concerning the confidentiality of information should be directed to the Chief Compliance Officer or the General Counsel. An abuse of the Firm’s policy of confidentiality could subject an Employee to immediate
disciplinary action that may include dismissal from the Firm. Nothing in this Code is intended to prevent an Employee from reporting a violation of applicable laws or regulations to an appropriate regulatory authority.
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I.
|
OUTSIDE EMPLOYMENT, ASSOCIATIONS AND BUSINESS ACTIVITIES; REPORTING OF POSITIONS OF IMMEDIATE FAMILY MEMBERS
|
Harris requires that all Advisory Persons make their positions with the Firm their primary employment. The approval
of Harris (and, in some cases, the approval of FINRA) is required before any Advisory Person may hold any outside position with any business organization (for-profit or not-for-profit), or enter into any relationship, or activity, where such outside position, relationship, or activity could influence the investment activities of the Firm or present a conflict of interest
with the Advisory Person’s employment with the Firm. All outside positions, regardless of whether such position is compensated or not, must be discussed with Compliance in advance of accepting such a position to assess the existence of a
conflict of interest. Any such outside position, relationship, or activity must be approved in advance in writing by the Chief Compliance Officer and the Advisory Person’s supervisor, and a copy of such approval shall be submitted and
maintained by the Compliance Department. Any change in the status of such approved position, relationship, investment, or activity must be reported in writing to the Compliance Department and the Advisory Person’s supervisor within the quarter
that the change in status occurred or within the certification cutoff period for the quarter. Any income or compensation received by an Advisory Person for serving in such position must be paid in full to the Firm, unless a waiver is granted by the
Chief Compliance Officer and the Advisory Person’s supervisor. Under no circumstance may an Advisory Person represent or suggest that Harris has approved or recommended the business activities of the outside organization or any person
associated with it. Associations with entities, such as charitable/volunteer and non-profit organizations where the activity is voluntary in nature (e.g., school or condominium board member, Scout leader,
Parent/Teacher Association) and does not involve securities-related activities (such as the selection of investments for endowments and foundations), will generally be granted a written exemption (e.g., email) from this section’s pre-approval requirement, and as such will not require written approval nor will it appear in the quarterly certification of outside activities.
12
An Advisory Person shall not be deemed to be engaged in securities-related activities as the
result of the grant of a durable or conditional power of attorney over an investment account until such time as the power of attorney is exercised or the condition has been met.
Reporting of Positions of Immediate Family Members that Involve Conflicts of Interest. To identify actual or potential conflicts
of interest, each Advisory Person must disclose in writing to the Compliance Department any position, relationship, investment, or activity that an immediate family member has that to the Advisory Person’s knowledge could present a conflict of
interest for the Advisory Person in his or role with the Firm. If an Advisory Person has any questions about any activities and the need for disclosure, the Advisory Person should be cautious and direct any questions to the Firm’s General
Counsel or Compliance Department.
|
J.
|
Certification of Compliance by Access Persons.
|
In addition to new-hire training on the Code, each Access Person will receive annual training over
certain aspects of the Code. The Firm shall distribute the Code to each Employee and Non-Access Director upon inception of employment and whenever the Code is amended, but no less frequently than annually.
Each Access Person and Non-Access Director is required to certify in writing annually that (i) he or she has received, read and understands the Code, (ii) recognizes that he or she is subject to the
Code, and, in the case of Access Persons, (iii) he or she has disclosed or reported all transactions in which the Access Person has a beneficial interest or ownership that are required to be disclosed or reported under the Code or,
alternatively, that the Access Person has not engaged in any personal securities transactions during the preceding year for which a report was required to be filed pursuant to the Code.
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K.
|
Annual Report to the Trust’s Board of Trustees.
|
HALP, as the adviser to the Trust, shall prepare an annual report to the board of trustees of the Trust that:
|
|
i.)
|
summarizes existing procedures concerning personal investing and any changes in those procedures during the
past year;
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|
|
ii.)
|
describes issues that arose during the previous year under the Code or procedures concerning personal
investing, including but not limited to information about material violations of the Code and sanctions imposed;
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|
|
iii.)
|
certifies to the board that the Trust, the Trust’s adviser (HALP), and the Trust’s principal
distributor (HASLP) have adopted procedures reasonably necessary to prevent their Access Persons from violating the Code; and
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|
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iv.)
|
identifies any recommended changes in existing restrictions or procedures based upon experience under the Code,
evolving industry practices, or developments in applicable laws or regulations.
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13
|
III.
|
POLICY STATEMENT ON INSIDER TRADING
|
Trading securities while in possession of material, nonpublic information or improperly communicating that information to others may expose you
to stringent penalties. Criminal sanctions may include a fine of up to $1,000,000 and/or ten years imprisonment. The SEC can recover the profits gained or losses avoided through the violative trading, obtain a penalty of up to three times the
illicit windfall and issue an order permanently barring you from the securities industry. Finally, you may be sued by investors seeking to recover damages for insider trading violations.
Regardless of whether a government inquiry occurs, Harris views seriously any violation of this Policy Statement. Such violations constitute
potential grounds for disciplinary sanctions, including dismissal.
Cautionary note: The law of insider trading is unsettled; an
individual legitimately may be uncertain about the application of the Policy Statement in a particular circumstance. Often, a single question can prevent a violation of law or forestall disciplinary action or complex legal problems. You
should direct any questions relating to the Policy Statement to the General Counsel and the Chief Compliance Officer or, in their absence, their respective deputies. You also must notify the General Counsel and the Chief Compliance Officer or, in
their absence, their respective deputies immediately if you have any reason to believe that a violation of the Policy Statement has occurred or is about to occur.
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|
B.
|
POLICY STATEMENT ON INSIDER TRADING
|
Generally, no person to whom this Policy Statement applies may trade, either personally or on behalf of others (such as Clients), while in
possession of material, nonpublic information and in breach of a duty of trust or confidence that is owed to the issuer of the security, the shareholders of the issuer, or to any other person who is the source of the material nonpublic information;
nor may such persons communicate material, nonpublic information to others in breach of a duty of confidentiality or in violation of the law. This Policy Statement applies to securities trading and information handling by all Employees (including
their spouse or domestic/live-in partner, minor children and adult members of their households).
The section below reviews principles important to this Policy Statement.
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|
1.
|
What is Material Information?
|
Information is “material” when there is a substantial likelihood that a reasonable investor would consider it important in making his
or her investment decisions. Generally, this is information whose disclosure will have a substantial effect on the price of a company’s securities. No simple “bright line” test exists to determine when information is material;
assessments of materiality involve a highly fact-specific inquiry. For this reason, you should direct any questions about whether information is material to the General Counsel or Chief Compliance Officer.
14
Material information often relates to a company’s results and operations including, for
example, dividend changes, earnings results, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments.
Material information also may relate to the market for a company’s securities. Information about a significant order to purchase or sell
securities may, in some contexts, be deemed material.
Similarly, prepublication information regarding reports in the financial press also
may be deemed material.
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|
2.
|
What is Nonpublic Information?
|
Information is “nonpublic” until it has been disseminated broadly to investors in the marketplace. Tangible evidence of such
dissemination is the best indication that the information is public. For example, information is public after it has become available to the general public through a public filing with the SEC or some other governmental agency, the Dow Jones
“tape” or the WALL STREET JOURNAL or some other publication of general circulation, and after sufficient time has passed so that the information has been disseminated widely.
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|
3.
|
Identifying Inside Information
|
Before executing any trade for yourself or others, including Clients, you must determine whether you have access to material, nonpublic
information. If you think that you might have access to material, nonpublic information, you should take the following steps:
i.)
Immediately alert the Trading Department to restrict trading in the security. No reason or explanation should be given to the Trading Department for the restriction.
ii.) Report the information and proposed trade immediately to the General Counsel or the Chief Compliance Officer.
iii.) Do not purchase or sell the securities on behalf of yourself or others, including Clients.
iv.) Do not communicate the information inside or outside Harris other than to the above individuals.
v.) After the above individuals have reviewed the issue, the Firm will determine whether the information is material and nonpublic and, if so,
what action(s) the Firm should take.
15
|
|
4.
|
Contacts with Public Companies
|
For Harris, contacts with public companies represent an important part of our research efforts. Harris may make investment decisions on the
basis of the Firm’s conclusions formed through such contacts and analysis of publicly-available information. Difficult legal issues arise, however, when, in the course of these contacts, an Employee becomes aware of material, nonpublic
information. This could happen, for example, if a company’s Chief Financial Officer prematurely discloses quarterly results to an analyst or an investor relations representative makes a selective disclosure of adverse news to a handful of
investors. In such situations, Harris must make a judgment as to its further conduct. To protect yourself, Clients and the Firm, you should contact the General Counsel or the Chief Compliance Officer immediately if you believe that you may have
received material, nonpublic information.
Tender offers represent a particular concern in the law of insider trading for two reasons. First, tender offer activity often produces
extraordinary gyrations in the price of the target company’s securities. Trading during this time period is more likely to attract regulatory attention (and produces a disproportionate percentage of insider trading cases). Second, the SEC has
adopted a rule which expressly forbids trading and “tipping” while in possession of material, nonpublic information regarding a tender offer received from the tender offeror, the target company or anyone acting on behalf of either.
Employees should exercise particular caution any time they become aware of nonpublic information relating to a tender offer.
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|
C.
|
PROCEDURES TO IMPLEMENT THE POLICY STATEMENT ON INSIDER TRADING
|
|
|
1.
|
Personal Securities Trading
|
The restrictions on Employee trading and procedures to implement those restrictions and the Firm’s reporting obligations, which are set
forth in Section II above and in the Procedures for Personal Trading, constitute the procedures to implement this Policy Statement. Review those procedures carefully and direct any questions about their scope or applicability to the General Counsel
or the Compliance Department.
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|
2.
|
Restrictions on Disclosures
|
Employees shall not disclose any nonpublic information (whether or not it is material) relating to Harris or its securities transactions to any
person outside Harris (unless such disclosure has been authorized by Harris). Material, nonpublic information may not be communicated to anyone, including persons within Harris, except as provided in Section III(B)(3) above. Such information must be
secured. For example, access to files containing material, nonpublic information and computer files containing such information should be restricted, and conversations containing such information, if appropriate at all, should be conducted in
private.
16
The Compliance Department or the Secretary of the Trust will maintain the records listed below for a period of five years. Such records shall
be maintained at the Firm’s principal place of business in an easily accessible place:
|
|
i.)
|
a list of all Persons Subject to this Code during that period;
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|
|
ii.)
|
receipts signed by all Persons Subject to this Code acknowledging receipt of copies of the Code and
acknowledging that they are subject to it;
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|
|
iii.)
|
a copy of each Code of Ethics that has been in effect at any time during the period;
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|
|
iv.)
|
a copy of each report filed pursuant to the Code and a record of any known violations and actions taken as a
result thereof during the period as well as a record of all persons responsible for reviewing these reports;
|
|
|
v.)
|
a copy of any decision and the reasons supporting the decision, to approve the acquisition of Limited
Offerings; and vi.) a copy of each report required by II.K of this Code.
|
17
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS AND STATEMENT
ON INSIDER TRADING
Code of Ethics.
Harris Associates L.P. (“HALP”), Harris Associates Securities L.P. (“HASLP”) and Harris Associates Investment Trust (the
“Trust”) have adopted a written Code of Ethics and Statement on Insider Trading (the “Code”) and Procedures for Personal Trading to address potential conflicts of interest by HALP and HASLP personnel and to govern the use and
handling of material non-public information. Capitalized terms used and not defined herein shall have the meanings ascribed to them in the Code. Copies of the Code and the Procedures for Personal Trading are
attached to this acknowledgement. As a condition of your continued employment with HALP and HASLP, and/or the retention of your position, if any, as an officer of the Trust or a member of the board of HALP’s general partner, you are required to
read, understand and abide by the Code and the Procedures for Personal Trading.
Compliance Program.
The Code requires that all Access Persons furnish to the Compliance Department information regarding any investment account in which you have a
“beneficial interest or ownership” other than Discretionary Accounts. You are also required to furnish to the Compliance Department copies of your monthly or quarterly account statements, or other documents, showing all purchases or sales,
other than those effected pursuant to a dividend reinvestment plan or systematic purchase plan, of securities in any such account. Additionally, you are required to furnish a report of your personal securities holdings in Covered Securities within
ten calendar days of commencement of your employment with HALP or HASLP and annually thereafter. These requirements apply to any investment account, such as an account at a brokerage house, trust account at a bank, custodial account or similar types
of accounts, other than Discretionary Accounts.
This compliance program also requires that Employees report any contact with any securities issuer,
government or its personnel, or others, that, in the usual course of business, might involve receipt of what the Employee believes might be material non-public financial information. The Code requires that
Employees bring to the attention of the General Counsel or the Chief Compliance Officer any information they receive from any source, which they believe might be material non-public information.
Any questions concerning the Code or Procedures for Personal Trading should be directed to the General Counsel or the Compliance Department.
I affirm that I have received new-hire training covering certain key aspects of the Code and Procedures for Personal
Trading from Compliance, and have read and understand the Code and Procedures for Personal Trading. I agree to the terms and conditions set forth in the Code and Procedures for Personal Trading.
If I am acting in the capacity as a contractor, consultant, temporary employee or intern (or similar person) to Harris, I acknowledge that all references to
“Employee” in the Code and Procedures for Personal Trading refer to me and shall be construed to mean “agent” and that I may be designated as an Advisory Person and therefore an Access Person as a result of my access to
information regarding the purchase or sale of Covered Securities. My agreement and affirmation are made in the capacity as an agent, and not as an employee of Harris, and are not intended to impact my status as an independent contractor.
ANNUAL AFFIRMATION OF COMPLIANCE FOR ACCESS PERSONS AND
NON-ACCESS DIRECTORS
I affirm that:
|
1.
|
I have received annual training pertaining to certain aspects of the Code of Ethics and Statement of
Insider Trading (the “Code”) and Procedures for Personal Trading, and have again read and, to the best of my knowledge, have complied with provisions of the Code and Procedures for Personal Trading that pertain to me during the past year.
Capitalized terms used and not defined herein shall have the meanings ascribed to them in the Code.
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2.
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I have provided to the Compliance Department the names and addresses of each investment account, other
than Discretionary Accounts, in which I have a beneficial interest or ownership, as defined in the Code, including, but not limited to, those with broker-dealers, banks and others. (List of known accounts attached.) (Access Persons only)
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3.
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I have provided to the Compliance Department copies of account statements or other reports showing each
and every transaction in any Covered Security in any non-Discretionary Account in which I have a beneficial interest or ownership, as defined in the Code, during the most recently ended calendar year
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or
during
the most recent calendar year there were no transactions in any security in which I had a beneficial interest or ownership required to be reported pursuant to the Code. (Access Persons only)
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4.
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I have provided to the Compliance Department a report of my personal securities holdings in Covered
Securities in all non-Discretionary Accounts in which I have a beneficial interest or ownership, as defined in the Code, as of the end of the most recent calendar year, including all required information for
each Covered Security in which I have any direct or indirect beneficial ownership. (Access Persons only)
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5.
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With respect to the activities conducted at Harris, I am unaware of any violations of applicable laws or
regulations that have not otherwise been reported to the Chief Compliance Officer or an appropriate regulatory authority.
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6.
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If I am acting in the capacity as a contractor, consultant, temporary employee or intern (or similar
person) to Harris, I acknowledge that all references to “Employee” in the Code and Procedures for Personal Trading refer to me and shall be construed to mean “agent” and that I may be designated as an Advisory Person and
therefore an Access Person as a result of my access to information regarding the purchase or sale of Covered Securities. My agreement and affirmation made herein are made in the capacity as an agent, and not as an employee of Harris, and are not
intended to impact my independent contractor status.
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APPENDIX A
Examples of Beneficial Interest
For purposes of the Code,
you will be deemed to have a beneficial interest in a security if you have the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security. Examples of beneficial ownership under this definition
include:
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•
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securities you own, no matter how they are registered, and including securities held for you by others (for
example, by a custodian or broker, or by a relative, executor or administrator) or that you have pledged to another (as security for a loan, for example);
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•
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securities held by a trust of which you are a beneficiary (except that, if your interest is a remainder interest
and you do not have or participate in investment control of trust assets, you will not be deemed to have a beneficial interest in securities held by the trust);
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securities held by you as trustee or co-trustee, where either you or any
member of your immediate family has a beneficial interest (using these rules) in the trust.
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•
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securities held by a trust of which you are the settlor, if you have the power to revoke the trust without
obtaining the consent of all the beneficiaries and have or participate in investment control;
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•
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securities held by any partnership in which you are a general partner, to the extent of your interest in the
greater of partnership capital or profits;
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securities held by a personal holding company controlled by you alone or jointly with others;
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•
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securities held, directly or through a trust, by a member of your immediate family who is sharing your home, even
if the securities were not received from you and the income from the securities is not actually used for the maintenance of your household; or
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•
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securities you have the right to acquire (for example, through the exercise of a derivative security), even if
the right is not presently exercisable, or securities as to which, through any other type of arrangement, you obtain benefits substantially equivalent to those of ownership.
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You will not be deemed to have beneficial ownership of securities in the following situations:
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•
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portfolio securities held by a limited partnership in which you do not have a controlling interest and do not
have or share investment control over the partnership’s portfolio; and
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•
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securities held by a foundation of which you are a trustee and donor, provided that the beneficiaries are
exclusively charitable and you have no right to revoke the gift.
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These examples are not exclusive. There are other circumstances in
which you may be deemed to have a beneficial interest in a security. Any questions about whether you have a beneficial interest should be directed to the General Counsel or Compliance Department.
Sands Capital Management, LLC
Code of Ethics
(Amended
September 2020)
Sands Capital Management Code of Ethics
Table of Contents
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Page
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I.
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DEFINITIONS
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1
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II.
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STATEMENT OF GENERAL PRINCIPLES
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4
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III.
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DUTY OF CONFIDENTIALITY
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5
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IV.
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DISQUALIFIED PERSONS
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5
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V.
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PERSONAL TRADING
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5
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A.
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Fraudulent Purchases or Sales
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5
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B.
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Initial Public Offerings and Limited Offerings
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6
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C.
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Individual Equity Securities
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6
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D.
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Blackout Periods
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6
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E.
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Securities Pre-Clearance
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7
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F.
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Prohibition on Short-Term Trading Profits
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7
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G.
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Options and Short Sales
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7
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H.
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Investment Clubs
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8
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I.
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Exempt Transactions
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8
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J.
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Hardship Exemptions
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8
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K.
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Directorships
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8
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L.
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Sands Capital Ventures Investments
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9
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M.
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Outside Employment
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9
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VI.
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REPORTING AND CERTIFICATION REQUIREMENTS
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9
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A.
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Duplicate Brokerage Statements
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9
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B.
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Initial Holdings Report
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9
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C.
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Annual Holdings Reports
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10
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D.
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Quarterly Transaction Reports
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10
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E.
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Exceptions to Reporting Requirements
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11
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F.
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Annual Certifications
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12
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G.
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Reporting of Code Violations
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12
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VII.
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GIFTS & ENTERTAINMENT
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12
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A.
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General Guidance on Gifts and Entertainment
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12
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B.
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Additional Guidance on Gifts and Entertainment
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13
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C.
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Reporting of Gifts & Entertainment
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14
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D.
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Exceptions
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15
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VIII.
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REPORTS TO FUND CLIENTS
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15
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IX.
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SANCTIONS
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15
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X.
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OTHER DISCLAIMERS
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15
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XI.
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RECORDS
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15
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CODE OF ETHICS
This Code of Ethics (this “Code”)
is adopted by Sands Capital Management, LLC (collectively with its affiliates “Sands Capital” or “Firm”) pursuant to Section 204A of the Investment Advisers Act of 1940, as amended, and Rule 204A-1 thereunder,
and Section 17(j) of the Investment Company Act of 1940, as amended, and Rule 17j-1 thereunder, to: (1) set forth standards of conduct, including compliance with the federal securities laws; (2) require reporting of personal
securities transactions, including transactions in mutual funds advised and sub-advised by Sands Capital; and (3) require prompt reporting of violations of this Code.
This Code is applicable to supervised persons (as defined below) of Sands Capital, and to activities within and outside of their duties at Sands Capital.
The Compliance Team will notify access persons (as defined below) of their reporting obligations under this Code. Any questions regarding this Code should be
directed to the Chief Compliance Officer, a member of the Compliance Team or the General Counsel.
Both the Chief Compliance Officer and the General
Counsel has the authority to grant written waivers of certain provisions of the Code in appropriate instances. However, Sands Capital expects that waivers will only be granted in rare instances and some provisions of the Code that are prescribed by
Securities and Exchange Commission rules cannot be waived. These provisions include, but are not limited to, the requirements that covered person file certain reports and obtain pre-clearance of certain transactions.
“Access person” means (i) any supervised person who has access to nonpublic information regarding any client’s purchase or sale of
securities, or nonpublic information regarding the portfolio holdings of any Reportable Fund, or who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic; and (ii) any
advisory person (as defined below). For this purpose, all supervised persons are presumed to be access persons.
“Accredited investor” in
the context of a natural person, includes anyone who earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonable expects the same for the current year, or has a net worth over
$1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
“Advisers Act”
means the Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder by the U.S. Securities and Exchange Commission.
“Advisory person” means (i) any employee who, in connection with his or her regular functions or duties, makes, participates in, or
obtains information regarding the purchase or sale of covered securities by a Reportable Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control
relationship to Sands Capital who obtains information concerning recommendations made to a Reportable Fund with regard to the purchase or sale of covered securities by the Reportable Fund.
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1
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“Automatic investment plan” means a program in which regular periodic purchases (or withdrawals)
are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan.
Beneficial ownership” is interpreted in a manner as it would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended, in
determining whether a person has beneficial ownership of a security for purposes of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. “Beneficial ownership” means any
opportunity, directly or indirectly, to profit or share in the profit from any transactions in securities. Beneficial ownership is a very broad concept and some examples of forms of beneficial ownership include:
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Securities held in a person’s own name, or that are held for the person’s benefit in nominee, custodial
or “street name” accounts.
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Securities owned by or for a partnership in which the person is a general partner (whether the ownership is under
the name of that partner, another partner or the partnership or through a nominee, custodial or “street name” account).
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Securities that are being managed for a person’s benefit by an investment adviser, broker, bank, trust
company or other manager, unless (i) the securities are held in a “blind trust” or similar arrangement under which the person is prohibited by contract from communicating with the manager of the account and the manager is prohibited
from disclosing to the person what investments are held in the account or (ii) the securities are held in a Non-Discretionary Account.
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Securities in a person’s individual retirement account.
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Securities in a person’s account in a 401(k) or similar retirement plan.
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Securities owned by a trust of which the person is (i) a beneficiary and has investment control over the
assets of the trust or (ii) is the trustee of a trust and his or her family members are beneficiaries of such trust.
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Securities owned by a corporation, partnership or other entity that the person controls (whether the ownership is
under the name of that person, under the name of the entity or through a nominee, custodial or “street name” account).
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Securities owned by an investment club in which the person participates.
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“Chief Compliance Officer” means the individual (or his or her designee) designated by Sands Capital as having the authority and
responsibilities set forth in this Code; provided, however, that if that individual proposes to engage in any conduct or transaction requiring approval or other action by the Chief Compliance Officer, the approval shall be granted or other
action shall be taken by such other individual as Sands Capital shall designate.
“Conflicts of Interest Board” means senior executives
of Sands Capital or its affiliates that will assess and make recommendations with respect to certain conflicts of interest and related policies and procedures that are applicable to Sands Capital and/or its affiliates.
“Control” has the meaning set forth in Section 2(a)(9) of the Investment Company Act. Section 2(a)(9) provides that
“control” means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with the company. Ownership of more than 25% of a company’s
outstanding voting securities is presumed to give the holder control over the company. The facts and circumstances of a given situation may counter this presumption.
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2
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“Covered Security” or “Reportable Security” means a security as defined in
Section 202(a)(18) of the Advisers Act or Section 2(a)(36) of the Investment Company Act, and includes notes, bonds, stocks, convertible securities, preferred stock, options on securities, futures on broad-based market indices,
exchange-traded Funds (ETFs), warrants and rights, and shares of closed-end Funds and Reportable Funds, but does not include direct obligations of the United States Government, bankers’ acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including repurchase agreements, and shares issued by money market and other open-end (mutual) Funds.
“Direct or indirect influence or control” includes: (a) suggesting purchases or sales of investments to the trustee or third-party
manager; (b) directing purchases or sales of investments; (c) consulting with the trustee or third-party manager as to the particular allocation of investments to be made in the account; and (d) discussions with the trustee or
third-party manage concerning account holdings. Note that discussions about broad asset allocations that would not reasonably be expected to result in the purchase or sale of a particular security and discussions in which a trustee or third-party
manager simply summarizes, describes or explains account activity to a Supervised Person would not indicate “direct or indirect influence or control.”
Members of a person’s “Family / Household” are presumed to include:
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Your spouse or domestic partner (unless they do not live in the same household as you and you do not contribute
in any way to their support).
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Your children under the age of 18.
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Your children who are 18 or older (unless they do not live in the same household as you and you do not contribute
in any way to their support).
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Any of these people who live in your household: your stepchildren, grandchildren, parents, stepparents,
grandparents, brothers, sisters, parents-in-law, sons-in-law, daughters-in-law, brothers-in-law and sisters-in-law, including adoptive relationships.
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“Federal securities laws” means the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the
Investment Company Act, the Advisers Act, Title V of the Gramm-Leach- Bliley Act, and any rules adopted by the U.S. Securities and Exchange Commission under any of those statutes, the Bank Secrecy Act as it applies to registered investment advisers
and investment companies, and any rules adopted thereunder by the U.S. Securities and Exchange Commission or the Department of the Treasury.
“Fund” means an investment company registered under the Investment Company Act. “General Counsel” means the Chief Legal
Officer of Sands Capital or his or her delegate.
“Initial public offering” means an initial public offering of securities, including any
securities registered under the Securities Act of 1933.
“Investment Company Act” means the Investment Company Act of 1940, as amended,
and the rules and regulations promulgated thereunder by the U.S. Securities and Exchange Commission.
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3
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“Limited offering” means any offering of securities that is not a public offering, including any
offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(a)(2) or Section 4(a)(6) or pursuant to Rule 504, Rule 505 or Rule 506 under the Securities Act of 1933.
“Non-Discretionary Account” is a trust or account over which you or members of your Family / Household do not exercise any direct or indirect
influence of control. In order to meet the definition of a “Non- Discretionary Account,” a Supervised Person must complete the necessary bi-annual certifications and any other documents so required
by the Compliance Team.
“Public company” means any company whose securities are listed for trading on a public market, including those
companies subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
“Purchase or sale of a
security” includes, among other things, the writing of an option to purchase or sell a security.
“Reportable Fund” means any
Fund, or separate investment portfolio of such Fund, for which Sands Capital serves as an investment adviser as defined in Section 2(a)(20) of the Investment Company Act. A list of Reportable Funds can be found on the intranet.
“Sands Capital Ventures” means Sands Capital Ventures, LLC, an affiliate of Sands Capital.
“SCM Holdings” means any issuer in which a Sands Capital client currently holds an equity investment. “Supervised Person”
means any partner, officer, director (or other person occupying a similar status or performing similar functions), or staff member of Sands Capital, or other person who provides investment advice on behalf of Sands Capital and is subject to the
supervision and control of Sands Capital.
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II.
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STATEMENT OF GENERAL PRINCIPLES
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Sands Capital and the Supervised Persons owe fiduciary duties to Sands Capital’s clients. As fiduciaries, Sands Capital and the Supervised Persons stand
in a special relationship of trust, confidence, and responsibility with Sands Capital’s clients. Accordingly, Supervised Persons must avoid activities, interests and relationships that might interfere, or appear to interfere, with acting in the
best interests of clients. Supervised Persons must, at all times, observe the following general fiduciary principles:
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1.
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you must conduct your personal securities transactions in compliance with this Code and in a manner that avoids
any abuse of your position of trust and responsibility; and
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2.
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you must not take inappropriate advantage of your position.
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Supervised Persons must comply with applicable federal securities laws and adhere to these general principles and the specific provisions of this Code at all
times. Supervised Persons are expected to comply with the spirit of the Code, as well as specific rules contained in the Code. Supervised Persons may be held personally liable for any improper or illegal act. “Ignorance of the law” is not
a defense. Technical compliance with this Code will not insulate a Supervised Person from scrutiny where his or her activities violate fiduciary duties owed to Sands Capital’s clients. Conversely, a technical breach of this Code may not
necessarily cause harm to Sands Capital or its clients and may require subjective analysis by the Compliance Team in order to determine impact and consequences. However, your conduct can violate the Code even if neither Sands Capital nor its clients
are harmed by your conduct.
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4
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III.
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DUTY OF CONFIDENTIALITY
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Supervised Persons may not disclose confidential information (as described below) to any person unless (i) the recipient has a clear and compelling need
to know such information, and (ii) such disclosure does not violate applicable law or any contractual covenant. Confidential information includes any nonpublic information obtained in the course of their duties at Sands Capital, including:
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information of or regarding Sands Capital’s (or its affiliate’s) clients or prospective clients,
including personal identifying information, such as name, address, Social Security Number or Tax Identification Number, and account information, such as recent or impending securities transactions by or on behalf of clients, account numbers and
balances;
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2.
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information on Sands Capital’s personnel, including pay, benefits, position level and performance ratings;
and
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3.
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information on the business of Sands Capital and its affiliates, including investment strategies, technologies
and business activities.
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Section 9 of the Investment Company Act prohibits persons who have committed various acts from serving in certain capacities with respect to mutual funds.
Under Section 9(a), an “ineligible person” generally cannot serve as an employee, officer, trustee, member of advisory board, investment adviser, or principal underwriter of a Fund (each a “Fund Position”). Ineligible
persons include:
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persons with convictions within the last 10 years who are tied to securities transactions or employment in the
securities field;
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2.
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persons with permanent or temporary injunctions from acting in certain capacities in the securities arena;
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3.
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persons who have an affiliate that is ineligible under clause (1) or (2) above; or
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4.
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persons subject to an SEC order declaring them ineligible under Section 9 of the Investment Company Act.
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The Chief Compliance Officer will monitor compliance with Section 9. A Supervised Person who becomes an “ineligible
person” (or who believes he or she may have hired or employed an “ineligible person”) as described above must promptly notify the Compliance Team.
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A.
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Fraudulent Purchases or Sales
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Supervised Persons may not, directly or indirectly, in connection with the purchase or sale of a security held or to be acquired by any client:
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employ any device, scheme or artifice to defraud the client;
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5
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2.
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make to the client any untrue statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which they are made, not misleading;
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3.
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engage in any act, practice or course of business which would operate as a fraud or deceit upon the client; or
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4.
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engage in any manipulative practice with respect to the client.
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B.
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Initial Public Offerings and Limited Offerings
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Neither Supervised Persons nor members of his or her Family / Household may, directly or indirectly, acquire beneficial ownership of any security in an initial
public offering or a limited offering without first obtaining written approval of the Chief Compliance Officer or General Counsel. Investments in securities in a Limited Offering (including investments in private companies and investment vehicles)
require pre- clearance from the Chief Compliance Officer or General Counsel. In the event approval is granted, the Chief Compliance Officer or the General Counsel will document the reasons for approval.
Notwithstanding the foregoing, Limited Offerings made by Sands Capital or Sands Capital Ventures have been reviewed by the Chief Compliance Officer or General Counsel and will generally be granted blanket pre-clearance for Supervised Persons who
want to invest.
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C.
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Individual Equity Securities
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Neither Supervised Persons nor members of his or her Family / Household may, directly or indirectly, acquire beneficial ownership of any individual equity
securities without first obtaining written approval of the Chief Compliance Officer or General Counsel. Pre-clearance for acquisitions will only be granted, on a case-by-case basis, for equity securities in SCM Holdings. Neither Supervised Persons
nor members of his or her Family / Household may dispose of any individual equity securities without first obtaining the written approval of the Chief Compliance Officer or General Counsel. Pre-clearance for dispositions will only be granted on a
case-by-case basis. For the avoidance of doubt, pre-clearance will only be granted during pre-determined quarterly trading windows (which are provided to Supervised Persons from time to time) and neither Supervised Persons nor members of his or her
Family / Household may transact in individual equity securities during any specified “blackout period” (as described below). In addition, neither Supervised Persons nor members of his or her Family / Household may, directly or indirectly,
acquire beneficial ownership of any individual securities in non-SCM Holdings at any time. In the event approval is granted, the Chief Compliance Officer or the General Counsel will document the reasons for approval and specify the window during
which the transaction will be permitted.
Neither Supervised Persons nor members of his or her Family / Household may trade any security that is the subject of an “investment action” for a
specified “blackout period.” An “investment action” occurs when Sands Capital acts to add (or eliminate) a security to (or from), or increase (or reduce) the weighting of a security in the portfolio of an investment strategy.
Specifically, neither Supervised Persons nor members of his or her Family / Household may, directly or indirectly, purchase or sell any security involved in an investment action during the:
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1.
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10 calendar days before the beginning of the investment action;
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2.
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during the investment action; and
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6
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3.
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7 calendar days after completion of the investment action (an investment action is deemed completed on the date
notification of such action is sent to advisory clients).
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E.
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Securities Pre-Clearance
|
Supervised Persons and members of his or her Family / Household are required to pre-clear all securities transactions (other than opened ended mutual funds,
ETFs, annuities, fixed income products, including U.S. government securities, systematic investment plans, foreign currency contracts, receipt of spousal stock options or grants, and non-discretionary accounts). Pre-clearance requests must be
submitted through the Compliance Science PTCC trading platform.
With regard to the window of trading 10 days prior to the start of an investment action,
the Compliance Team will analyze any breaches to determine if the Supervised Person had prior knowledge of the investment action. In this regard, the Compliance Team will seek to ascertain if the investment action had been decided upon and
communicated to Supervised Persons by the Portfolio Manager Decision Teams. If prior knowledge is not established, the breach will not be deemed a violation of this Code
By requesting pre-clearance you represent that you (or the registered account holder):
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1.
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have no knowledge of a pending investment action involving the security;
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2.
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are not in possession of any material nonpublic information concerning the security to which this request
relates;
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3.
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are not engaging in any manipulative or deceptive trading activity; and
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4.
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the transaction does not violate the “Short-Term Trading” prohibition.
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The Compliance Team has the discretion to approve or decline any pre-clearance request. Any pre-clearance that is
granted is valid for the day your personal trade request is approved plus one (1) business day after approval is granted.
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F.
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Prohibition on Short-Term Trading Profits
|
With respect to individual equity securities (as discussed in Section V.C above), Supervised Persons and members of their Family / Household are prohibited
from disposing of any such individual equity securities, within 90 calendar days of purchase, regardless of whether such transaction would result in a loss.
With respect to all other covered securities, Supervised Persons and members of their Family / Household are prohibited from profiting from the purchase and
sale of the same (or equivalent) covered securities, including Reportable Funds, within 30 calendar days. This prohibition does not apply to transaction resulting in a loss.
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G.
|
Options and Short Sales
|
Neither Supervised Persons nor members of his or her Family / Household may trade in options or sell securities “short” (except in the limited
situations where an exchange traded fund, mutual fund, or foreign currency contract that is eligible for investment by the Supervised Person or member of his or her Family / Household transacts in options or short sales).
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7
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An investment club is a group of people who pool their money to make investments. Usually, after the members study different investments, the group decides to
buy or sell based on a majority vote of the members. Club meetings may be educational and each member may actively participate in investment decisions.
Neither Supervised Persons nor members of his or her Family / Household may form or participate in an investment club unless prior written clearance has been
obtained from the Chief Compliance Officer or General Counsel. Generally, transactions by the investment club in which an access person has beneficial ownership or control are subject to the same pre-clearance and reporting requirements applicable
to an individual’s trades in covered securities.
The prohibitions and restrictions of this Section V do not apply to:
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1.
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purchases or sales effected in any Non-Discretionary Account;
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2.
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purchases, sales or other acquisitions of securities that are non-volitional on the part of the Supervised
Person or members of his or her Family / Household, such as sales from a margin account pursuant to bona fide margin calls, stock dividends, stock splits, mergers, consolidations, spin- offs, or other
similar corporate reorganizations or distributions;
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3.
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purchases that are part of an automatic investment plan;
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4.
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purchases effected upon the exercise of rights issued pro rata to all holders of a class of its
securities, to the extent such rights were acquired from such issuer; and
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5.
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acquisitions of securities through gifts or bequests.
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A Supervised Person may submit to the Chief Compliance Officer or General Counsel a request for an exemption from the blackout period of the personal trading
policy for an unforeseen hardship situation (e.g., the purchase of a home, a large unforeseen expense, such as a medical expense). All requests must be in writing and must state the reasons for the hardship. The Chief Compliance Officer or General
Counsel will make a determination in light of all relevant facts and circumstances, including any actual or apparent conflict of interests generated by the possible exception when reviewing exceptions. These exceptions are granted rarely and only in
extreme circumstances.
Supervised Persons may not serve on the board of directors of any for profit public company or private entity without first obtaining written approval of the
Chief Compliance Officer or General Counsel. Supervised Persons may not serve as a member of the board of directors of any organization where Sands Capital directly serves as the investment manager of funds owned and/or directed by that organization
without written approval from the Chief Compliance Officer.
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8
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L.
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Sands Capital Ventures Investments
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Sands Capital Ventures has offered, and from time to time is expected to offer, staff members the opportunity to invest directly or indirectly in privately
held businesses. Staff members who choose to participate in such an investment may or may not receive allocations based upon availability, and accept all risks up to and including the loss of their total investment. Limited Offerings made by Sands
Capital Ventures have been reviewed by the Chief Compliance Officer or General Counsel and will generally be granted blanket pre-clearance for Supervised Persons who want to invest.
Staff members who invest in Sands Capital Ventures’ investment opportunities are typically required to represent that they are qualified to invest,
including that they are accredited investors. Generally, staff members will have blanket pre-clearance for any investment sponsored by Sands Capital Ventures unless the Chief Compliance Officer of either Sands Capital or Sands Capital Ventures
informs a specific group or individual otherwise.
Privately-held securities acquired by staff members through Sands Capital Ventures that become eligible
for trading on a public exchange will generally be locked-up for a period of time. At the Firm’s discretion, Sands Capital has the authority to restrict people from exiting some or all of their positions. The Conflicts of Interest Board will be
responsible for assessing conflicts of interest, if any, that may arise when staff members have interests in a private company that is conducting its initial public offering. Purchases of additional shares of any such company on the open market will
be subject to the pre-clearance criteria and restrictions that apply generally under this Code.
Supervised Persons are permitted to engage in outside employment or self-employment if it is free of any actions that could be considered a conflict of
interest. Outside employment must not adversely affect a Supervised Person’s job performance at Sands Capital, and must not result in absenteeism, tardiness or a Supervised Person’s inability to work overtime when requested or required.
Supervised Persons may not engage in outside employment that requires or involves using the Firm’s time, materials or resources.
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VI.
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REPORTING AND CERTIFICATION REQUIREMENTS
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Reports pursuant to this Section VI shall be made to and reviewed by the Compliance Team.
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A.
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Duplicate Brokerage Statements
|
Supervised persons and members of their Family / Household are required to instruct their broker-dealers, banks or other financial services firms to provide
duplicate statements (no less than quarterly) for any account in which they have any direct or indirect beneficial ownership. These statements may be received electronically via the PTCC system or in traditional paper format.
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B.
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Initial Holdings Report
|
No later than 10 days after becoming a Supervised Person, such person shall report the following:
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1.
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the title and exchange ticker symbol or CUSIP number, type of security, number of shares and principal amount
(if applicable) of each covered security in which he or she has any direct or indirect beneficial ownership; or
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9
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2.
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in the event that the Supervised Person or member of his or her Family / Household has no beneficial ownership
in any covered securities, either a statement to that effect or the word “None” (or similar designation); and
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3.
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the name of any broker, dealer or bank with which the Supervised Person or member of his or her Family /
Household maintains an account in which any securities are held for his or her direct or indirect benefit; and
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4.
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the date the Supervised Person submits the report.
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The information in an Initial Holdings Report must be current as of a date not more than 45 days prior to the date the person became a Supervised Person.
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C.
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Annual Holdings Reports
|
On or before February 14th of each year, supervised persons must report the following:
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1.
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the title and exchange ticker symbol or CUSIP number, type of security, number of shares and principal amount
(if applicable) of each covered security in which the Supervised Person or member of his or her Family / Household has any direct or indirect beneficial ownership (generally, duplicate brokerage statements will be used to satisfy this requirement);
or
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2.
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in the event that he or she has no beneficial ownership in any covered securities, either a statement to that
effect or the word “None” (or some similar designation); and
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3.
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the name of any broker, dealer or bank with which the Supervised Person or member of his or her Family /
Household maintains an account in which any securities are held for his or her direct or indirect benefit; and
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4.
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the date the Supervised Person submits the report.
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The information in an Annual Holdings Report shall be current as of December 31st of the preceding year.
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D.
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Quarterly Transaction Reports
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No later than 30 days after the end of each calendar quarter, supervised persons must report the following:
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1.
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With respect to any transaction during the quarter in a covered security in which the Supervised Person or
member of his or her Family / Household has, or by reason of such transaction acquires, any direct or indirect beneficial ownership (generally, duplicate brokerage statements will be used to satisfy this requirement):
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a.
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the trade date of the transaction, the title and exchange ticker symbol or CUSIP number, the interest rate and
maturity date (if applicable), the number of shares and the principal amount (if applicable) of each covered security involved;
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10
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b.
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the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
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c.
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the price of the covered security at which the transaction was effected; and
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d.
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the name of the broker, dealer or bank with or through which the transaction was effected; or
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e.
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in the event there were no such transactions during the quarter, either a statement to that effect or the word
“None” (or some similar designation); and
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f.
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the date the Supervised Person submits the report.
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2.
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With respect to any account established by the Supervised Person or member of his or her Family / Household in
which any covered securities were held during the quarter for the direct or indirect benefit of the Supervised Person or member of his or her Family / Household:
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a.
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the name of the broker, dealer or bank with whom the account is established; and
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b.
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the date the account was established; or
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c.
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in the event there were no such accounts established during the quarter, either a statement to that effect or
the word “None” (or some similar designation); and
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|
|
d.
|
the date the Supervised Person submits the report.
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|
|
E.
|
Exceptions to Reporting Requirements
|
A Supervised Person need not submit:
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|
1.
|
any report with respect to securities held in a Non-Discretionary Account;
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|
|
2.
|
a transaction report with respect to transactions effected pursuant to an automatic investment plan;
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|
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3.
|
a transaction report if the report would duplicate information contained in broker trade confirmations or
account statements that are received by the Compliance Team with respect to such person, so long as the Compliance Team receives the confirmations or statements no later than 30 days after the end of the applicable calendar quarter; and
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|
4.
|
qualified tuition programs established pursuant to Section 529 of the Internal Revenue Code of 1986,
otherwise known as 529 plans if neither Sands Capital or a control affiliate of Sands Capital manages, distributes, markets, or underwrites the 529 Plan or the investments and strategies underlying the 529 Plan.
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11
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Any report required by this Section IV may contain a statement that the report shall not be construed as an
admission by the person making the report that he or she has any direct or indirect beneficial ownership in the security to which the report relates.
Supervised Persons shall certify in writing at least annually that they (i) have read and understand this Code; (ii) recognize that they are subject
to this Code; and (iii) will comply with the requirements of this Code, including reporting all information required to be reported by this Code.
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|
G.
|
Reporting of Code Violations
|
Each Supervised Person is required to notify the Chief Compliance Officer promptly if he or she knows of any violation of this Code. Failure to do so is a
violation of this Code. In the event that a matter implicates the Chief Compliance Officer, notice of a violation may be provided to the General Counsel or another executive officer of Sands Capital.
Consistent with Sands Capital’s policies, no person or group within Sands Capital shall retaliate, nor shall Sands Capital or any Supervised Person
tolerate any retaliation by any other person or group within the firm, directly or indirectly, against anyone who, in good faith, reports any violation of this Code or provides assistance to management or any other person or group, including any
governmental, regulatory or law enforcement body, investigating any violation of this Code.
Sands Capital shall not reveal the identity of any person who
reports a violation of this Code and who asks that his or her identity as the person who made such report remain confidential. Sands Capital shall not make any effort, or tolerate any effort made by any other person or group, to ascertain the
identity of any person who reports a violation anonymously, unless (i) such information is required to be disclosed by law or applicable legal process or by applicable securities or commodities exchange, self-regulatory organization, or other
rules or regulations; or (ii) disclosure of such information, or ascertaining such identity, is supported by a clear and compelling interest of clients that is sufficient in the particular case to overcome an expectation of anonymity.
|
VII.
|
GIFTS & ENTERTAINMENT
|
|
|
A.
|
General Guidance on Gifts and Entertainment
|
Sands Capital prohibits the acceptance, by Supervised Persons, of gifts, entertainment, or any compensation (other than salary from Sands Capital) from persons
doing business, or hoping to do business with Sands Capital or any registered fund advised or sub-advised by Sands Capital. By refusing inappropriate inducements of any kind, Supervised Persons will be preserving assets of far greater value: their
good name, the reputation of Sands Capital, and our clients’ financial welfare.
General rules for Supervised Persons:
|
|
•
|
|
You may give and receive modest business gifts, and this policy is not intended to restrict normal business
activity.
|
|
|
•
|
|
You may not give or accept any gift of more than de minimis value (currently $250 per year) from any
person, entity, client or prospective client that does business with or is seeking to do business with Sands Capital or its affiliates (a “business contact”). For purposes of applying the $250 per year limitation, gifts from different
business contacts at the same organization shall be aggregated.
|
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12
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|
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•
|
|
Gifts of cash or cash equivalents may not be given or received regardless of value.
|
|
|
•
|
|
Gifts do not apply to ordinary and usual business entertainment, such as an occasional meal, sporting event,
theater production or comparable entertainment event of reasonable value so long as it is neither so frequent nor so extensive as to raise any question of propriety.
|
These general rules apply equally to gifts made by any business contact to any members of a Supervised Person’s Family / Household.
At times it could be difficult to discern between a gift and entertainment. If you are attending an event with the giver of the tickets to the event it is
typically considered entertainment. In comparison, gifts are given and used/consumed only by the Supervised Person and members of his/her Family / Household. Please refer to definitions below:
Gift
The term “gift” includes the giving or receipt
of gratuities, merchandise and the enjoyment or use of property or facilities for weekends, vacations, trips, dinners, and the like, including transportation and lodging costs.
Business Entertainment
“Business entertainment” is a
normal part of a business relationship and occurs when a Sands Capital staff member is in the presence of a business contact (either when the business contact is being entertained by a Sands Capital staff member or vice versa). Some examples may
include meals, snacks, drinks, or sporting events.
Please contact the Compliance Team if you are unable to determine if something is a gift or
entertainment.
|
|
B.
|
Additional Guidance on Gifts and Entertainment
|
It is important to remember that some entities (e.g., clients or potential clients that are states, municipalities, or qualified retirement plans) have very
stringent restrictions and/or prohibitions on the acceptance of gifts or business entertainment by the personnel. Care must be taken to ensure that Sands Capital does not inadvertently give a gift or provide business entertainment that might cause a
business contact to violate any of these restrictions.
Public and Foreign Officials
Supervised Persons are prohibited from giving or providing any gift, including a personal gift, to any official of a Public Fund without the express prior
approval of the Chief Compliance Officer or General Counsel. U.S. states may adopt rules that govern the provision of gifts and business entertainment. These rules may impose increased reporting requirements.
In addition, Sands Capital prohibits any Supervised Person or agent, either personally or on behalf of others, from making, offering or promising to make,
authorizing or directing any payment of anything of value (including cash or property), directly or indirectly, to a foreign government official for the purpose of inducing or influencing the foreign government official to use his or her position in
order to assist in obtaining or retaining business or securing any improper business advantage. Giving gifts to and receiving gifts from foreign officials is prohibited.
|
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|
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13
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For more information on gifts and entertainment in relation to foreign public officials, see Sands Capital
Management’s FCPA policy and procedure, available on the intranet.
Financial Conduct Authority of the United Kingdom (FCA) Clients
Supervised Persons are prohibited from providing any gift, including a personal gift, to any client (or potential client), who is regulated by the
Financial Conduct Authority of the United Kingdom (the “FCA”). In addition, when hosting or providing non-monetary benefits to a client (or potential client), Supervised Persons must assess whether all aspects of the benefit or event are
designed to enhance the quality of the service to the client, including the location and nature of the venue. Hosting events or providing benefits is prohibited if they are not conducive to business discussions or if business discussions could
better take place without them. Hosting sporting and social events or otherwise subsidizing entertainment, for example, is prohibited.
While
activities/benefits such as hosting a meal, providing welcome bags at a client event or validating parking are not prohibited, they may require Sands Capital to disclose whatever information the client or potential client deems necessary to enable
them to comply with FCA reporting regulations.
ERISA
In accordance with guidance from the Department of Labor the annual limit on gifts and business entertainment the annual limit on gifts and business
entertainment provided to an ERISA plan fiduciary representative is $250. Generally, meals provided at educational conferences, or associated with business meetings do not count towards the $250 annual limit.
Taft-Hartley
Any gifts, payments of money or
anything of value made directly or indirectly by you to a labor organization or officer, agent, shop steward, or other representative or employee of any labor organization (including union officials serving in some capacity to a Taft-Hartley Plan)
must be reported to the Chief Compliance Officer. All items regardless of the amount or value must be reported. Following are examples of potentially reportable items:
|
|
|
|
|
• Meals
|
|
• Advertising at union or Taft-Hartley fund related
functions
|
|
• Gifts (e.g., holiday gifts)
|
|
• Travel and lodging costs
|
|
• Sponsorship of union conferences, picnics, other
events
|
|
• Bar bills
|
|
• Sporting event tickets
|
|
• Donations to union related charities or scholarship
funds
|
|
• Theatre tickets
|
|
• Clothing or equipment
|
|
• Conferences attended by union officials, Supervised Persons,
etc.
|
|
• Raffle donations
|
|
• Retirement dinners
|
|
• Receptions attended by union officials, Supervised Persons,
etc.
|
|
• Golf (including charity golf tournaments)
|
|
• Hole sponsorships for golf tournament
|
|
• Donations for apprenticeship graduation dinners
|
|
|
C.
|
Reporting of Gifts & Entertainment
|
All gifts of which you are the recipient must be reported in writing via email to the Chief Compliance Officer or General Counsel if the value is reasonably
judged to exceed $250 per year. Reporting must include the name(s) of the giver, the date, the organization of the giver, a description of the gift or event, and the value or estimated value of the gift or event.
|
|
|
|
|
|
|
14
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|
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|
|
Exceptions to the gift limit may be made by the Chief Compliance Officer or General Counsel. Supervised Persons should request exceptions for personal
circumstances in which the employee has a personal relationship with a third party (such as receiving or providing personal gifts as wedding gifts or gifts for the birth of a child).
|
VIII.
|
REPORTS TO FUND CLIENTS
|
Sands Capital shall furnish to the board of directors/trustees of each Reportable Fund, at the direction and timing specified by such boards, but no less
frequently than annually, a written report that (i) describes any issues affecting the Reportable Fund arising under this Code or related procedures since the last report, including, but not limited to, information about material violations of
this Code or such procedures and the sanctions imposed in response to material violations; and (ii) certifies that Sands Capital has adopted procedures reasonably necessary to prevent its Supervised Persons from violating this Code.
Supervised Persons who violate this Code will be subject to such sanctions as deemed necessary and appropriate under the circumstances and in the best interest
of clients. The range of sanctions include but are not limited to a written warning or reprimand, cancellation of trades, disgorgement of profits or sale of positions at a loss, restriction on trading privileges, fines, suspension of employment
without pay, termination of employment, and/or referral to regulatory or law enforcement authorities.
Notwithstanding the foregoing and anything else contained in these policies and procedures, nothing in these policies and procedures is intended to prevent,
delay or otherwise restrict a staff member’s rights under applicable law to notify government authorities of suspected or actual wrongdoing by Sands Capital or its employees and representatives.
Sands Capital shall maintain such records relating to this Code of Ethics, in the manner and as required by Rule 204-2(a)(12) under the Advisers Act and Rules
17f-1(f) and 31a-1(f) under the Investment Company Act.
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15
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|
|
LOOMIS, SAYLES & CO., L.P.
LOOMIS SAYLES INVESTMENTS LIMITED
LOOMIS SAYLES INVESTMENTS ASIA PTE. LTD.
Code of Ethics
Policy on Personal Trading and
Related Activities
by
Loomis Sayles Personnel
EFFECTIVE:
January 14, 2000
AS AMENDED:
December 16, 2020
1
Table of Contents
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|
1.
|
|
INTRODUCTION
|
|
|
3
|
|
|
2.
|
|
STATEMENT OF GENERAL PRINCIPLES
|
|
|
3
|
|
|
3.
|
|
A FEW KEY TERMS
|
|
|
4
|
|
|
3.1.
|
|
Covered Security
|
|
|
4
|
|
|
3.2.
|
|
Beneficial Ownership
|
|
|
6
|
|
|
3.3.
|
|
Investment Control
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|
|
7
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|
|
3.4.
|
|
Maintaining Personal Accounts
|
|
|
7
|
|
|
4.
|
|
SUBSTANTIVE RESTRICTIONS ON PERSONAL TRADING
|
|
|
8
|
|
|
4.1.
|
|
Pre-clearance
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|
|
8
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|
|
4.2.
|
|
Good Until Canceled and Limit Orders
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|
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10
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|
|
4.3.
|
|
Short Term Trading Profits
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|
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10
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|
|
4.4.
|
|
Restrictions on Round Trip Transactions in Loomis Advised Funds
|
|
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11
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|
|
4.5.
|
|
Derivatives
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|
|
11
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|
|
4.6.
|
|
Short Sales
|
|
|
12
|
|
|
4.7.
|
|
Competing with Client Trades
|
|
|
12
|
|
|
4.8.
|
|
Large Cap/De Minimis Exemption
|
|
|
13
|
|
|
4.9.
|
|
Investment Person Seven-Day Blackout Rule
|
|
|
13
|
|
|
4.10.
|
|
Research Recommendations
|
|
|
14
|
|
|
4.11.
|
|
Initial Public Offerings
|
|
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15
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|
|
4.12.
|
|
Private Placement Transactions
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|
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15
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|
|
4.13.
|
|
Insider Trading
|
|
|
16
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|
|
4.14.
|
|
Restricted and Concentration List
|
|
|
17
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|
|
4.15.
|
|
Loomis Sayles Hedge Funds
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|
|
18
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|
|
4.16.
|
|
Exemptions Granted by the Chief Compliance Officer
|
|
|
18
|
|
|
5.
|
|
PROHIBITED OR RESTRICTED ACTIVITIES
|
|
|
18
|
|
|
5.1.
|
|
Public Company Board Service and Other Affiliations
|
|
|
18
|
|
|
5.2.
|
|
Participation in Investment Clubs and Private Pooled Vehicles
|
|
|
19
|
|
|
6.
|
|
REPORTING REQUIREMENTS
|
|
|
19
|
|
|
6.1.
|
|
Initial Holdings Reporting, Account Disclosure and Acknowledgement of Code
|
|
|
19
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|
|
6.2.
|
|
Brokerage Confirmations and Brokerage Account Statements
|
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20
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6.3.
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Quarterly Transaction Reporting and Account Disclosure
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21
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6.4.
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Annual Reporting
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22
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6.5.
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Review of Reports by Chief Compliance Officer
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23
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6.6.
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Internal Reporting of Violations to the Chief Compliance Officer
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23
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7.
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SANCTIONS
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24
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8.
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RECORDKEEPING REQUIREMENTS
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25
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9.
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MISCELLANEOUS
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26
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9.1.
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Confidentiality
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26
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9.2.
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Disclosure of Client Trading Knowledge
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26
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9.3.
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Notice to Access Persons, Investment Persons and Research Analysts as to Code Status
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26
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9.4.
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Notice to Personal Trading Compliance of Engagement of Independent Contractors
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27
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9.5.
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Questions and Educational Materials
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27
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2
Code of Ethics
Policy on Personal Trading and
Related Activities
1. INTRODUCTION
This Code of Ethics (“Code”) has been adopted by Loomis, Sayles & Co., L.P. (“Loomis US”), Loomis Sayles
Investments Limited (“Loomis UK”) and Loomis Sayles Investments Asia Pte. Ltd. (“Loomis Asia”) (collectively (“Loomis Sayles”) to govern certain conduct of Loomis Sayles’ Supervised Persons and personal
trading in securities and related activities of those individuals who have been deemed Access Persons thereunder, and under certain circumstances, those Access Persons’ family members and others in a similar relationship to them.
The policies in this Code reflect Loomis Sayles’ desire to detect and prevent not only situations involving actual or potential
conflicts of interest or unethical conduct, but also those situations involving even the appearance of these.
2. STATEMENT OF GENERAL PRINCIPLES
It is the policy of Loomis Sayles that no Access Person or Supervised Person as such terms are defined under the Code,
(please note that Loomis Sayles treats all employees as Access Persons) shall engage in any act, practice or course of conduct that would violate the Code, the fiduciary duty owed by Loomis Sayles and its personnel to Loomis
Sayles’ clients, Rule 204A-1 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or
the provisions of Section 17(j) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and Rule 17j-1 there under. It is required that all Access Persons must
comply with all applicable laws, rules and regulations including, but not limited to the Federal Securities Laws. The Investment Management Association of Singapore’s (“IMAS’”) Code of Ethics & Standards of
Professional Conduct provides that Loomis Asia (as a member of IMAS) should have in place appropriate policies and internal controls governing personal dealing and appropriate structures in place to carry out monitoring and to ensure compliance.
Therefore, all employees of Loomis Asia must also comply with the Securities and Futures Act, Chapter 289 of Singapore (the “Securities and Futures Act”), the Financial Advisers Act, Chapter 110 of Singapore (the “Financial Advisers
Act”), and all other applicable Singapore laws, rules and regulations.
Under the requirements of the Financial Conduct Authority (FCA), there are
Conduct Rules within the Senior Managers and Certification Regime (SM&CR) with which all employees of Loomis UK must comply. These rules are designed to improve the levels of responsibility and accountability, honesty and integrity, and to act
at all times with due care, skill and diligence.
The Code is designed to comply with all of the above regulations.
The fundamental position of Loomis Sayles is, and has been, that it must at all times place the interests of its clients first. Accordingly,
your personal financial transactions (and in some cases, those of your family members and others in a similar relationship to you) and related activities must be conducted consistently with this Code and in such a manner as to avoid any actual or
potential conflict of interest or abuse of your position of trust and responsibility.
3
Without limiting in any manner the fiduciary duty owed by Loomis Sayles to its clients, it should
be noted that Loomis Sayles considers it proper that purchases and sales be made by Access Persons in the marketplace of securities owned by Loomis Sayles’ clients, provided that such securities
transactions comply with the spirit of, and the specific restrictions and limitations set forth in the Code. In making personal investment decisions, however, you must exercise extreme care to ensure that the provisions of the Code are not violated
and under no circumstances, may an Access Person use the knowledge of Covered Securities purchased or sold by any client of Loomis Sayles or Covered Securities being considered for purchase or sale by any client of
Loomis Sayles to profit personally, directly or indirectly, by the market effect of such transactions.
Improper trading activity can
constitute a violation of the Code. The Code can also be violated by an Access Person’s failure to file required reports, by making inaccurate or misleading reports or statements concerning trading activity, or by opening an account with
a non-Select Broker without proper approval as set forth in the Code.
It is not intended that these policies will
specifically address every situation involving personal trading. These policies will be interpreted and applied, and exceptions and amendments will be made, by Loomis Sayles in a manner considered fair and equitable, but in all cases with the view
of placing Loomis Sayles’ clients’ interests paramount. It also bears emphasis that technical compliance with the procedures, prohibitions and limitations of this Code will not automatically insulate you from scrutiny of, and sanctions
for, securities transactions which indicate an abuse of Loomis Sayles’ fiduciary duty to any of its clients.
You are encouraged to
bring any questions you may have about the Code to Personal Trading Compliance.
Personal Trading Compliance, the
Chief Compliance Officer and the Loomis Sayles Ethics Committee will review the terms and provisions of the Code at least annually, and make amendments as necessary. Any amendments to the Code will be provided to you.
3. A FEW KEY TERMS
Boldfaced
terms have special meaning in this Code. The application of a particular Code requirement to you may hinge on the elements of the definition of these terms. See the Glossary at the end of this Code for definitions of these terms.
In order to have a basic understanding of the Code, however, you must have an understanding of the terms “Covered Security”, “Beneficial Ownership” and “Investment Control” as used in the
Code.
This Code generally relates to transactions in and ownership of an investment that is a Covered Security. Currently, this means any type
of equity or debt security (such as common and preferred stocks, and corporate and government bonds or notes), any equivalent (such as ADRs, GDR’s, etc.), any derivative, instrument representing, or any rights relating to, a Covered
Security, and any closely related security (such as certificates of participation, depository receipts, collateral– trust certificates, put and call options, warrants, and related convertible or exchangeable securities and securities
indices). Shares of closed-end funds, municipal obligations and securities issued by agencies and instrumentalities of the U.S. government (e.g. GNMA obligations) are also considered Covered Securities
under the Code.
4
Additionally, the shares of any investment company registered under the Investment Company Act
and the shares of any collective investment vehicle (“CIV”), (e.g. SICAVs, OEICs, UCITs, etc.) that is advised, sub-advised, or distributed by Loomis Sayles, Natixis, or a Natixis affiliate
(“Reportable Funds”) are deemed to be Covered Securities for purposes of certain provisions of the Code. Reportable Funds include open-end and
closed-end funds and CIVs that are advised, sub-advised, or distributed by Loomis Sayles, Natixis, or a Natixis affiliate, but exclude money market funds. A current list
of Reportable Funds is attached as Exhibit One and will be maintained on the firm’s intranet site under the Legal and Compliance page.
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Explanatory Note:
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While the definition of Reportable Funds encompasses funds or CIVs that are advised, sub-advised and/or distributed by Natixis and its affiliates, only
those funds or CIVs advised or sub-advised by Loomis Sayles (“Loomis Advised Fund”) are subject to certain trading restrictions of the Code (specifically,
the Short-Term Trading Profit and Round Trip Transaction restrictions). Please refer to Section 4.3 and 4.4 of the Code for further explanation of these trading restrictions. Additionally, Exhibit One distinguishes between those funds and CIVs
that are only subject to reporting requirements under the Code (all Reportable Funds), and those that are subject to both the reporting requirements and the aforementioned trading restrictions (Loomis
Advised Funds).
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Shares of exchange traded funds (“ETFs”) and
closed-end funds are deemed to be Covered Securities for the purposes of certain provisions of the Code. Broad based open-ended ETFs with either a market capitalization exceeding U.S.
$1 billion OR an average daily trading volume exceeding 1 million shares (over a 90 day period); options on such ETFs, options on the indices of such ETFs; and ETFs that invest 80% of their assets in securities that are not subject
to the pre-clearance requirements of the Code, are exempt from certain provisions of the Code (“Exempt ETFs”). A current list of Exempt ETFs is attached as Exhibit
Two and will be maintained on the firm’s intranet site under the Legal and Compliance page.
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Explanatory Note:
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Broad based open-ended ETFs are determined by Personal Trading Compliance using Bloomberg data.
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All Access Persons are
expected to comply with the spirit of the Code, as well as the specific rules contained in the Code. Therefore, while the lists of Reportable Funds and Exempt ETFs are subject to change, it is ultimately the responsibility of
all Access Persons to review these lists which can be found in Exhibit(s) One and Two, prior to making an investment in a Reportable Fund or ETF.
It should be noted that private placements, hedge funds and investment pools are deemed to be Covered Securities for purposes of the
Code whether or not advised, sub-advised, or distributed by Loomis Sayles or a Natixis investment adviser. Investments in such securities are discussed under sections 4.12 and 5.2.
Please see Exhibit Three for the application of the Code to a specific Covered Security or instrument, including exemptions from
pre-clearance.
5
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3.2.
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Beneficial Ownership
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The Code governs any Covered Security in which an Access Person has any direct or indirect “Beneficial Ownership.”
Beneficial Ownership for purposes of the Code means a direct or indirect “pecuniary interest” that is held or shared by you directly or indirectly (through any contract, arrangement, understanding, relationship or otherwise) in a
Covered Security. The term “pecuniary interest” in turn generally means your opportunity directly or indirectly to receive or share in any profit derived from a transaction in a Covered Security, whether or not the
Covered Security or the relevant account is in your name and regardless of the type of account (i.e. brokerage account, direct account, or retirement plan account). Although this concept is subject to a variety of U.S.
Securities and Exchange Commission (“SEC”) rules and interpretations, you should know that you are presumed under the Code to have an indirect pecuniary interest as a result of:
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•
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ownership of a Covered Security by your spouse or minor children;
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•
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ownership of a Covered Security by a live-in partner who shares
your household and combines his/her financial resources in a manner similar to that of married persons;
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•
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ownership of a Covered Security by your other family members sharing your household (including an adult
child (even if that child is currently living away at a college/university), a stepchild, a grandchild, a parent, stepparent, grandparent, sibling, mother- or
father-in-law, sister- or brother-in-law, and
son- or daughter-in-law);
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•
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your share ownership, partnership interest or similar interest in Covered Securities held by a
corporation, general or limited partnership or similar entity you control;
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•
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your right to receive dividends or interest from a Covered Security even if that right is separate or
separable from the underlying securities;
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•
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your interest in a Covered Security held for the benefit of you alone or for you and others in a trust or
similar arrangement (including any present or future right to income or principal); and
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•
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your right to acquire a Covered Security through the exercise or conversion of a “derivative
Covered Security.”
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In addition, life events such as marriage, death of a family member (i.e., inheritance),
etc. may result in your acquiring Beneficial Ownership and/or Investment Control over accounts previously belonging to others. Therefore, any Covered Security, including Reportable Funds, along with any account that holds
or can hold a Covered Security, including Reportable Funds, in which you have a Beneficial Ownership and/or Investment Control, as described in Section 3.2 and Section 3.3 of the Code, resulting from marriage or
other life event must be reported to Personal Trading Compliance promptly, and no later than the next applicable quarterly reporting period.
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Explanatory Note:
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All accounts that hold or can hold a Covered Security in which an Access Person has Beneficial Ownership are subject to the Code (such accounts
include, but are not limited to, personal brokerage accounts, mutual fund accounts, accounts of your spouse, accounts of minor children living in your household, Family of Fund accounts, transfer agent accounts holding mutual funds or
book entry shares, IRAs, 401Ks, trusts, DRIPs, ESOPs, etc.).
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Please see Exhibit Four for specific examples of the types of interests and accounts subject to the
Code.
6
The Code governs any Covered Security in which an Access Person has direct or indirect “Investment Control.” The
term Investment Control encompasses any influence (i.e., power to manage, trade, or give instructions concerning the investment disposition of assets in the account or to approve or disapprove transactions in the account), whether sole or
shared, direct or indirect, you exercise over the account or Covered Security.
You should know that you are presumed under
the Code to have Investment Control as a result of having:
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•
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Investment Control (sole or shared) over your personal brokerage account(s);
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•
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Investment Control (sole or shared) over an account(s) in the name of your spouse or minor
children, unless, you have renounced an interest in your spouse’s assets (subject to the approval of the Chief Compliance Officer);
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•
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Investment Control (sole or shared) over an account(s) in the name of any family member, friend or
acquaintance;
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•
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Involvement in an Investment Club;
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•
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Trustee power over an account(s); and
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•
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The existence and/or exercise of a power of attorney over an account.
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Please see Exhibit Four for specific examples of the types of interests and accounts subject to the Code.
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3.4.
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Maintaining Personal Accounts
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All Access Persons that reside within the U.S.(“Loomis US Access Persons”), who have personal accounts that hold or can hold
Covered Securities in which they have direct or indirect Investment Control and Beneficial Ownership are required to maintain such accounts at one of the following firms: Ameriprise, Baird, Bank of America/Merrill
Lynch, Charles Schwab, Citi Personal Wealth Management, E*TRADE, Fidelity Investments, Interactive Brokers, JP Morgan Chase & Co., Morgan Stanley Smith Barney, TD Ameritrade, UBS, Vanguard, or Wells Fargo (collectively, the “Select
Brokers”). In addition, shares of Reportable Funds must be held through either: a Select Broker; directly through the Reportable Fund’s transfer agent, or through one or more of Loomis Sayles’ retirement
plans, unless an exception to the Select Broker requirement, as described below, is granted.
Accounts in which the Loomis US Access
Person only has either Investment Control or Beneficial Ownership; certain retirement accounts with the Loomis US Access Person’s prior employer; accounts managed by an outside adviser in which the Loomis US
Access Person exercises no investment discretion; accounts in which the Loomis US Access Person’s spouse is employed by another investment firm and must abide by that firm’s Code of Ethics; and/or the retirement
accounts of a Loomis US Access Person’s spouse may be maintained with a firm other than the Select Brokers upon the prior written approval of Personal Trading Compliance or the Chief Compliance Officer. In these
cases, Loomis US Access Persons are responsible for ensuring that Personal Trading Compliance receives duplicate confirms as and when transactions are
7
executed in such accounts, and statements on a monthly basis, if available, or at least quarterly for non-Select Brokers. In addition, Personal Trading Compliance or the Chief Compliance Officer may grant exemptions to the Select Broker requirement for accounts not used for general trading
purposes such as ESOPs, DRIPs, securities held physically or in book entry form, family of fund accounts or situations in which the Loomis US Access Person has a reasonable hardship for maintaining their accounts with a Select Broker.
Access Persons with a residence outside the U.S., are exempt from maintaining their personal accounts at a Select
Broker. However, such Access Persons are responsible for ensuring that Personal Trading Compliance receives duplicate confirms as and when transactions are executed in such accounts, and statements on a monthly basis, if available,
or at least quarterly.
All Access Persons must receive pre-clearance approval from Personal
Trading Compliance prior to the opening of any new personal accounts that can hold Covered Securities in which the Access Person has direct or indirect Investment Control or Beneficial Ownership. This includes Select Broker accounts. In addition,
the opening of all reportable accounts must also be reported to Personal Trading Compliance as set forth in Section 6.2 and Section 6.3 of the Code.
Finally, Access Persons must inform the Select Broker or other financial institution of his/her association with Loomis Sayles during
the account opening process.
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Explanatory Note:
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While certain accounts may be granted an exemption from certain provisions of the Code, inclusive of the Select Broker requirement, they are still subject to the reporting requirements of the Code and may be
subject to the pre-clearance requirements of the Code (e.g. joint accounts) as set forth in Section 4.1 of the Code. The terms of a specific exemption will be outlined in an exemption memorandum which is
issued to the Access Person by Personal Trading Compliance. An Access Person’s failure to abide by the terms and
conditions of an account exemption issued by Personal Trading Compliance could result in a violation of the Code.
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4.
|
SUBSTANTIVE RESTRICTIONS ON PERSONAL TRADING
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The following are substantive prohibitions and restrictions on Access Persons’ personal trading and related activities. In general,
the prohibitions set forth below relating to trading activities apply to accounts holding Covered Securities in which an Access Person has Beneficial Ownership and Investment Control.
Each Access Person must pre-clear through the PTA
Pre-Clearance System (“PTA”) all Volitional transactions in Covered Securities (i.e. transactions in which the Access Person has determined the timing as to when the
purchase or sale transaction will occur and amount of shares to be purchased or sold) in which he or she has Investment Control and in which he or she has or would acquire Beneficial Ownership. Exceptions to the pre-clearance requirement include, but are not limited to: Open-ended mutual funds, and CIVs meeting the criteria described below, Exempt ETFs listed in Exhibit Two, and US Government
Agency bonds (i.e. GNMA, FNMA, FHLMC), as set forth in Exhibit(s) Three and Five.
8
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Explanatory Note:
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A CIV is exempt from pre-clearance under the following conditions: issues shares that shareholders have the right to redeem on demand; calculates an NAV on a daily basis in a manner
consistent with the principles of Section 2(a)(41) of the 1940 Act and Rule 2a-4 thereunder; issues and redeems shares at the NAV next determined after receipt of the relevant purchase or redemption order
consistent with the “forward pricing” principles of Rule 22c-1 under the 1940 Act; and there is no secondary market for the shares of the CIV.
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Explanatory Note:
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Futures, options and swap transactions in Covered Securities must be manually pre-cleared by Personal Trading Compliance since PTA
cannot handle such transactions. Initial public offerings, private placement transactions, including hedge funds whether or not they are advised, sub- advised, or distributed by Loomis Sayles or a Natixis investment adviser, participation in
investment clubs and private pooled vehicles require special pre-clearance as detailed under Sections 4.11, 4.12 and 5.2 of the Code.
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Explanatory Note:
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Broad based open-ended ETFs with either a market capitalization exceeding $1billion OR an average daily trading
volume exceeding 1 million shares (over a 90 day period); options on such ETFs, options on the indices of such ETFs; and ETFs that invest 80% of their assets in securities that are not subject to the
pre-clearance requirements of the Code, are exempt from the pre-clearance and trading restrictions set forth in Sections 4.1, 4.3, 4.5, 4.6, 4.7, 4.9, and 4.10 of the
Code. A list of the Exempt ETFs is provided in Exhibit Two of the Code. All closed end-funds, closed-end ETFs, sector based/narrowly defined
ETFs and broad based open-ended ETFs with a market capitalization below U.S. $1 billion AND an average daily trading volume below 1 million shares (over a 90 day period) are subject to the pre- clearance and trading restrictions detailed
under Section 4 of the Code.
All
closed-end funds and ETFs, including those Exempt ETFs and their associated options as described above, are subject to the reporting requirements detailed in Section 6 of the Code.
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Any transaction approved pursuant to the pre- clearance request
procedures must be executed by the end of the trading day on which it is approved unless Personal Trading Compliance extends the pre-clearance for an additional
trading day. If the Access Person’s trade has not been executed by the end of the same trading day (or the next trading day in the case of an extension), the pre-clearance will lapse and the
Access Person may not trade without again seeking and obtaining pre-clearance of the intended trade.
For Access Persons with a U.S. residence, pre-clearance requests can only be submitted through
PTA and/or to Personal Trading Compliance Monday – Friday from 9:30am-4:00pm Eastern Standard Time. Access Persons with a residence outside the U.S. will be given separate pre-clearance guidelines instructing them on the availability of PTA and Personal Trading Compliance support hours.
9
If after pre-clearance is given and before it has lapsed,
an Access Person becomes aware that a Covered Security as to which he or she obtained pre-clearance has become the subject of a buy or sell order or is being considered for purchase or sale for a client account, the Access
Person who obtained the pre-clearance must consider the pre-clearance revoked and must notify Personal Trading Compliance immediately.
If the transaction has already been executed before the Access Person becomes aware of such facts, no violation will be considered to have occurred as a result of the Access Person’s transaction.
If an Access Person has actual knowledge that a requested transaction is nevertheless in violation of this Code or any provision
thereof, approval of the request will not protect the Access Person’s transaction from being considered in violation of the Code. The Chief Compliance Officer or Personal Trading Compliance may deny or revoke pre-clearance for any reason that is deemed to be consistent with the spirit of the Code.
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4.2.
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Good Until Canceled and Limit Orders
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No Access Person shall place a “good until canceled,” “limit” or equivalent order with his/her broker except that an
Access Person may utilize a “day order with a limit” so long as the transaction is consistent with provisions of this Code, including the pre-clearance procedures. All orders must expire at
the end of the trading day on which they are pre-cleared unless otherwise extended by Personal Trading Compliance.
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4.3.
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Short Term Trading Profits
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No Access Person may profit from the Volitional purchase and sale, or conversely the Volitional sale and purchase,
of the same or equivalent Covered Security (including Loomis Advised Funds) within 60 calendar days (unless the sale involved shares of a Covered Security that were acquired more than 60 days prior). Hardship exceptions may be
requested (in advance) from Personal Trading Compliance.
An Access Person may sell a Covered Security (including
Loomis Advised Funds) or cover an existing short position at a loss within 60 calendar days. Such requests must be submitted through the PTA System and to Personal Trading Compliance for approval because the PTA System does not have
the capability to determine whether the Covered Security will be sold at a gain or a loss.
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Explanatory Note:
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For purposes of calculating the 60 day holding period, the trade date of a given purchase or sale is deemed to be day zero. 60 full days must pass before an Access Person can trade that same Covered
Security for a profit and therefore, allowing the Access Person to do so on the 61st day.
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Explanatory Note:
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The Short Term Trading Profits provision is applicable to transactions that are executed across all of an Access Person’s accounts. For example, if an Access Person sold shares of
ABC in his/her Fidelity brokerage account today, that Access Person would not be allowed to buy shares of ABC in his/her Charles Schwab IRA account at a lower price within 60 days following the sale.
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Explanatory Note:
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Please refer to Exhibit One for a current list of Loomis Advised Funds. Please also note that all closed-end funds are subject to the trading restrictions of
Section 4.3 of the Code.
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10
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4.4.
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Restrictions on Round Trip Transactions in Loomis Advised Funds
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In addition to the 60 day holding period requirement for purchases and sales of Loomis Advised Funds, an Access Person is
prohibited from purchasing, selling and then re-purchasing shares of the same Loomis Advised Fund within a 90 day period (“Round Trip Restriction”). The Round Trip Restriction does not
limit the number of times an Access Person can purchase a Loomis Advised Fund or sell a Loomis Advised Fund during a 90 day period. In fact, subject to the holding period requirement described above, an Access
Person can purchase a Loomis Advised Fund (through one or multiple transactions) and can liquidate their position in that fund (through one or several transactions) during a 90 day period. However, an Access Person
cannot then reacquire a position in the same Loomis Advised Fund previously sold within the same 90 day period.
The Round Trip
Restriction will only apply to Volitional transactions in Loomis Advised Funds. Therefore, shares of Loomis Advised Funds acquired through a dividend reinvestment or dollar cost averaging program, and automatic
monthly contributions to the firm’s 401K plan will not be considered when applying the Round Trip Restriction.
Finally, all
Volitional purchase and sale transactions of Loomis Advised Funds, in any share class and in any employee account (i.e., direct account with the Loomis Advised Fund, Select Broker account, 401K account, etc.) will be
matched for purposes of applying the Round Trip Restriction.
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Explanatory Note:
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Only Loomis Advised Funds are subject to Section 4.4 of the Code. Please refer to Exhibit One for a current list of Loomis Advised
Funds.
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No Access Person shall use derivatives, including but not limited, to options, futures, swaps or warrants on a Covered Security
to evade the restrictions of the Code. In other words, no Access Person may use derivative transactions with respect to a Covered Security if the Code would prohibit the Access Person from taking the same position
directly in the underlying Covered Security.
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Explanatory Note:
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When transacting in derivatives, Access Persons must pre-clear the derivative and the underlying security in PTA as well as receive manual approval from
Personal Trading Compliance before executing their transaction. Please note that options on Exempt ETFs and the underlying index of the ETF, as well as futures on currencies, commodities, cash instruments (such as loans or
deposits), stock indexes and interest rates do not require pre-clearance, but do require reporting. For more detailed information, please see Section 4.1 of the Code.
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Explanatory Note:
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Futures and Options on virtual currency (e.g., Bitcoin, Ethereum) are exempt from pre-clearance and the Code’s trading restrictions, similar to futures and options on other currencies,
but they are subject to the Code’s reporting requirements. Futures and Options on an Initial Coin Offering require pre-clearance, reporting and are subject to the Code’s trading
restrictions.
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Explanatory Note:
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Entering into Financial Spread Betting or Contract for Difference transactions, the act of taking a bet on the price movement of a security or underlying index is strictly prohibited under the Code.
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11
No Access Person may purchase a put option, sell a call option, sell a Covered Security short or otherwise take a short position
in a Covered Security then being held long in a Loomis Sayles client account, unless, in the cases of the purchase of a put or sale of a call option, the option is on a broad based index.
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Explanatory Note:
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If an Access Person seeks pre-clearance to purchase a put option or sell a call option to hedge an existing long position in the same underlying securities, PTC will
compare the value of the underlying long position to the option to determine whether the Access Person’s net position would be long or short. If short, the option transaction will be denied.
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4.7.
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Competing with Client Trades
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Loomis Asia is required to give priority to Loomis Sayles’ client orders. Loomis Asia cannot purchase or sell securities that are permitted to be traded
on the Singapore Exchange Securities Trading Limited (the “SGX-ST”) or on the securities market of any recognized market operator in Singapore if it were to act as a principal or on behalf of a
person associated with or connected to Loomis Asia, where a client of Loomis Sayles who is not associated with or connected to Loomis Asia has instructed Loomis Asia to purchase or sell securities of the same class and Loomis Asia has not complied
with the instruction. In addition, Loomis Asia must also accord priority to transactions for the purchase or sale of securities or to investments made on behalf of clients, over those made for the following persons: (i) Loomis Asia;
(ii) Loomis Asia’s associated persons; (iii) Loomis Asia’s officers; (iv) Loomis Asia’s employees; (v) Loomis Asia’s representatives; (vi) any person whom Loomis Asia knows to be an associated person of
the persons in (iii), (iv) or (v). However, neither Loomis Asia nor its employees will act in a principal capacity.
Except as set forth
in Section 4.8, an Access Person may not, directly or indirectly, purchase or sell a Covered Security (Reportable Funds are not subject to this rule.) when the Access Person knows, or reasonably should have
known, that such Covered Securities transaction competes in the market with any actual or considered Covered Securities transaction for any client of Loomis Sayles, or otherwise acts to harm any Loomis Sayles client’s
Covered Securities transactions.
Generally pre-clearance will be denied if:
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a Covered Security or a closely related Covered Security is the subject of a pending
“buy” or “sell” order for a Loomis Sayles client until that buy or sell order is executed or withdrawn.
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the Covered Security is being considered for purchase or sale for a Loomis Sayles client, until that
security is no longer under consideration for purchase or sale.
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The PTA System has the information necessary to deny pre-clearance if any of these situations apply. Therefore, if you receive an approval in PTA, you may assume the Covered Security is not being considered for purchase or sale for a client account
unless you have actual knowledge to the contrary, in which case the pre-clearance you received is null and void. For Covered Securities requiring manual pre-clearance (i.e. futures, options and other derivative transactions in Covered Securities), the applicability of such restrictions will be determined by Personal Trading Compliance upon the
receipt of the pre-clearance request.
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4.8.
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Large Cap/De Minimis Exemption
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An Access Person who wishes to make a trade in a Covered Security that would otherwise be denied
pre-clearance solely because the Covered Security is under consideration or pending execution for a client, as provided in Section 4.7, will nevertheless receive approval when submitted for pre-clearance provided that:
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the issuer of the Covered Security in which the Access Person wishes to transact has a market
capitalization exceeding U.S. $5 billion (a “Large Cap Security”); AND
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the aggregate amount of the Access Person’s transactions in that Large Cap Security on that
day across all personal accounts does not exceed $10,000 USD.
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Such transactions will be subject to all other provisions
of the Code.
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4.9.
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Investment Person Seven-Day Blackout Rule
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No Investment Person shall, directly or indirectly, purchase or sell any Covered Security (Reportable Funds are not
subject to this rule) within a period of seven (7) calendar days (trade date being day zero) before and after the date that a Loomis Sayles client, with respect to which he or she has the ability to influence investment decisions
or has prior investment knowledge regarding associated client activity, has purchased or sold such Covered Security or a closely related Covered Security. It is ultimately the Investment Person’s responsibility to
understand the rules and restrictions of the Code and to know what Covered Securities are being traded in his/her client(s) account(s) or any account(s) with which he/she is associated.
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Explanatory Note:
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The “seven days before” element of this restriction is based on the premise that an Investment Person who
has the ability to influence investment decisions or has prior investment knowledge regarding associated client activity can normally be expected to know, upon execution of his or her personal trade, whether any client as to which he or she is
associated, has traded, or will be trading in the same or closely related Covered Security within seven days of his or her personal trade. Furthermore, an Investment Person who has the
ability to influence investment decisions has a fiduciary obligation to recommend and/or affect suitable and attractive trades for clients regardless of whether such trades may cause a prior personal trade to be considered an apparent violation of
this restriction. It would constitute a breach of fiduciary duty and a violation of this Code to delay or fail to make any such recommendation or transaction in a client account in order to avoid a conflict with this restriction.
It is understood that there may be particular circumstances (i.e. news on an issuer,
a client initiated liquidation, subscription or rebalancing) that may occur after an Investment Person’s personal trade which gives rise to an opportunity or necessity for an associated client to trade in that
Covered Security which did not exist or was not anticipated by that person at the time
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of that person’s personal trade. Personal Trading Compliance will review all extenuating circumstances which may
warrant the waiving of any remedial actions in a particular situation involving an inadvertent violation of this restriction. In such cases, an exception to the Investment Person Seven-Day Blackout Rule will
be granted upon approval by the Chief Compliance Officer.
The Chief Compliance Officer, or designee thereof, may grant a waiver of the Investment Person
Seven-Day Blackout Rule if the Investment Person’s proposed transaction is conflicting with client “cash flow” trading in the same security (i.e., purchases of a broad
number of portfolio securities in order to invest a capital addition to the account or sales of a broad number of securities in order to generate proceeds to satisfy a capital withdrawal from the account). Such “cash flow” transactions are
deemed to be non- volitional at the security level since they do not change the weighting of the security being purchased or sold in the client’s portfolio.
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Explanatory Note:
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The trade date of an Investment Person’s purchase or sale is deemed to be day zero. Any associated client trade activity executed, in either that Covered Security
or a closely related Covered Security, 7 full calendar days before or after an Access Person’s trade will be considered a violation of the Investment Person
Seven-Day Blackout Rule. For example, if a client account purchased shares of company ABC on May 4th, any Access Person who is associated with that client account cannot trade ABC in a
personal account until May 12th without causing a potential conflict with the Investment Person Seven-Day Blackout Rule.
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Explanatory Note:
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While the Investment Person Seven-Day Blackout Rule is designed to address conflicts between Investment Persons and their clients, it is the fiduciary obligation of all
Access Persons to not effect trades in their personal account if they have prior knowledge of client trading or pending trading activity in the same or equivalent securities. The personal trade activity of all Access
Persons is monitored by Personal Trading Compliance for potential conflicts with client trading activity.
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4.10.
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Research Recommendations
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The Loomis Sayles Fixed Income Research Analysts issue “Buy,” “Sell,” and “Hold” recommendations on the
fixed income securities that they cover. The Loomis Sayles Equity Research Analysts issue price targets and other types of recommendations on the companies they cover, and certain Equity products have their own research analysts that provide
recommendations to their respective investment teams. Collectively the fixed income and equity recommendations and equity price targets are hereinafter referred to as “Recommendations”.
Recommendations are intended to be used for the benefit of the firm’s clients. It is also understood Access Persons
may use Recommendations as a factor in the investment decisions they make in their personal and other brokerage accounts that are covered by the Code. The fact that Recommendations may be used by the firm’s investment teams for
client purposes and Access Persons may use them for personal reasons creates a potential for conflicts of interests. Therefore, the following rules apply to Recommendations:
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During the three (3) business day period before a Research Analyst issues a recommendation on
a Covered Security, that the Research Analyst has reason to believe that his/her Recommendation is likely to result in client trading in the Covered Security, the Research Analyst may not purchase or sell said
Covered Security for any of his/her personal brokerage accounts or other accounts covered by the Code.
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Explanatory Note:
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It is understood that there may be particular circumstances such as a news release, change of circumstance or similar event that may occur
after a Research Analyst’s personal trade which gives rise to a need, or makes it appropriate, for the Research Analyst to issue a Recommendation on said
Covered Security. A Research Analyst has an affirmative duty to make unbiased Recommendations and issue reports, both with respect to their timing and substance,
without regard to his or her personal interest in the Covered Security. It would constitute a breach of a Research Analyst’s fiduciary duty and a violation of this Code to delay or fail to issue a
Recommendation in order to avoid a conflict with this restriction.
Personal Trading Compliance will review any extenuating circumstances which may warrant the waiving of any
remedial sanctions in a particular situation involving an inadvertent violation of this restriction.
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Access Persons are prohibited from using a Recommendation for purposes of transacting in the
Covered Security covered by the Recommendation in their personal accounts and other accounts covered by the Code until such time Loomis Sayles’ clients have completed their transactions in said securities in order to give priority
to Loomis Sayles’ clients’ best interests.
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Explanatory Note:
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Personal Trading Compliance utilizes various automated reports to monitor Access Persons’ trading in Covered Securities relative to Recommendations and associated client transactions. It also has
various tools to determine whether a Recommendation has been reviewed by an Access Person. An Access Person’s trading in a Covered Security following a Recommendation and subsequent client trading in the same
security and in the same direction will be deemed a violation of the Code unless Personal Trading Compliance determines otherwise.
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4.11.
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Initial Public Offerings
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Investing in Initial Public Offerings of Covered Securities is prohibited unless such opportunities are connected with your prior
employment compensation (i.e. options, grants, etc.) or your spouse’s employment compensation. No Access Person may, directly or indirectly, purchase any securities sold in an Initial Public Offering without obtaining prior
written approval from the Chief Compliance Officer.
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4.12.
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Private Placement Transactions
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No Access Person may, directly or indirectly, purchase any Covered Security offered and sold pursuant to a Private Placement
Transaction, including hedge funds and Initial Coin Offerings, without obtaining the advance written approval of Personal Trading Compliance, the Chief Compliance Officer and the applicable Access Person’s
supervisor or other appropriate
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member of senior management. In addition to addressing potential conflicts of interest between the Access
Person’s Private Placement Transaction and the firm’s clients’ best interests, the pre-clearance of Private Placements is designed to determine whether the Access Person may
come into possession of material non-public information (“MNPI”) on a publically traded company as a result of the Private Placement.
A Private Placement Transaction approval must be obtained by completing an automated Private Placement
Pre-clearance Form which can be found on the Legal and Compliance Intranet Homepage under ‘Personal Trading Compliance Forms’.
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Explanatory Note:
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If you have been authorized to acquire a Covered Security in a Private Placement Transaction, you must disclose to Personal Trading
Compliance if you are involved in a client’s subsequent consideration of an investment in the issuer of the Private Placement, even if that investment involves a different type or class of Covered
Security. In such circumstances, the decision to purchase securities of the issuer for a client must be independently reviewed by an Investment Person with no personal interest in the issuer.
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The purchase of additional shares, (including mandatory capital calls), or the subsequent sale (partial or
full) of a previously approved Private Placement, must receive pre-clearance approval from the Chief Compliance Officer. In addition, all transactions in Private Placements
must be reported quarterly and annually as detailed in Section 6 of the Code.
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Explanatory Note:
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To submit a pre-clearance request for subsequent trade activity in a Private Placement, Access Persons must complete the
automated Private Placement Pre-clearance Form which will be reviewed by Personal Trading Compliance to ensure there are no conflicts with any
underlying Code provisions including the Short-Term Trading Rule.
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At the start of an Access Person’s engagement with Loomis Sayles, and annually thereafter, each Access Person must acknowledge his/her
understanding of and compliance with the Loomis Sayles Insider Trading Policies and Procedures. The firm’s policy is to refrain from trading or recommending trading when in the possession of MNPI.
Some examples of MNPI may include:
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Earnings estimates or dividend changes
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Positive or negative forthcoming news about an issuer
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Supplier discontinuances
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Mergers or acquisitions
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If an Access Person receives or believes that he/she may have received MNPI with respect to a company, the Access Person must
contact the Chief Compliance Officer or General Counsel immediately, and must not:
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purchase or sell that security in question, including any derivatives of that security;
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recommend the purchase or sale of that security, including any derivatives of that security; or
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relate the information to anyone other than the Chief Compliance Officer or General Counsel of Loomis
Sayles.
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If it has been determined that an Access Person has obtained MNPI on a particular company, its
securities will generally be placed on the firm’s Restricted List thereby restricting trading by the firm’s client accounts and Access Persons. The only exception to this policy is with the approval of the Chief Compliance
Officer or General Counsel of the firm, and then only in compliance with the firm’s Firewall Procedures.
In addition, under the
Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), Loomis Asia is required under the Notice on Reporting of Misconduct of Representatives by Holders of Capital Markets Services License and Exempt Financial Institutions to
report to the Monetary Authority of Singapore (“MAS”) upon discovery of, inter alia, any involvement of its representatives in market misconduct or insider trading.
For Loomis UK, the Market Abuse Regulation (“MAR”) requires that firms and individuals report suspicious transactions and orders (STORs), as defined
in Article 16 of MAR, as well as attempted market abuse, to the FCA, without delay. The STOR report should be submitted via the FCA’s Connect system.
Separately, Access Persons must inform Personal Trading Compliance if a spouse, partner and/or immediate family member
(“Related Person”) is an officer and/or director of a publicly traded company in order to enable Personal Trading Compliance to implement special pre-clearance procedures for said
Access Persons in order to prevent insider trading in the Related Person’s company’s securities.
Access
Persons should refer to the Loomis Sayles Insider Trading Policies and Procedures which are available on the Legal and Compliance homepage of the firm’s Intranet, for complete guidance on dealing with MNPI.
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4.14.
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Restricted and Concentration List
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The Loomis Sayles Restricted and Concentration List (“Restricted List”) is designed to restrict Loomis Sayles and/or Access
Persons from trading in or recommending, the securities of companies on the Restricted List for client and/or Access Persons personal accounts. Companies may be added to the Restricted List if Loomis Sayles comes into possession of MNPI
about a company. A company’s securities can also be added to the Restricted List due to the size of the aggregate position Loomis Sayles’ clients may have in the company. Finally, there may be regulatory and/or client contractual
restrictions that may prevent Loomis Sayles from purchasing securities of its affiliates, and as a result, the securities of all publicly traded affiliates of Loomis Sayles will be added to the Restricted List. No conclusion should be drawn from the
addition of an issuer to the Restricted List. The Restricted List is confidential, proprietary information which must not be distributed outside of the firm.
At times, an Access Person may have possession of MNPI on a specific company as a result of his/her being behind a firewall. In such
cases, Personal Trading Compliance will create a specialized Restricted List in PTA for the Access Person behind the wall in order to prevent trading in the company’s securities until such time as the Chief Compliance
Officer has deemed the information in the Access Person’s possession to be in the public domain or no longer material.
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If a security is added to either the Loomis Sayles firm-wide Restricted List or an individual or
group Access Person Restricted List, Access Persons will be restricted from purchasing or selling all securities related to that issuer until such time as the security is removed from the applicable Restricted List. The PTA System has
the information necessary to deny pre-clearance if these situations apply.
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4.15.
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Loomis Sayles Hedge Funds
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From time to time Loomis Sayles may manage hedge funds, and Access Persons of Loomis Sayles, including the hedge fund’s investment
team and supervisors thereof may make personal investments in such hedge funds. At times, especially during the early stages of a new hedge fund, there may be a limited number of outside investors (i.e., clients and
non-employee individual investors) in such funds. In order to mitigate the appearance that investing personally in a hedge fund can potentially be used as a way to benefit from certain trading practices that
would otherwise be prohibited by the Code if Access Persons engaged in such trading practices in their personal accounts, investment team members of a hedge fund they manage are individually required to limit their personal investments in
such funds to no more than 20% of the hedge funds’ total assets. In addition, the supervisor of a hedge fund investment team must limit his/her personal investment in such hedge fund to no more than 25% of the hedge fund’s total assets.
By limiting the personal interests in the hedge fund by their investment teams and their supervisors in this manner, all of the portfolio
trading activity of the Loomis Sayles hedge funds is deemed to be exempt from the pre-clearance and trading restrictions of the Code.
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4.16.
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Exemptions Granted by the Chief Compliance Officer
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Subject to applicable law, Personal Trading Compliance or the Chief Compliance Officer may from time to time grant
exemptions, other than or in addition to those described in Exhibit Five, from the trading restrictions, pre-clearance requirements or other provisions of the Code with respect to particular
individuals such as non-employee directors, consultants, temporary employees, interns or independent contractors, and types of transactions or Covered Securities, where, in the opinion of the Chief
Compliance Officer, such an exemption is appropriate in light of all the surrounding circumstances.
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5.
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PROHIBITED OR RESTRICTED ACTIVITIES
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5.1.
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Public Company Board Service and Other Affiliations
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To avoid conflicts of interest, MNPI and other compliance and business issues, Loomis Sayles prohibits Access Persons from serving as
officers or members of the board of any publicly traded entity. This prohibition does not apply to service as an officer or board member of any parent or subsidiary of Loomis Sayles.
In addition, in order to identify potential conflicts of interests, compliance and business issues, before accepting any service, employment,
engagement, connection, association, or affiliation in or within any enterprise, business or otherwise, (herein after, collectively “Outside Activity(ies)”), an Access Person must obtain the advance written approval of
Personal Trading Compliance, the Chief Compliance Officer and the applicable Access Person’s supervisor or other appropriate member of senior management.
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To pre-approve an Outside Activity the Access Person must
complete the Outside Activity Form, that can be found within the ‘Important Links’ section of the PTA Homepage. In determining whether to approve such Outside Activity, Personal Trading Compliance and the Chief Compliance
Officer will consider whether such service will involve an actual or perceived conflict of interest with client trading, place impediments on Loomis Sayles’ ability to trade on behalf of clients or otherwise materially interfere with
the effective discharge of Loomis Sayles’ or the Access Person’s duties to clients. Loomis Asia Compliance will also be involved in this review process to be alerted on activities that require prompt notifications to MAS.
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Explanatory Note:
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Examples of Outside Activities include, but are not limited to, family businesses, acting as an officer, partner or trustee of an organization or trust, political positions, second jobs, professional associations, etc. Outside
Activities that are not covered by the Code are activities that involve a charity or foundation, as long as you do not provide investment or financial advice to the organization. Examples would include: volunteer work, homeowners’ organizations
(such as condos or coop boards), or other civic activities.
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5.2.
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Participation in Investment Clubs and Private Pooled Vehicles
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No Access Person shall participate in an investment club or invest in a hedge fund, or similar private organized investment pool (but
not an SEC registered open-end mutual fund) without the express permission of Personal Trading Compliance, the Chief Compliance Officer and the applicable Access Person’s
supervisor or other appropriate member of senior management, whether or not the investment vehicle is advised, sub-advised or distributed by Loomis Sayles or a Natixis investment adviser.
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6.
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REPORTING REQUIREMENTS
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6.1.
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Initial Holdings Reporting, Account Disclosure and Acknowledgement of Code
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Within 10 days after becoming an Access Person, each Access Person must file with Personal Trading Compliance, a
report of all Covered Securities holdings (including holdings of Reportable Funds) in which such Access Person has Beneficial Ownership or Investment Control. The information contained therein must be
current as of a date not more than 45 days prior to the individual becoming an Access Person.
Additionally, within 10 days
of becoming an Access Person, such Access Person must report all brokerage or other accounts that hold or can hold Covered Securities in which the Access Person has Beneficial Ownership or
Investment Control. The information must be as of the date the person became an Access Person. An Access Person can satisfy these reporting requirements by providing Personal Trading Compliance with a current copy of
his or her brokerage account or other account statements, which hold or can hold Covered Securities. An automated Initial Code of Ethics Certification and Disclosure Form can be found on the Legal and Compliance Intranet Homepage under
‘Personal Trading Compliance Forms’. This form must be completed and submitted to Personal Trading Compliance by the Access Person within 10 days of becoming an
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Access Person. The content of the Initial Holdings information must include, at a minimum, the
title and type of security, the ticker symbol or CUSIP or ISIN, number of shares, and principal amount of each Covered Security (including Reportable Funds) and the name of any broker, dealer or bank with which the securities are held. With the
exception of the Access Persons of Loomis Asia and Loomis UK, newly hired Access Persons must close existing non-Select brokerage accounts and transfer the assets to a Select Broker within 30
days of their start date at Loomis Sayles, unless the Access Person receives written approval from Personal Trading Compliance or the Chief Compliance Officer to maintain his/her account(s) at a non-Select Broker.
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Explanatory Note:
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Loomis Sayles treats all of its employees and certain consultants as Access Persons. Therefore,
you are deemed to be an Access Person as of the first day you begin working for the firm.
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Explanatory Note:
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Types of accounts in which Access Persons are required to report include, but are not limited to: personal brokerage accounts, mutual fund accounts, accounts of your spouse, accounts of minor children living
in your household, Family of Fund accounts, transfer agent accounts holding mutual funds or book entry shares, IRAs, 401Ks, trusts, DRIPs, ESOPs etc. that either hold or can hold Covered Securities (including Reportable Funds). In addition,
physically held shares of Covered Securities must also be reported. An Access Person should contact Personal Trading Compliance if they are unsure as to whether an
account or personal investment is subject to reporting under the Code so the account or investment can be properly reviewed.
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At the time of the initial disclosure period, each Access Person must also submit information pertaining
to:
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His/her participation in any Outside Activity as described in Section 5.1 of the Code;
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His/her participation in an Investment Club as described in Section 5.2 of the Code;
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Holdings in Private Placements including hedge funds; and
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A Related Person that is an officer and/or director of a publicly traded company; if any.
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Upon becoming an Access Person, each Access Person will receive a copy of the Code, along with the Loomis
Sayles Insider Trading Policies and Procedures and Loomis Sayles Gifts, Business Entertainment and Political Contributions Policies and Procedures. Within the 10 day initial disclosure period and annually thereafter, each Access Person must
acknowledge that he or she has received, read and understands the aforementioned policies and recognize that he or she is subject hereto, and certify that he or she will comply with the requirements of each.
6.2. Brokerage Confirmations and Brokerage Account Statements
Each Access Person must notify Personal Trading Compliance immediately upon the opening of an account that holds or
may hold Covered Securities (including Reportable Funds), in which such Access Person has Beneficial Ownership or Investment Control. In addition, if an account has been granted an exemption to the Select
Broker requirement and/or the account is unable to be added to the applicable Select Broker’s daily electronic broker feed, which supplies
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PTA with daily executed confirms and positions, Personal Trading Compliance will instruct the broker
dealer of the account to provide it with duplicate copies of the account’s confirmations and statements. If the broker dealer cannot provide Personal Trading Compliance with confirms and statements, the Access Person is
responsible for providing Personal Trading Compliance with copies of such confirms as and when transactions are executed in the account, and statements on a monthly basis, if available, but no less than quarterly. Upon the opening of an
account, an automated Personal Account Reporting Form must be completed and submitted to Personal Trading Compliance. This form can be found on the Legal and Compliance Intranet Homepage under ‘Personal Trading Compliance
Forms’.
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Explanatory Note:
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If the opening of an account is not reported immediately to Personal Trading Compliance, but is
reported during the corresponding quarterly certification period, and there has not been any trade activity in the account, then the Access Person will be deemed to have not violated its reporting
obligations under this Section of the Code.
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Explanatory Note:
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For those accounts that are maintained at a Select Broker and are eligible for the broker’s daily electronic confirm and position feed, Access Persons do not need to provide
duplicate confirms and statements to Personal Trading Compliance. However, it is the Access Person’s responsibility to accurately review and certify their
quarterly transactions and annual holdings information in PTA, and to promptly notify Personal Trading Compliance if there are any discrepancies.
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6.3. Quarterly Transaction Reporting and Account Disclosure
Utilizing PTA, each Access Person must file a report of all Volitional transactions in Covered Securities
(including Volitional transactions in Reportable Funds) made during each calendar quarterly period in which such Access Person has, or by reason of such transaction acquires or disposes of, any Beneficial
Ownership of a Covered Security (even if such Access Person has no direct or indirect Investment Control over such Covered Security), or as to which the Access Person has any direct or indirect
Investment Control (even if such Access Person has no Beneficial Ownership in such Covered Security). Non-volitional transactions in Covered Securities (including
Reportable Funds) such as automatic monthly payroll deductions, changes to future contributions within the Loomis Sayles Retirement Plans, dividend reinvestment programs, dollar cost averaging programs, and transactions made within the
Guided Choice Program are still subject to the Code’s annual reporting requirements. If no transactions in any Covered Securities, required to be reported, were effected during a quarterly period by an Access Person, such
Access Person shall nevertheless submit a report through PTA within the time frame specified below stating that no reportable securities transactions were affected. The following information will be available in electronic
format for Access Persons to verify on their Quarterly Transaction report:
The date of the transaction, the title of the security,
ticker symbol, CUSIP or ISIN, number of shares, and principal amount of each reportable security, nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition), the price of the transaction, and the name of the
broker, dealer or bank with which the transaction was effected. However, the Access Person is responsible for confirming the accuracy of this information and informing Personal Trading Compliance if his or her reporting information is
inaccurate or incomplete.
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With the exception of those accounts described in Exhibit Four, Access Persons are
also required to report each account that may hold or holds Covered Securities (including accounts that hold or may hold Reportable Funds) in which such Access Person has Beneficial Ownership or Investment Control
that have been opened or closed during the reporting period. In addition, life events such as marriage, death of a family member (i.e., inheritance), etc. may result in your acquiring Beneficial Ownership and/or Investment
Control over accounts previously belonging to others. Therefore, any Covered Security, including Reportable Funds, along with any account that holds or can hold a Covered Security, including Reportable Funds, in which
you have a Beneficial Ownership and/or Investment Control, as described in Section 3.2 and Section 3.3 of the Code, resulting from marriage or other life event must be reported to Personal Trading Compliance
promptly, and no later than the next applicable quarterly reporting period.
Every quarterly report must be submitted no later than
thirty (30) calendar days after the close of each calendar quarter.
On an annual basis, as of a date specified by Personal Trading Compliance, each Access Person must file with Personal
Trading Compliance a dated annual certification which identifies all holdings in Covered Securities (including Reportable Funds) in which such Access Person has Beneficial Ownership and/or Investment
Control. This reporting requirement also applies to shares of Covered Securities, including shares of Reportable Funds that were acquired during the year in Non-volitional
transactions. Additionally, each Access Person must identify all personal accounts which hold or may hold Covered Securities (including Reportable Funds), in which such Access Person has Beneficial Ownership and/or
Investment Control. The information in the Annual Package shall reflect holdings in the Access Person’s account(s) that are current as of a date specified by Personal Trading Compliance. The following information will be
available in electronic format for Access Persons to verify on the Annual Holdings report:
The title of the security, the ticker
symbol, CUSIP or ISIN, number of shares, and principal amount of each Covered Security (including Reportable Funds) and the name of any broker, dealer or bank with which the securities are held. However, the Access Person is
responsible for confirming the accuracy of this information and informing Personal Trading Compliance if his or her reporting information is inaccurate or incomplete.
Furthermore, on an annual basis, each Access Person must acknowledge and certify that during the past year he/she has received, read,
understood and complied with the Code, Insider Trading Policies and Procedures, and the Policies and Procedures on Gifts, Business Entertainment, and Political Contributions, except as otherwise disclosed in writing to Personal Trading
Compliance or the Chief Compliance Officer. Finally, as part of the annual certification, each Access Person must acknowledge and confirm any Outside Activities in which he or she currently participates and any Related
Person that is an officer and/or director of a publicly traded company.
All material changes to the Code will be promptly distributed to
Access Persons, and also be distributed to Supervised Persons on a quarterly basis. On an annual basis, Supervised Persons will be asked to acknowledge his/her receipt, understanding of and compliance with the Code.
Every annual report must be submitted no later than (45) calendar days after the date specified by Personal Trading Compliance.
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6.5.
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Review of Reports by Chief Compliance Officer
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The Chief Compliance Officer shall establish procedures as the Chief Compliance Officer may from time to time determine
appropriate for the review of the information required to be compiled under this Code regarding transactions by Access Persons and to report any violations thereof to all necessary parties.
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6.6.
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Internal Reporting of Violations to the Chief Compliance Officer
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Prompt internal reporting of any violation of the Code to the Chief Compliance Officer or Personal Trading Compliance is required
under Rule 204A-1 and FCA (MAR and COBS) While the daily monitoring process undertaken by Personal Trading Compliance is designed to identify any violations of the Code and handle any such
violations promptly, Access Persons and Supervised Persons are required to promptly report any violations they learn of resulting from either their own conduct or those of other Access Persons or Supervised Persons
to the Chief Compliance Officer or Personal Trading Compliance. It is incumbent upon Loomis Sayles to create an environment that encourages and protects Access Persons or Supervised Persons who report
violations. In doing so, individuals have the right to remain anonymous in reporting violations. Furthermore, any form of retaliation against an individual who reports a violation could constitute a further violation of the Code, as deemed
appropriate by the Chief Compliance Officer. All Access Persons and Supervised Persons should therefore feel safe to speak freely in reporting any violations.
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6.7.
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Register of Interests in Securities
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Pursuant to regulations 4 and 4A of the Securities and Futures (Licensing and Conduct of Business) Regulations, all employees of Loomis Asia
who have been appointed as representatives under the Securities and Futures Act are required to maintain a register of their interests in securities which are listed for quotation, or quoted on the Singapore Exchange Securities Trading Limited or
any recognized market operator recognized by the Monetary Authority of Singapore under the Securities and Futures Act. For purposes of the register of interests in securities, “securities” includes any type of equity or debt security, any
equivalent, any derivative, instrument representing, or any rights relating to a security, and any closely related security, as well as units in any open-ended funds, closed-end funds and business trusts. In
addition, all employees are deemed to have an “interest” in securities if he/she has Beneficial Ownership or Investment Control (whether formal or informal, expressed or implied) over those securities. Section 4 of the
SFA also sets out instances under which a person is deemed to have an “interest” in securities (for instance, where a person has an interest in securities through a corporation in which such person has a controlling interest. If you are
unsure whether your personal trading activity needs to be entered into your register of interests in securities, please consult Personal Trading Compliance.
Representatives of Loomis Asia must enter into their register of interests in securities, within 7 days after the date that they acquire any
interest in securities, particulars of the securities in which they have an interest and particulars of their interests in those securities. Where there is a change in any interest in securities, representatives must enter in their register, within
7 days after the date of the change, particulars of the change (including the date of the change and the circumstances by reason of which the change occurred). Representatives of Loomis Asia maintain records of their holdings and transactions in
securities on an Automated System (PTA). Such records must be produced for the MAS’ inspection upon request.
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Loomis Asia separately maintains a nil register of interest in securities for the entity which
does not hold any such interest.
The register of interests in securities is kept in Loomis Asia’s office (as notified to MAS) and
Loomis US. Each entry in the register must be retained in an easily accessible form for a period of not less than 5 years after the date on which the entry was first made.
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6.8.
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Mandatory Notification to the MAS for Loomis Asia’s Directors and Appointed Representatives
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Pursuant to the license conditions set out upon being granted the Capital Markets Services License to conduct the
regulated activity of Fund Management and Dealing in Capital Markets Products in Singapore, Loomis Asia’s Directors, Chief Executive Officer and Appointed Representatives are required to inform MAS via email or other means directed, of any
business interests and substantial shareholdings (i.e., 5% or more ownership of the outstanding voting securities in any entity).
Notification of
Substantial Shareholdings
For Loomis Asia’s Appointed Representatives, substantial shareholdings need to be notified via MASNET
Form 16 within 14 calendar days from the acquisition date of a 5% position, and thereafter for any 1% change in a 5% position. For Loomis Asia’s Directors and CEO who are not an Appointed Representatives, notification of substantial
shareholdings to MAS is usually made via email unless otherwise directed to be made in other means.
Appointed Representatives, the CEO
and Directors of Loomis Asia are responsible for immediately notifying Loomis Asia’s Compliance upon acquiring a 5% position and any 1% changes thereto. Loomis Asia Compliance will also rely on ad hoc reviews and quarterly checklists to
identify reportable holdings.
Notification of Business interests
Business interests refer to any role with any business entity arising from pre-approved Outside
Activities or internal roles within Loomis’s corporate and affiliated entities usually held by senior officers and directors. Loomis Asia’s Appointed Representatives would need to notify MAS via MASNET Form 16 within 14 calendar days from
the effective date of any changes to their business interests. Changes in business interests of Loomis Asia’s Directors or CEO would be separately notified to MAS via email or other means directed.
For internal roles within Loomis’s corporate and affiliated entities held by certain Loomis Asia’s directors, Loomis Asia’s
Compliance will work with the Legal and Compliance of Loomis US to periodically obtain updates on potential changes to the internal roles for prompt notification to MAS.
Any violation of the substantive or procedural requirements of this Code will result in the imposition of a sanction as set forth in the
firm’s then current Sanctions Policy, or as the Ethics Committee may deem appropriate under the circumstances of the particular violation. These sanctions may include, but are not limited to:
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a letter of caution or warning (i.e. Procedures Notice);
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requiring the employee to reverse a trade and realize losses or disgorge any profits;
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restitution to an affected client;
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suspension of personal trading privileges;
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actions affecting employment status, such as suspension of employment without pay, demotion or termination of
employment; and
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referral to the SEC, FCA or MAS and other civil authorities or criminal authorities.
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Serious violations, including those involving deception, dishonesty or knowing breaches of law or fiduciary duty, will result in one or more
of the most severe sanctions regardless of the violator’s history of prior compliance.
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Explanatory Note:
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Any violation of the Code, following a “first offense” whether or not for the same type of violation, will be treated as a subsequent offense.
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Fines, penalties and disgorged profits will be donated to a charity selected by the Loomis Sayles Charitable
Giving Committee.
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8.
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RECORDKEEPING REQUIREMENTS
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Loomis Sayles shall maintain and preserve records, in an easily accessible place, relating to the Code of the type and in the manner and form
and for the time period prescribed from time to time by applicable law. Currently, Loomis Sayles is required by law to maintain and preserve:
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in an easily accessible place, a copy of this Code (and any prior Code of Ethics that was in effect at any time
during the past five years) for a period of five years;
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in an easily accessible place a record of any violation of the Code and of any action taken as a result of such
violation for a period of five years following the end of the fiscal year in which the violation occurs;
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a copy of each report (or information provided in lieu of a report including any manual pre-clearance forms and information relied upon or used for reporting) submitted under the Code for a period of five years, provided that for the first two years such copy must be preserved in an easily accessible
place;
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copies of Access Persons’ and Supervised Persons’ written acknowledgment of initial
receipt of the Code and his/her annual acknowledgement;
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in an easily accessible place, a record of the names of all Access Persons within the past five years,
even if some of them are no longer Access Persons, the holdings and transactions reports made by these Access Persons, and records of all Access Persons’ personal securities reports (and duplicate brokerage confirmations or account
statements in lieu of these reports);
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a copy of each report provided to any Investment Company as required by paragraph (c)(2)(ii) of Rule 17j-1 under the 1940 Act or any successor provision for a period of five years following the end of the fiscal year in which such report is made, provided that for the first two years such record shall be preserved
in an easily accessible place; and
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a written record of any decision and the reasons supporting any decision, to approve the purchase by an Access
Person of any Covered Security in an Initial Public Offering or Private Placement Transaction or other limited offering for a period of five years following the end of the fiscal year in which the approval is granted.
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Explanatory Note:
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Under Rule 204-2, the standard retention period required for all documents and records listed above is five years, in easily accessible place, the first two years in an appropriate office
of Personal Trading Compliance. Under the IMAS Code of Ethics & Standards of Professional Conduct, Loomis Asia is required to keep records related to its policies and internal controls governing personal dealing,
including any violations and the resultant investigations and actions taken where appropriate, for a period of six years. Under MAR, the FCA requires all records be retained for 5 years.
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Loomis Sayles will keep information obtained from any Access Person hereunder in strict confidence. Notwithstanding the forgoing,
reports of Covered Securities transactions and violations hereunder will be made available to the SEC, FCA, MAS or any other regulatory or self-regulatory organizations to the extent required by law, rule or regulation, and in certain
circumstances, may in Loomis Sayles’ discretion be made available to other civil and criminal authorities. In addition, information regarding violations of the Code may be provided to clients or former clients of Loomis Sayles that have been
directly or indirectly affected by such violations.
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9.2.
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Disclosure of Client Trading Knowledge
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No Access Person may, directly or indirectly, communicate to any person who is not an Access Person or other approved agent of
Loomis Sayles (e.g., legal counsel) any non-public information relating to any client of Loomis Sayles or any issuer of any Covered Security owned by any client of Loomis Sayles, including,
without limitation, the purchase or sale or considered purchase or sale of a Covered Security on behalf of any client of Loomis Sayles, except to the extent necessary to comply with applicable law or to effectuate traditional asset
management/operations activities on behalf of the client of Loomis Sayles.
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9.3.
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Notice to Access Persons, Investment Persons and Research Analysts as to Code Status
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Personal Trading Compliance will initially determine an employee’s status as an Access Person,
Research Analyst or Investment Person and the client accounts to which Investment Persons should be associated, and will inform such persons of their respective reporting and duties under the Code.
All Access Persons and/or the applicable supervisors thereof, have an obligation to inform Personal Trading Compliance if an
Access Person’s responsibilities change during the Access Person’s tenure at Loomis Sayles.
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9.4.
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Notice to Personal Trading Compliance of Engagement of Independent Contractors
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Any Access Person that engages as a non-employee service provider (“NESP”), such as a
consultant, temporary employee, intern or independent contractor shall notify Personal Trading Compliance of this engagement, and provide to Personal Trading Compliance the information necessary to make a determination as
to how the Code shall apply to such NESP, if at all.
NESPs are generally not subject to the
pre-clearance, trading restrictions and certain reporting provisions of the Code. However, NESP’s must receive, review and acknowledge a Code of Ethics Compliance Statement that further describes his/her
Code requirements and fiduciary duties while engaged with Loomis Sayles.
At times, NESP’s are contracted to various departments at
Loomis Sayles where they may be involved or be privy to the investment process for client accounts or the Loomis Sayles recommendation process. Prior to their engagement, the Loomis Sayles Human Resources Department will notify Personal Trading
Compliance of these NESP’s and depending on the facts and circumstances, the NESP will be communicated what provisions of the Code will apply to them during their engagement.
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9.5.
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Questions and Educational Materials
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Employees are encouraged to bring to Personal Trading Compliance any questions you may have about interpreting or complying with the
Code about Covered Securities, accounts that hold or may hold Covered Securities or personal trading activities of you, your family, or household members, your legal and ethical responsibilities, or similar matters that may involve the
Code.
Personal Trading Compliance will from time to time circulate educational materials or bulletins or conduct training
sessions designed to assist you in understanding and carrying out your duties under the Code. On an annual basis, each Access Person is required to successfully complete the Code of Ethics and Fiduciary Duty Tutorial designed to educate
Access Persons on their responsibilities under the Code and other Loomis Sayles policies and procedures that generally apply to all employees.
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GLOSSARY OF TERMS
The boldface terms used throughout this policy have the following meanings:
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1.
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“Access Person” means an “access person” as defined from time to time in Rule 17j-1 under the 1940 Act or any applicable successor provision. Currently, this means any director, or officer of Loomis Sayles, or any Advisory Person (as defined below) of Loomis Sayles, but does not
include any director who is not an officer or employee of Loomis Sayles or its corporate general partner and who meets all of the following conditions:
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a.
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He or she, in connection with his or her regular functions or duties, does not make, participate in or obtain
information regarding the purchase or sale of Covered Securities by a registered investment company, and whose functions do not relate to the making of recommendations with respect to such purchases or sales;
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b.
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He or she does not have access to nonpublic information regarding any clients’ purchase or sale of
securities, or nonpublic information regarding the portfolio holdings of any Reportable Fund; and
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c.
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He or she is not involved in making securities recommendations to clients, and does not have access to such
recommendations that are nonpublic.
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Loomis Sayles treats all employees as Access Persons.
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2.
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“Advisory Person” means an “advisory person” and “advisory representative”
as defined from time to time in Rule 17j-1 under the 1940 Act and Rule 204-2(a)(12) under the Advisers Act, respectively, or any applicable successor provision.
Currently, this means (i) every employee of Loomis Sayles (or of any company in a Control relationship to Loomis Sayles), who, in connection with his or her regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a Covered Security by Loomis Sayles on behalf of clients, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) every natural person in a
Control relationship to Loomis Sayles who obtains information concerning recommendations made to a client with regard to the purchase or sale of a Covered Security. Advisory Person also includes: (a) any other employee designated
by Personal Trading Compliance or the Chief Compliance Officer as an Advisory Person under this Code; (b) any consultant, temporary employee, intern or independent contractor (or similar person) engaged by Loomis
Sayles designated as such by Personal Trading Compliance or the Chief Compliance Officer as a result of such person’s access to information about the purchase or sale of Covered Securities by Loomis Sayles on behalf of
clients (by being present in Loomis Sayles offices, having access to computer data or otherwise).
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3.
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“Beneficial Ownership” is defined in Section 3.2 of the Code.
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4.
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“Chief Compliance Officer” refers to the officer or employee of Loomis Sayles designated from
time to time by Loomis Sayles to receive and review reports of purchases and sales by Access Persons, and to address issues of personal trading. “Personal Trading Compliance” means the employee or employees of Loomis Sayles
designated from time to time by the General Counsel of Loomis Sayles to receive and review reports of purchases and sales, and to address issues of personal trading, by the Chief Compliance Officer, and to act for the Chief Compliance
Officer in the absence of the Chief Compliance Officer.
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5.
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“Covered Security” is defined in Section 3.1 of the Code.
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6.
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“Exempt ETF” is defined in Section 3.1 of the Code and a list of such funds is found
in Exhibit Two.
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7.
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“Federal Securities Laws” refers to the Securities Act of 1933, the Securities Exchange Act of
1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, the Investment Advisers Act of 1940, Title V of the Gramm-Leach-Bliley Act, any rules adopted by the SEC under any of these statutes, the Bank Secrecy Act as it applies to
funds and investment advisers, and any rules adopted there under by the SEC or the U.S. Department of the Treasury, and any amendments to the above mentioned statutes.
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8.
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“Investment Control” is defined in Section 3.3 of the Code. This means
“control” as defined from time to time in Rule 17j-1 under the 1940 Act and Rule 204-2(a)(12) under the Advisers Act or any applicable successor provision.
Currently, this means the power to directly or indirectly influence, manage, trade, or give instructions concerning the investment disposition of assets in an account or to approve or disapprove transactions in an account.
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9.
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“Initial Public Offering” means an “initial public offering” as defined from time to
time in Rule 17j-l under the 1940 Act or any applicable successor provision. Currently, this means any offering of securities registered under the Securities Act of 1933 the issuer of which immediately before
the offering, was not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
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10.
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“Investment Company” means any Investment Company registered as such under the 1940 Act
and for which Loomis Sayles serves as investment adviser or subadviser or which an affiliate of Loomis Sayles serves as an investment adviser.
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11.
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“Investment Person” means all Portfolio Managers of Loomis Sayles and other Advisory
Persons who assist the Portfolio Managers in making and implementing investment decisions for an Investment Company or other client of Loomis Sayles, including, but not limited to, designated Research Analysts and
traders of Loomis Sayles. A person is considered an Investment Person only as to those client accounts or types of client accounts as to which he or she is designated by Personal Trading Compliance or the Chief Compliance
Officer as such. As to other accounts, he or she is simply an Access Person.
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12.
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“Loomis Advised Fund” is any Reportable Fund advised or
sub-advised by Loomis Sayles. A list of these funds can be found in Exhibit One.
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13.
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“Non-volitional” transactions are any transaction in
which the employee has not determined the timing as to when the purchase or sale will occur and the amount of shares to be purchased or sold, i.e. changes to future contributions within the Loomis Sayles Retirement Plans, dividend reinvestment
programs, dollar cost averaging program, automatic monthly payroll deductions, and any transactions made within the Guided Choice Program. Non-volitional transactions are not subject to the pre-clearance or quarterly reporting requirements under the Code.
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14.
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“Portfolio Manager” means any individual employed by Loomis Sayles who has been designated as
a Portfolio Manager by Loomis Sayles. A person is considered a Portfolio Manager only as to those client accounts as to which he or she is designated by the Chief Compliance Officer as such. As to other client accounts,
he or she is simply an Access Person.
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15.
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“Private Placement Transaction” means a “limited offering” as defined from time to
time in Rule 17j-l under the 1940 Act or any applicable successor provision. Currently, this means an offering exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) or 4(6) or
Rule 504, 505 or 506 under that Act, including hedge funds.
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16.
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“Recommendation” means any change to a security’s price target or other type of
recommendation in the case of an equity Covered Security, or any initial rating or rating change in the case of a fixed income Covered Security in either case issued by a Research Analyst.
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17.
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“Reportable Fund” is defined in Section 3.1 of the Code, and a list of such funds is
found in Exhibit One.
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18.
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“Research Analyst” means any individual employed by Loomis Sayles who has been designated as a
Research Analyst or Research Associate by Loomis Sayles. A person is considered a Research Analyst only as to those Covered Securities which he or she is assigned to cover and about which he or she issues research reports
to other Investment Persons or otherwise makes recommendations to Investment Persons beyond publishing their research. As to other securities, he or she is simply an Access Person.
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19.
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“Select Broker” is defined in Section 3.4 of the Code.
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20.
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“Supervised Person” is defined in Section 202(a)(25) of the Advisers Act and currently
includes any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of Loomis Sayles, or other person who provides investment advice on behalf of Loomis Sayles and is subject to the
supervision and control of Loomis Sayles.
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21.
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“Volitional” transactions are any transactions in which the employee has determined the timing
as to when the purchase or sale transaction will occur and amount of shares to be purchased or sold. Volitional transactions are subject to the pre-clearance and reporting requirements under the Code.
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3
CODE OF ETHICS
Access Persons are responsible for reading and being familiar with each of the definitions below, which are used throughout the Code of Ethics. It is
important that you understand the meaning of the definitions as their meaning may be more expansive or restrictive than in another context. All defined terms are capitalized in the Code of Ethics.
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“1933 Act” – Securities Act of 1933, as amended.
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“1934 Act” – Securities Exchange Act of 1934, as amended.
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“1940 Act” – Investment Company Act of 1940, as amended.
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“529 Plan” – A qualified tuition program or college savings plan that meets the
requirements of Section 529 of the IRC.
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“Access Person(s)” – Any partner, officer, director, employee, intern, or consultant1 who has or may obtain access to non-public information regarding Clients’ purchase or sale of Securities, or
non-public information regarding the portfolio holdings of any Client, or any person who is involved in making investment decisions on behalf of Clients, or who has access to such recommendations that are non-public. As the Adviser’s primary business is providing investment advice, all personnel are presumed to be Access Persons unless otherwise confirmed with the CCO. Each Access Person is required to
understand and comply with applicable reporting requirements of this Code.2
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“Access Person Account” – Any account holding Reportable Securities in which an
Access Person has Beneficial Ownership.
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“Adviser”, “Firm”, or “WIC” – Water Island Capital, LLC and
companies controlling, controlled by, or under common control with the Adviser, such as WIC UK.
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“Advisers Act” – Investment Advisers Act of 1940, as amended.
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“Automatic Investment Plan” – A program in which regular periodic purchases (or
withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation without affirmative action by the account owner, such as a dividend reinvestment plan.
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“Beneficial Ownership” – Having or sharing the opportunity, directly or indirectly, to
profit or share in any profit derived from a transaction in Securities. Generally, an individual is considered to have a “Beneficial Ownership” interest in Securities held in any account that is owned individually or jointly with
others or is maintained by or for:
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Any individuals who live in the Access Person’s household and over whose purchases, sales or trading
activities the Access Person exercises control or investment discretion;
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Any persons for whom the Access Person provides financial support and (i) whose financial affairs are
controlled by the Access Person, or (ii) for whom the Access Person provides discretionary advisory services with respect to such person’s ownership of Securities;
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Any trust or other arrangement that names the Access Person as a beneficiary or remainderman; or
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The CCO shall determine on a
case-by-case basis whether interns, consultants, and temporary employees are Access Persons.
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A list of all Access Persons will be maintained by the Firm’s Compliance Department.
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Any partnership, corporation, or other entity in which the Access Person has a 25% or greater beneficial
interest, or in which the Access Person exercises, either individually or together with others, effective control.
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“Bribery” or “Bribe” – The offering, promising, giving, accepting, or
soliciting of an advantage as an inducement for an action which is illegal, improper, unethical, or a breach of trust. Inducements can take the form of Gifts, loans, fees, rewards, or other advantages, including offers of employment. The FCPA
does not require the Bribe to have been consummated or to have succeeded in producing the desired outcome to be unlawful.
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“Business Partner” – Any person or entity not affiliated with the Adviser that does
business with or seeks to do business with the Adviser or its affiliates, such as a Client, prospective client, broker/dealer, custodian bank, consultant, vendor, prospective vendor, and those working on their behalf, including, but not
limited to, auditors, lawyers, accountants, and outsourced officers and independent trustees of a fund the Firm sponsors or manages.
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“CCO” – The individual designated by the Adviser to serve as Chief Compliance Officer.
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“Charitable Contribution” – Any donation or gift of value to an entity which qualifies as
a charitable organization under section 501(c)(3) of the IRC, including the donation of time.
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“Client” or “Client Account” – Any fund or account advised or sub-advised by the Adviser, and, for purposes of the Code, any investors in a Private Fund sponsored by the Adviser or an affiliate of the Adviser.
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“Code” - This Code of Ethics, as amended.
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“Conflict of Interest” – Any activity or relationship in which a person’s interests
interfere or compete with the interests of Clients or the Firm.
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“Covered Associate” - Any general partner, managing member, or executive officer of the
Adviser, any employee who solicits a US Government Entity that is a state or political subdivision of a state for the Adviser and any person who supervises, directly or indirectly, such employee, and any Political Action Committee controlled
by the Adviser. Executive officers include the president, a vice president in charge of a principal business unit, division or function, and any other officer of the Adviser or any other person who performs policy-making functions for the Adviser.
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“Derivative” – A Security whose price is dependent upon or derived from one or more
underlying assets. Derivatives can either be traded over the counter (OTC) or on an exchange. Futures contracts, forward contracts, swaps, Options, and warrants are common forms of Derivatives.
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“Entertainment” – A situation when an Access Person entertains or is entertained by
a third party and there is an opportunity for the Access Person to discuss matters relating to Firm business with the third party at the event.
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“ERISA Plan” – A private-industry employee benefit plan. The term “employee
benefit plan” includes defined benefit plans (e.g., pension plans), defined contribution plans (e.g., 401(k) plans, simplified employee retirement plans (or SEPs), employee stock ownership plans (or ESOPs), and profit sharing plans),
employee welfare benefit plans (e.g., group health plans), and Taft-Hartley Plans. ERISA Plans do not include retirement plans set up and maintained by Government Entities or churches.
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“Ethics Committee” – A committee composed of the CCO, the Firm’s
Managing Member or designee, and a third employee chosen by the CCO and Managing Member. The Ethics Committee may be empaneled from time to time at the request of the CCO or another member of the committee to determine disciplinary action
for violations of the Code.
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“EC” – European Commission.
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“Exchange-Traded Fund” or “ETF” – An Investment Company that issues
Securities that trade in the secondary market and which are redeemable only in large aggregations called creation units.
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“Exempt Account” – Any of the following accounts:
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Mutual Fund-Only Accounts (unless they hold a fund that is
advised/sub-advised by WIC);
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•
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Water Island Capital, LLC Retirement Plan3;
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•
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WIC UK’s Pension Plan; and
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•
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Any other account that is incapable of holding Reportable Securities.
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•
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“Exempt Security” – Includes the following Securities:
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•
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|
Direct obligations of the US government (i.e., any Security directly issued or guaranteed as to principal or
interest by the US, such as Treasury bills or notes)4;
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•
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Cash or cash equivalents, bankers’ acceptances, bank certificates of deposit, commercial paper, bank
repurchase agreements and other high-quality short-term debt instruments;
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•
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Shares issued by money market funds;
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•
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Shares issued by Open-End Investment Companies that are registered under
the 1940 Act, provided they are not: (i) ETFs; or (ii) mutual funds managed or sub-advised by the Adviser;
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•
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Interests in unit trusts and Open-End Investment Companies that are
authorized by the FCA for sale in the UK;
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•
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Interests in unit-linked life and pension products sold in the UK;
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•
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UCITS (i.e., mutual funds based in the EU); and
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•
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Bitcoin, Ethereum, and any other cryptocurrency that is pre-approved as
an Exempt Security in writing by the CCO. NOTE: Transactions in other cryptocurrencies, as well as Options and other Derivative transactions on all cryptocurrencies, are Reportable Securities.
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•
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“Facilitation Payment” – A payment made to expedite a lower-level Public
Official’s performance of routine government actions to which the Firm is entitled.
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•
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“Family Member” – Includes any of the following:
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•
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Spouse or domestic partner;
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•
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Children under the age of 18;
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•
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Children who are 18 or older (unless they do not live in the same household as the Access Person and the Access
Person does not contribute in any way to their support); and
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•
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Any of these other people who live in the Access Person’s household: stepchildren, grandchildren, parents,
stepparents, grandparents, siblings (e.g., brothers and sisters), mothers-in-law,
fathers-in-law, daughters-in-law, sons-in-law, brothers-in-law, and
sisters-in-law, including any adoptive relationships.
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•
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“FCA” – The UK’s Financial Conduct Authority.
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•
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“FCPA” – The Foreign Corrupt Practices Act of 1977, as amended.
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•
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“Federal Securities Laws” – The 1933 Act, the 1934 Act, the Sarbanes-Oxley Act of
2002, the 1940 Act, the Advisers Act, Title V of the Gramm-Leach-Bliley Act, any rules adopted by the SEC under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted thereunder by
the SEC or the Department of the Treasury.
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•
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“FINRA” – Financial Industry Regulatory Authority.
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3
|
Employee transactions and holdings information relating to funds managed by WIC in the Water Island Capital,
LLC Retirement Plan are maintained by the administrator of the plan and available to Compliance to review upon request.
|
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4
|
Municipal Securities do not fall into the category of “direct obligations of the US government” and
are therefore not excluded from the definition of “Reportable Security”.
|
3
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•
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|
“Gift” – Any item of value, including favors, presents, and gratuities, received from a
Business Partner, unless exempted under the Code.
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•
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“Government Entity” – Any national, regional, territorial, state, province, district,
county, city, town, village, or other municipal government or political subdivision thereof, whether in the US or other country, including:
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•
|
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Any board, agency, authority, or instrumentality of the Government Entity; o Any pool of assets sponsored or
established by the Government Entity;
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•
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Any plan or program of a Government Entity, including, but not limited to, a defined benefit plan or a state
general fund;
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•
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Any entity that is owned or controlled by the Government Entity; and
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•
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Officers, agents, or employees of the Government Entity, acting in their official capacity.
|
Sovereign wealth funds and public pension funds are typically Government Entities.
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•
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|
“Initial Public Offering” or “IPO” – The first offering of a company’s
Securities to the public through an allocation by the underwriter.
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•
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“Insider Trading” – The act of trading in Securities while having Material Non-Public Information regarding the Securities or communicating MNPI to others.
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•
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“Investment Club” – A membership organization where investors make joint decisions
on which Securities to buy or sell. The Securities are generally held in the name of the Investment Club.
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•
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“Investment Company” – A company that issues Securities that represent an undivided
interest in the net assets held by the company. The Federal Securities Laws categorize Investment Companies into three basic types:
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•
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Open-End Investment Companies (generally known as mutual funds);
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•
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|
Closed-end investment companies (generally known as closed-end funds); and
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•
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Unit Investment Trusts.
|
ETFs are a type of exchange-traded investment product that must register with the SEC under the 1940 Act as either an Open-End Investment Company or a Unit Investment Trust.
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•
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|
“IRC” – The Internal Revenue Code of 1986, as amended.
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•
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|
“Limited Offering” – An offering that is exempt from registration pursuant to
sections 4(a)(2) or 4(6) of the 1933 Act, or pursuant to Rules 504, 505, or 506 of Regulation D; also known as a “Private Placement”. Examples of Private Placements include limited partnerships, certain co-operative investments in real estate, commingled investment vehicles such as hedge funds and private equity funds, and investments in family-owned businesses.
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•
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|
“Market Manipulation” – The act of artificially affecting the price of a Security or
otherwise influencing the behavior of the market for personal gain.
|
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•
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|
“Material Non-Public Information” or “MNPI”
– Information that (i) has not been made generally available to the public5, and that (ii) a reasonable investor would likely consider important in making an
investment decision6. Access Persons should consult with Compliance about any question as to whether information constitutes MNPI.
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•
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|
“Meal” – An event, the main purpose of which is eating food. Therefore, events where
eating is not the main purpose but at which food is served, such as cocktail parties or music events, are considered Entertainment, not Meals.
|
|
5
|
Examples of effective disclosure include:
|
|
|
•
|
|
Public filings with the SEC or similar regulator;
|
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|
•
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|
Information appearing in publications of general circulation;
|
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•
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|
Company press releases; and
|
|
|
•
|
|
Company meetings with members of the press and public.
|
|
6
|
Information that could reasonably be expected to affect the price of Securities is typically considered
material.
|
4
|
|
•
|
|
“Municipal Security” – A bond, note, warrant, certificate of participation, or other
obligation issued by a state or local government or their agencies or authorities (such as cities, towns, villages, counties, or special districts).
|
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•
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|
“Mutual Fund-Only Account” – An account that allows the account holder to invest
only in mutual funds. Such accounts do not have the capability of holding Reportable Securities (including ETFs).
|
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•
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|
“Open-End Investment Company” – An
Investment Company that continually creates new shares on demand. A mutual fund registered under the 1940 Act is an Open-End Investment Company.
|
|
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•
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|
“Option” – A Security that gives the investor the right, but not the obligation, to
buy or sell a specific Security at a specified price within a specified time frame. Any Access Person who buys/sells an Option is generally deemed to have purchased/sold the underlying Security when the Option was purchased/sold.7
|
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•
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|
“Outside Business Activity” – Includes the following:
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•
|
|
Being engaged in any outside business;
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•
|
|
Being employed by, or receiving compensation from, any other person, entity, or business organization;
|
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•
|
|
Serving as a director of a public or private company or on the board (or in any similar capacity) of any other
organization outside of your obligations to the Firm, including not-for-profit organizations; or
|
|
|
•
|
|
Being involved in any other endeavor that may interfere with your responsibilities to the Firm.
|
|
|
•
|
|
“Political Action Committee” – Any political committee that raises and spends
money contributions, directly or indirectly, to candidates and Political Parties. Non-profit, tax-exempt groups organized under section 501(c)(3) of the IRC that
operate for religious, charitable, scientific, or educations purposes are not considered to be “Political Action Committees.”
|
|
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•
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|
“Political Activity” – The participation in any fundraising activity or performance
of any work for the campaign of any candidate for, or incumbent of, a federal, state, or local political office or a political office in any non-US country.
|
|
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•
|
|
“Political Contribution” – Any gift, subscription, loan, advance, or deposit of
money or anything of value made in any country to:
|
|
|
•
|
|
A candidate for, or incumbent of, a federal, state, or local political office;
|
|
|
•
|
|
A Political Action Committee.
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•
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|
“Political Party” – Any political organization that typically seeks to influence
government policy, usually by nominating their own candidates and trying to seat them in political office.
|
|
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•
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|
“Private Fund” – A pooled investment vehicle, such as a hedge fund, that is not
subject to registration requirements under the 1933 Act and the 1940 Act. A Private Fund is an example of a Limited Offering.
|
|
|
•
|
|
“Private Placement” – See “Limited Offering”.
|
|
|
•
|
|
“Public Official” or “Official” – Includes any of the following:
|
|
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•
|
|
Any person who is employed in a full- or part-time capacity by a Government Entity, or by public or independent
agencies, public enterprises, state-owned businesses, state-controlled businesses, or public academic institutions;
|
|
|
•
|
|
Any individual who holds a legislative or judicial position of any kind (whether appointed or elected);
|
|
7
|
Example: If an Access Person buys a call (put) Option, the Access Person is considered to have purchased (sold)
the underlying Security on the date the Option was purchased. If an Access Person sells a call (put) Option, the Access Person is considered to have sold (purchased) the underlying Security on the date the Option was sold.
|
5
|
|
•
|
|
Any individual who conducts a public function for a public agency or public enterprise;
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•
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|
Any official, staff member, agent, or representative of: (i) a Government Entity; (ii) a Political
Party; (iii) a public international organization, such as the United Nations, the World Bank, the International Monetary Fund, or EU; or
|
|
|
•
|
|
Candidates for political office.
|
The term “Public Official” also includes any person (including any election committee for the person) who was, at the time of the
contribution, an incumbent or candidate for elective office of a Government Entity, if the office:
|
|
•
|
|
Is directly or indirectly responsible for, or can influence the outcome of, the hiring of the Firm; or
|
|
|
•
|
|
Has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome
of, the hiring of the Firm by a Government Entity.
|
|
|
•
|
|
“Reportable Security” – Any Security, except (i) Exempt Securities, or
(ii) Securities in an Exempt Account or in a Third-Party Managed Account.
|
|
|
•
|
|
“Restricted Security” – Any Reportable Security that:
|
|
|
(1)
|
A Client Account owns or is in the process of buying or selling;
|
|
|
(2)
|
The Firm is researching, analyzing, or considering buying or selling for a Client or Client Account (see pre-clearance procedures for Investment and Risk team members); or
|
|
|
(3)
|
Is subject to a restriction on trading issued by Compliance pursuant to the Firm’s Insider Trading
policies and procedures.
|
Exceptions: The following Securities will not be considered Restricted Securities by
Compliance unless Compliance has placed a restriction on trading a particular Security:
|
|
•
|
|
The purchase or sale by an Access Person of 250 shares or less (not to exceed US$100,000) per trading day in
Securities of companies comprising the S&P 500 Index or NASDAQ 100 Index; or
|
|
|
•
|
|
Broad-based ETFs with market capitalizations greater than US$5 billion.
|
NOTE: While an exception has been granted for transactions in these Securities, such transactions remain subject to the Code’s pre-clearance, reporting, and minimum 30-day holding period requirements.
|
|
•
|
|
“SEC” – The US’s Securities and Exchange Commission.
|
|
|
•
|
|
“Security” – Any note, stock, treasury stock, initial coin offering, security
future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group
or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or
instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing. Any
questions about whether an instrument is a Security for purposes of the Code of Ethics should be directed to the CCO. For the avoidance of doubt, the term “Security” as used in this Code includes all ETFs.
|
|
|
•
|
|
“Taft-Hartley Plan” – A collectively bargained plan maintained by more than one
employer (i.e., a multi-employer plan), usually within the same or related industries, and a labor union.
|
6
|
|
•
|
|
“Third-Party Managed Account” – Also known as a
“Non-Discretionary Account”. An account in which an Access Person has (i) Beneficial Ownership but no direct or indirect influence or control over the investment decision-making process,
(ii) no knowledge of transactions until after they are completed, and (ii) entered into an agreement with a third-party providing the third-party with full discretionary authority over the trading in the account.8 NOTE: You must obtain written pre-approval from Compliance before you may rely on the exemption from the
pre-clearance requirement afforded to Third-Party Managed Accounts under the Code.9
|
|
|
•
|
|
“Travel” – Any type of travel, accommodation, or lodging.
|
|
|
•
|
|
“UCITS” – An Undertaking for Collective Investment in Transferable Securities based
in the EU (i.e., an Open-End Investment Company regulated by the EC).
|
|
|
•
|
|
“UK Bribery Act” – UK’s Bribery Act 2010, as amended.
|
|
|
•
|
|
“Union Plan” – A Taft-Hartley-Plan.
|
|
|
•
|
|
“Unit Investment Trust” – An Investment Company that offers a fixed (unmanaged)
portfolio of securities having a definite life.
|
|
|
•
|
|
“US State/Local Official” – Any incumbent or candidate for state or local office in
the US, or any election committee of that person. For example, a US State/Local Official includes a federal office holder (e.g., a Representative or Senator) who is running for state office. It also includes a state office holder (e.g., a
Governor) who is running for federal office.
|
|
|
•
|
|
“WIC UK” – Water Island Capital U.K. Limited.
|
Water Island Capital, LLC is registered as an investment adviser under the Advisers Act. Rule 204A-1 under the Advisers
Act requires all registered investment advisers to adopt a code of ethics that sets forth standards of conduct for Access Persons and requires them to comply with applicable Federal Securities Laws.
This Code establishes the standards of conduct required of all WIC Access Persons. The Code is designed to govern personal Securities trading activities in a
manner consistent with the Advisers Act and Rule 17j-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as other regulatory requirements.
|
8
|
Pursuant to an agreement and in actual practice, an investment adviser or broker (who is not an Access Person
or Family Member, the Adviser, or an affiliate of the Adviser) has full discretionary authority to purchase and sell Securities in a Third-Party Managed Account without prior notification to, discussion with or consent of the accountholder or
his/her representatives (including the Access Person or Family Member). The Access Person and/or Family Member retains no discretion over decisions to purchase or sell Securities in the account, and communications with the adviser or broker are
limited to confirmations and account statements, fee discussions, and other communications and discussions that do not relate to purchases or sales of specific Securities. If an Access Person or Family Member shares discretion with an adviser, has
veto authority over an adviser’s trade recommendations, or has any ability to effect trades in an account, the account will not be deemed a Third-Party Managed Account for purposes of the Code.
|
|
9
|
In order for Compliance to deem an account a Third-Party Managed Account, Compliance must obtain an acceptable
written acknowledgement from the adviser that the Access Person or Family Member has no direct or indirect influence or control regarding any transactions to be made in the relevant account. At its discretion, Compliance may also require that Access
Persons provide a copy of, or relevant excerpt from, the investment advisory agreement that the Access Person or their Family Member has entered with the adviser. Compliance may require Access Persons to obtain and provide periodically an updated
acknowledgement from the relevant adviser that the Access Person and/or Family Member has had no influence or control regarding any transactions made in the Third-Party Managed Account.
|
7
The information collected pursuant to this Code is a required element of the Firm’s reporting to the Board
of Trustees of each registered Investment Company advised or sub-advised by the Firm.
|
|
C.
|
Standards of Business Conduct
|
WIC has set out basic principles in this Code to guide the day-to-day business
activities of its employees. Among other things, employees are not permitted to:
|
|
•
|
|
Defraud any Client or prospective Client in any manner;
|
|
|
•
|
|
Mislead any Client or prospective Client, including by making a false statement or a statement that omits
material facts;
|
|
|
•
|
|
Engage in any act, practice, or course of conduct which operates or would operate as a fraud or deceit upon any
Client or prospective Client; or
|
|
|
•
|
|
Engage in any manipulative practice with respect to any Client or prospective Client.
|
WIC has a fiduciary duty to act in the best interests of its Clients. High ethical standards are essential to maintaining the confidence of Clients, including
investors in funds managed by the Firm. The Firm’s success and long-term business interests are best served by adherence to the principle that the interests of Clients come first. Accordingly, the Firm has adopted the following principles to be
followed by all its employees:
|
|
•
|
|
You must put the interests of the Firm’s Clients before your own personal interests and must act honestly
and fairly in all respects in dealings with Clients;
|
|
|
•
|
|
You must effect all personal Securities transactions in a manner that avoids any actual or perceived conflict
between your personal interests and those of our Clients and fund shareholders;
|
|
|
•
|
|
You must avoid actions or activities that allow you or your family to take inappropriate advantage from your
position with the Firm, or that bring into question your independence or judgment;
|
|
|
•
|
|
You must not disclose Material Non-Public Information to others or engage
in the purchase or sale, or recommend or suggest the purchase or sale, of any Security to which such information relates; and
|
|
|
•
|
|
You must comply with all Federal Securities Laws.
|
Moreover, employees are expected to:
|
|
•
|
|
Conduct business fairly and honestly;
|
|
|
•
|
|
Report information accurately and truthfully; and
|
|
|
•
|
|
Treat others fairly and respectively.
|
Adherence to the Code of Ethics is a basic condition of employment by the Firm. If you have any doubt as to the propriety of any activity, you should consult
with Compliance.
|
|
1.
|
Maintenance and Oversight of Personal Trading
|
The Firm must be in a position to properly oversee the personal trading activity of its Access Persons. To assist with this oversight requirement, the Firm
uses ACA Compliance Group’s Compliance Employee Level
8
Filing (“ELF”), a web-based platform designed to facilitate the
collection and analysis of the information required by Rule 204A-1. The personal trading activity in the ELF system is reviewed by Compliance personnel with oversight responsibility. Each Access Person has
been provided an ELF account to comply with many of the reporting requirements of this Code, such as maintenance of Access Person Account information, pre-clearance requests, transaction records, Initial and
Annual Holdings Reports, new employee on-boarding, document distribution, annual and ad-hoc certifications/attestations, and compliance questionnaires.
For the avoidance of doubt, securities transactions effected by Client Accounts, including Private Funds, mutual funds, and ETFs advised by WIC, are exempt
from the personal trading pre-clearance and reporting requirements of this Code.10 However, transactions by Access Persons and their Family Members in
Securities issued by such funds (e.g., transactions in interests in Private Funds, mutual funds, and ETFs advised by WIC) are subject to the Code’s personal trading requirements.
|
|
2.
|
Access Person Accounts
|
The Firm requires that all Access Person Accounts be held with broker/dealers that can provide electronic transaction and holdings feeds directly to ELF. A
list of such brokers may be obtained from Compliance. All new Access Person Accounts must be pre-approved by Compliance prior to being opened by submitting a “New Brokerage Account” notification via
the ELF system. It is the responsibility of each Access Person to ensure all their Access Person Accounts have been approved by Compliance and linked to ELF. Failure to report an account may be treated as a serious breach of this Code.
|
|
3.
|
Pre-Clearance Requirement
|
It is the responsibility of Access Persons to ensure that all Securities transactions being considered for their Access Person Accounts are not subject to a
restriction contained in this Code.
Prior to execution, Access Persons are required to obtain pre-clearance
through the ELF system for all Reportable Securities transactions in their Access Person Accounts. Pre-clearance is not considered obtained until the Access Person receives an electronic notification from the
ELF system that the transaction has been “approved”.
Pre-clearance for transactions in Reportable
Securities will only be effective until the end of the trading day on which the pre-clearance authorization is granted, unless otherwise specified by Compliance in writing.
Limit orders that extend beyond the end of the trading day are allowed only if the Access Person continues to seek and obtain
pre-clearance in ELF through the date of execution of the limit order. If at any time the limit order is denied in ELF, the limit order must be cancelled by the Access Person.
|
|
A.
|
Private Placements/Limited Offerings
|
Access Persons must obtain approval from Compliance prior to a transaction in a Limited Offering, including Private Funds managed by WIC. Access Persons
seeking approval to transact in a Limited Offering must submit a request via email to Compliance, and furnish any prospectus, private placement
|
10
|
Compliance conducts surveillance of trading in all accounts managed by WIC.
|
9
memoranda, subscription documents and/or other materials about the investment as Compliance may request. If the
request is approved, Compliance will add the Private Placement to the list of Securities in the ELF system, at which time the Access Person can submit the request through ELF. The effective period for
pre-approval for a private placement is at the discretion of Compliance but will be limited to a reasonable period of time prior to the date of the intended transaction.
|
|
B.
|
Pre-Clearance Procedures for Investment, Risk, Operations, and Data
and Technology Team Members
|
All Investment, Risk, Operations, and Data and Technology team members are also required to obtain
written approval from the Trading team prior to requesting pre-clearance in the ELF system for any trades in their Access Person Accounts. The Trading team will not approve trades in Securities that WIC is
researching, analyzing, or considering buying or selling for a Client or Client Account. The Trading team will copy Compliance on all approvals. Compliance will notify the Trading Team immediately of any violations of these procedures.
|
|
C.
|
Exceptions to the Pre-Clearance Requirement
|
Pre-clearance is not required with respect to the following transactions:
|
|
•
|
|
Transactions in Exempt Securities;
|
|
|
•
|
|
Transactions made pursuant to an Automatic Investment Plan;
|
|
|
•
|
|
Involuntary transactions11;
|
|
|
•
|
|
Receipt of rights issued by an issuer pro rata to all holders of a class of the issuer’s securities
(NOTE: The exercise or sale of such rights does require pre-clearance);
|
|
|
•
|
|
Transactions in an Exempt Account (except that pre-clearance is required
for transactions in funds that are advised/sub-advised by WIC within the Water Island Capital, LLC Retirement Plan);
|
|
|
•
|
|
Transactions in a Third-Party Managed Account; and
|
|
|
•
|
|
Bona fide Gifts or contributions of Securities, including inheritances12.
|
Please consult with Compliance if you are uncertain whether pre-clearance is required for a transaction in a particular Security.
|
|
D.
|
Transactions by Family Members in Employee Benefit, Stock, Stock Option, and Deferred Compensation Plans
|
The purchase of an employer’s Securities under a bona fide employee benefit, stock, or deferred compensation plan by a
Family Member who is an employee of the organization offering the plan does not require pre-clearance but must be reported.
The receipt of Options in an employer’s Securities under a bona fide employee stock Option plan or deferred compensation plan by a Family Member
who is an employee of the organization offering the plan does not require pre-clearance or reporting.
|
11
|
Examples include stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, and other similar corporate actions generally applicable to all holders of the same class of Securities and sales of fractional shares.
|
|
12
|
A “bona fide Gift or contribution” is one where the donor does not receive anything of monetary value
in return.
|
10
The exercise of Options in an employer’s Securities done under a bona fide employee stock Option or
deferred compensation plan by a Family Member who is an employee of the organization offering the plan does not require pre-clearance but must be reported.
The sale of an employer’s Securities requires both pre-clearance and reporting.
|
|
E.
|
Restrictions on Access Person Securities Transactions
|
Access Persons may not acquire Beneficial Ownership of Restricted Securities in their Access Person Accounts (except in Third-Party Managed Accounts).
|
|
2.
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Sale of a Restricted Security
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If an Access Person holds a Security in an Access Person Account that subsequently becomes a Restricted Security, the Access Person may be permitted to sell
the position under the following circumstances:
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•
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The sale may only take place on a day when the Firm is not contemplating trading in the Security;
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•
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A pre-approval request must be submitted through ELF. Once pre-approval has been rejected by ELF, the Access Person must then submit the request to Compliance; and
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•
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Compliance may approve or reject the request, in writing, based on discussions with Trading staff.
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•
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If approved, Compliance will document its approval in ELF and the sale can only take place by the Access Person
on the same day approval is obtained in ELF.
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3.
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Initial Public Offerings
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Access Persons are prohibited from acquiring for their Access Person Accounts any Security distributed in an Initial Public Offering until trading of the
Security commences in the secondary market.
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4.
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Other Prohibited Transactions
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The following Securities transactions are always prohibited and will not be authorized under any circumstances, unless otherwise indicated below:
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Material Non-Public Information – Any transaction in a
Security by an Access Person who possesses MNPI regarding the Security or the issuer of the Security is prohibited.
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•
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Market Manipulation – Transactions intended to raise, lower, or maintain the price of any Security or
to create a false appearance of active trading are prohibited.
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•
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Unlawful or Prohibited Investment Company Transactions – Access Persons shall not knowingly
participate in or facilitate late trading, market timing, or any other activity with respect to any Investment Company in violation of applicable law or the provisions of the fund’s disclosure documents.
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•
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Investment Clubs – Since each member of an Investment Club generally participates in the investment
decision-making process, Access Persons and their Family Members are prohibited from participating in an Investment Club unless the Access Person obtains prior written approval from Compliance.
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Other – Any other transaction deemed by the CCO to involve a Conflict of Interest, possible
diversions of corporate opportunity, or an appearance of impropriety, is prohibited.
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5.
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30-Day Holding Period Requirement
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The Firm believes that short-term or excessive personal trading by its Access Persons can raise Conflicts of Interests. Except as otherwise approved by
Compliance in very limited circumstances (such as an unforeseen financial hardship), Access Persons are subject to a minimum 30-calendar day holding period for any Reportable Security in their Access Person
Accounts (except in Third-Party Managed Accounts).13
The Firm generally discourages short-term trading strategies, and employees are cautioned that such strategies may inherently carry a higher risk of regulatory
and other scrutiny. Excessive or inappropriate trading that interferes with job performance or compromises the duty that the Firm owes its Clients will not be tolerated. The CCO reserves the right to limit the number of pre-clearance requests that may be submitted periodically by Access Persons.
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F.
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Reporting Requirements
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Access Persons are required to submit certain reporting to Compliance as set forth below. In addition to the reporting requirements disclosed below, the CCO
reserves the right to require additional reporting to the extent deemed necessary.
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1.
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Acknowledgement of Receipt of Code of Ethics
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Compliance will provide each Access Person with a copy of the Code and any amendments to the Code. Within 10 calendar days of receiving a copy of the Code or
any amendment (or the effective date of such amendment), each Access Person must submit a certification to Compliance via the ELF system acknowledging their receipt of, and their agreement to comply with, the Code or any amendment.
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A.
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Initial Holdings Report
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Within 10 calendar days after an Access Person joins WIC or otherwise becomes covered by the Code, the Access Person must submit an Initial Holdings Report via
the ELF system disclosing all Reportable Securities of which they have Beneficial Ownership (including Securities held in Third-Party Managed Accounts). Holdings in Exempt Accounts and holdings of Exempt Securities are not reportable. The
information required in the Initial Holdings Report is described below. The information contained in the Initial Holdings Report must be current as of a date no more than 45 days prior to the date the Access Person becomes covered by the Code (i.e.,
generally, the start date of employment).
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13
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The 30-calendar day holding period requirement will be applied across
all Access Person Accounts on a last-in first-out basis (i.e., it is not applied
account-by-account, on a first-in first-out basis, or on a specific identification lot
basis).
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12
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B.
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Annual Holdings Report
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Each Access Person must submit an Annual Holdings Report via the ELF system disclosing all Reportable Securities of which they have Beneficial Ownership
(including Securities held in Third-Party Managed Accounts) at least once in each 12-month period on a date specified by Compliance. Holdings in Exempt Accounts and holdings of Exempt Securities are not
reportable. The information required in the Annual Holdings Report is described below. The information contained in the Annual Holdings Report must be current as of a date no more than 45 days prior to the date the report was submitted.
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C.
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Initial and Annual Holdings Report Information Requirements
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The Initial and Annual Holdings Reports must include, at a minimum: (i) the name of each Reportable Security in which the Access Person has Beneficial
Ownership; (ii) the exchange ticker symbol or CUSIP/ISIN/SEDOL number of each Reportable Security held; (iii) the type of Reportable Security held; (iv) the number of shares (or quantity) of each Reportable Security held; (v) the
principal amount (or value) of each Reportable Security; (vi) the name of the broker, dealer, or bank with which the Access Person (or Family Member) maintains an account in which each Reportable Security is held; (vii) the account title;
and (viii) the account number. Similar information for Securities other than Exempt Securities held in Third-Party Managed Accounts is also required.
Holdings information for Access Person Accounts that provide electronic feeds to ELF will be pre-populated within the
Annual Holdings Report. If any holdings information is missing, incomplete, or inaccurate, you must correct it before submitting the report.
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3.
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Quarterly Transaction Reports
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Within 30 days after the end of each calendar quarter, all Access Persons must submit a report via the ELF system listing all Reportable Securities
transactions effected in their Access Person Accounts (including transactions in Securities held in Third-Party Managed Accounts) during the prior quarter. Transactions in Exempt Accounts and Exempt Securities transactions are not reportable. Access
Persons who did not effect any Reportable Securities transactions during the previous quarter are required to submit a certification in ELF indicating that no Reportable Securities transactions need to be reported.
The Quarterly Transaction Report must include, at a minimum: (i) the name of each Reportable Security traded; (ii) the exchange ticker symbol or
CUSIP/ISIN/SEDOL number of the Reportable Security traded; (iii) the number of shares (or quantity) of each transaction; (iv) the principal amount (or value) of each transaction; (v) the nature or type of transaction (i.e., purchase, sale,
or any other type of acquisition or disposition); (vi) the price at which each transaction was effected; (vii) the name of the broker, dealer, or bank through which the transaction was effected; and (viii) the date of each transaction.
Reportable Securities transaction information for Access Person Accounts that provide electronic feeds to ELF will be
pre-populated within the Quarterly Transaction Report. If any information is missing, incomplete, or inaccurate, you must correct it before submitting the report.
All Access Persons are required to disclose in ELF any new accounts opened in which they have a Beneficial Ownership interest that hold, or have the capability
of holding, Reportable Securities.
13
Access Persons must report new accounts by the earliest of the following dates: (i) no later than 30
calendar days after the account is opened; or (ii) one calendar day before trading in the new account.
Access Persons do not need to disclose Exempt
Accounts.
5. Ongoing Account Reporting
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A.
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Electronic Broker Feeds
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Access Persons are required to turn on electronic feeds for all reportable accounts that are held with brokers that offer electronic feeds into ELF. Absent
exceptional circumstances, if the broker of a reportable account does not offer an electronic feed, the account must be migrated promptly to a broker that provides such feeds into ELF. Electronic broker feeds are not required for 401(k) Plan
accounts or employee stock option/purchase plan accounts offered by a Family Member’s employer for which an electronic feed is unavailable.
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B.
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Duplicate Account Statements
|
If a reportable account does not supply an electronic feed into ELF, duplicate copies of all account statements (or holdings reports and transaction summaries
originating from the broker, such as screen shots from the broker’s website) relating to the account must be provided to Compliance no less frequently than quarterly within 30 calendar days after the end of each calendar quarter. The account
statements must reflect the holdings, transactions, and other activity in the account, if any.
Access Persons do not need to provide account statements
for Exempt Accounts.
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G.
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Gifts, Meals, Entertainment, Travel, and Charitable Contributions
|
Gifts and Entertainment can foster goodwill in business relationships; however, the giving or receiving of Gifts and Entertainment to or from Business Partners
could call into question the independence of the Firm’s or an employee’s judgment as a fiduciary of its Clients. If the Firm and/or an employee was found to be acting in a position of undisclosed conflict of interest, it could be
considered a breach of fiduciary duty.
WIC is relying on the professional attitude and good judgment of its employees to ensure that the Firm fully
complies with all applicable policies and regulatory requirements. WIC, along with its employees and third parties that act on its behalf, are required to comply with the FCPA and, when applicable, other regulations governing bribery or payments to
Public Officials in jurisdictions in which the Firm does business (e.g., the UK Bribery Act). Certain employees are registered representatives licensed to sell securities and sponsored by a brokerage firm (unaffiliated with WIC) that is registered
with FINRA. These employees are required to comply with such brokerage firm’s written policies and procedures and FINRA rules relating to gifts, gratuities, and non-cash compensation.
14
All situations that an employee may encounter cannot possibly be addressed in Firm policies. If there are any
questions as to the appropriateness of any Gift, Meal, Entertainment, or Travel item, event, or activity, it is the responsibility of the employee to seek guidance from Compliance.
The policy’s overriding principle is that employee’s (a) may not accept Gifts, Meals, Entertainment, Travel, or other things of material value
in any situation where it could influence their decision-making on behalf of the Firm or make the employee feel beholden to a Business Partner; and (b) may not provide or offer Gifts, Meals, Entertainment, Travel, or other things of material
value to persons with which the Firm does business that could be viewed as overly generous or aimed at influencing decision-making or making a Business Partner feel beholden to the Firm or any employee.
Employees are to be cognizant of the appearance of Gifts and Entertainment, especially from the perspective of our Clients or the media. Employees must not
offer, give, or accept inappropriate Gifts, Entertainment, or other benefits to or from third parties, such as those that may be considered Bribes, corruption, or violate sexual harassment or hostile workplace laws (e.g., adult entertainment or
other entertainment/venues that would not be considered business appropriate).
Moreover, employees may not accept or give Gifts, Meals, Entertainment, or
Travel that exceed what is “reasonable and customary” under the circumstances of the business relationship.
“Reasonable and
customary” generally means something that is:
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•
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Appropriate under the circumstances;
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Consistent with acceptable business practices in the applicable geographical location; and
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Not lavish, extravagant, or excessive.
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When an employee believes special circumstances, such as customary business practices, justify an exception to the limits described below, and the exception
would not otherwise be prohibited by local law or regulations, the request for an exception should be submitted to the CCO via ELF by submitting a Gift or Business Entertainment pre-clearance request (as
appropriate).
The following general restrictions also apply:
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•
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Employees may not personally contribute to cover costs that would otherwise violate the value limits specified in
this policy without prior approval from the CCO;
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•
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Employees may not attempt to circumvent specified limits by splitting costs amongst employees;
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•
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If an employee wants to accept more than one invitation to a Meal or Entertainment event (e.g., for a Family
Member or friend), the employee must obtain pre-approval from the CCO via ELF by submitting a Business Entertainment pre-clearance request;
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•
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Employees may not solicit a Gift or anything else of value (including Meals, Entertainment, or Travel) from a
Business Partner;
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•
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Employees may not accept a Gift or anything else of value (including Meals, Entertainment, or Travel) from a
broker as compensation for directing Client portfolio transactions to such broker; and
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15
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•
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Employees may not provide Gifts, Meals, Entertainment, or Travel to any Business Partner in excess of any
limit(s) set by such Business Partner.
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With respect to dollar limits and reporting thresholds, Gifts and Entertainment must be valued
at the higher of cost or market (resale) value. For example, the market value of a ticket to a sold-out event may exceed its face value. Employees are responsible for researching the market value of event
tickets. If there is any question about the appropriateness or valuation of any Gift or Entertainment event, employees should consult Compliance.
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2.
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ERISA Plans, Union Plans, Labor Unions, and Public Officials
|
ERISA prohibits the acceptance of fees, kickbacks, Gifts, loans, money, and anything of value that are given with the intent of influencing decision-making
with respect to any employee benefit plan. Many public employee benefit plans are subject to similar restrictions. Employees may never offer Gifts or other favors for the purpose of influencing decisions of existing or prospective ERISA
Clients.
Entertainment of ERISA or public plan trustees may be permissible if there is a business purpose for the Entertainment (e.g., review of
account performance), but any such Entertainment must be consistent with the Code of Conduct of the ERISA Plan.
A Gift, Meal, Entertainment, or Travel
received from a Business Partner in connection with services rendered to an ERISA Plan may not be accepted unless pre-approval is obtained from the CCO via ELF.
A Gift, Meal, Entertainment, or Travel may also not be provided to an official, employee, or other representative of an ERISA Plan, Union Plan, labor union,
or a Public Official without obtaining pre-approval from the CCO via ELF.
Firm-sponsored events involving an
ERISA Plan, Union Plan, or a Public Official also require pre-approval from the CCO.
Facilitation Payments made
to Public Officials are prohibited without pre-approval from the CCO. Legally required administrative fees for fast-track services are not considered Facilitation Payments, or Gifts, and are allowed as long as
they are transparent and are paid to a Government Entity, but not to a Public Official or other individual or entity.
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3.
|
Accepting Gifts, Meals, Entertainment, and Travel
|
Limit - Employees are limited to accepting Gifts that have an aggregate value of not more than US$100 per calendar year from a single donor/Business
Partner unless pre-approval is obtained from the CCO via ELF.
Employees may not accept Gifts of cash, cash
equivalents (e.g., a gift card or iTunes or Uber credits), or securities from a Business Partner in any amount.
The following items are not
considered “Gifts” for purposes of this policy:
16
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•
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Usual and customary promotional items marked with a Business Partner’s logo (e.g., umbrellas, tote bags,
shirts, etc.);
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•
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Food items shared with colleagues and consumed on the Firm’s premises (e.g., candy, cookies, and items of a
like nature); and
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•
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Usual and customary Gifts given to or by employees based on a family relationship (e.g., the Business Partner and
employee have a family relationship), provided that the family relationship has already been disclosed to Compliance.
|
Gifts for
infrequent life events (e.g., a wedding gift or congratulatory gift for the birth or adoption of a child) are not subject to the annual limit provided they are “reasonable and customary”, personal in nature and not in relation to the
business of the Firm. In determining whether a Gift is “personal in nature and not in relation to the business” of the Firm, Compliance will consider the nature of any pre-existing personal
relationship between the donor and the recipient.
Reporting - Employees are required to report all accepted Gifts via the ELF system within 30
calendar days from the date of receipt.
Limit - Meals provided to employees may generally be accepted without reimbursement to the Business Partner, and without a specified limit, provided the
cost and frequency of such Meals does not exceed what is “reasonable and customary” under the circumstances of the business relationship.
Meals
provided to employees by Business Partners that exceed what is considered “reasonable and customary” under the circumstances of the business relationship must be reimbursed personally by the employee.
Reporting - Meals received that are considered “reasonable and customary” do not need to be reported.
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C.
|
Receipt of Entertainment
|
Limit - Employees may not accept Entertainment with a cost or market (resale) value greater than US$300 per occasion or US$1,000 per calendar year from
the same donor/Business Partner unless pre-approval is obtained from the CCO via ELF.
Employees may not accept
Entertainment unless (i) there is a business purpose for such event (e.g., relationship building) and (ii) both the employee and the donor are present. If an event or activity is not attended with the Business Partner or there is not an
opportunity at the event or activity to discuss business matters, then the event or activity is considered a Gift.
From time to time, compliance may
impose additional restrictions with respect to the receipt of certain Entertainment events, such as limiting the number of events an employee may attend or prohibiting attendance at certain events.
Reporting - All Entertainment accepted must be reported in ELF within 30 calendar days from the date of receipt.
17
Limit - Travel should generally not be accepted from third parties unless an employee is at a business meeting, Meal, or Entertainment event with a
Business Partner and the Business Partner, who is not associated with an ERISA Plan, pays for local transportation related to the meeting or event.
Otherwise, an employee may not accept Travel without obtaining pre-approval from the CCO via ELF.
Reporting - All Travel taken by an employee paid for by a third party outside the limited exception specified above must be reported in ELF (via a
Business Entertainment notification) within 30 calendar days from the date of receipt, providing details of the Travel, the cost, and the purpose of the trip.
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4.
|
Providing Gifts, Meals, Entertainment, and Travel
|
Limit - Employees may not give any Gift(s) with an aggregate value in excess of US$100 per calendar year to any Business Partner, person associated with
a securities or financial organization, including brokerage firms or other investment management firms, or to members of the news media. Please note that some Business Partners may have Gift policies that are more restrictive and may be prohibited
from accepting Gifts other than promotional items from the Firm.
Employees may not give Gifts of cash, cash equivalents (e.g., a gift card or iTunes or
Uber credits), or securities to a Business Partner in any amount.
Reporting - All Gifts provided to third parties must be reported in ELF
or in an expense report submitted to Finance within 30 calendar days from the date the Gift was given.
Employees may provide Meals to a third party without a specified limit, where such provision would be “reasonable and customary” under the
circumstances of the business relationship.
Reporting - All Meals provided to third parties must be reported in ELF (via a Business Entertainment
notification) or in an expense report submitted to Finance within 30 calendar days from the date the Meal was provided.
|
|
C.
|
Providing Entertainment
|
Limit - Employees may not provide Entertainment to a Business Partner with a cost or market (resale) value greater than US$300 per person per occasion
or US$1,000 per person per calendar year unless pre-approval is obtained from the CCO via ELF.
Employees may not
provide Entertainment unless (i) there is a business purpose for such event (e.g., relationship building) and (ii) both the employee and the recipient are present. If an event or activity is not attended with the Business Partner or there
is not an opportunity at the event or activity to discuss business matters, then the event or activity is considered a Gift.
18
Reporting - All Entertainment provided to third parties must be reported in ELF or in an expense report
submitted to Finance within 30 calendar days from the date the Entertainment was provided.
Limit - Travel should generally not be provided to third parties unless an employee is at a business meeting, Meal, or Entertainment event with a
Business Partner who is not associated with an ERISA Plan, Union Plan, labor union, or a Public Official, and the employee pays for local transportation related to the meeting or event.
Otherwise, Travel may only be provided under exceptional circumstances and with the prior approval of the CCO.
Reporting - All Travel provided to third parties must be reported in ELF (via a Business Entertainment notification) or in an expense report submitted
to Finance within 30 calendar days from the date the Travel was provided.
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5.
|
Charitable Contributions
|
Employees may not solicit a Charitable Contribution from a Business Partner without prior approval from the CCO, who shall maintain a record of each such
solicitation.
From time to time, the Firm or its employees may be solicited by Business Partners or otherwise wish to make Charitable Contributions.
Employees must obtain pre-approval from the CCO for all business-related Charitable Contributions. Business-related Charitable Contributions include, but are not necessarily limited to, the following:
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•
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Charitable Contributions solicited by or on behalf of a Business Partner or Public Official; and
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•
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Charitable Contributions to be made to an organization associated with a Business Partner or Public Official.
|
Employees may otherwise make Charitable Contributions without preclearance or reporting.
|
|
6.
|
Reporting in ELF and Expense Reports
|
If a Business Partner provides Gifts, Entertainment, or Travel to multiple employees, each employee is individually responsible for reporting their receipt of
such Gifts, Entertainment, or Travel in ELF. Conversely, if an employee provides Gifts, Meals, Entertainment, or Travel to a Business Partner and more than one employee participates, only one employee is required to report the item, event, or
activity in ELF or in an expense report, but the employee must identify all participants in attendance.
Although employees may delegate the task of
reporting into ELF or an expense report to a designee, the responsibility to ensure that all reporting complies with this policy and has been reported in an accurate and timely manner lies with each employee who received or gave the Gift, Meal,
Entertainment, or Travel item.
19
Employees must make all certifications via ELF required by Compliance pertaining to Gifts, Meals, Entertainment,
Travel, and Charitable Contributions.
|
|
H.
|
Outside Business Activities and Other Potential Conflicts of Interest
|
The Firm requires that employees devote their full professional attention to the interests of the Firm and its Clients. Employees have a fiduciary duty towards
Clients and must not place their personal interests before the interests of Clients or the Firm. Compliance with this duty can best be achieved by avoiding activities, interests, or associations outside of the Firm that could interfere with, or give
the appearance of interfering with, an employee’s ability to act in the best interests of Clients or the Firm or perform work for Clients or the Firm objectively and effectively. Employees must fully disclose all material facts concerning
potential Conflicts of Interest that do arise with respect to any Client or the Firm. The appearance of a Conflict of Interest may be just as harmful to the Firm’s reputation as an actual conflict.
An “Outside Business Activity” includes the following:
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Being engaged in any outside business;
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Being employed by, or receiving compensation from, any other person, entity, or organization;
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Serving as a director of a public or private company or on the board (or in any similar capacity) of any other
organization outside of your obligations to the Firm, including not-for-profit organizations; or
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•
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Being involved in any other endeavor that may interfere with your responsibilities to the Firm.
|
A potential “Conflict of Interest” occurs when the personal interests, activities, or relationships of an employee could
potentially interfere or compete with the interests of Clients or the Firm.
Examples of potential Conflicts of Interest include the following (not an
exhaustive list):
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•
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Either you or a Family Member serves as a director, officer, owner, partner, employee, or agent of, or consultant
to, any firm or organization that does business with or seeks to do business with the Firm (e.g., Clients, prospective Clients, consultants, vendors, broker/dealers, custodian banks, etc.) or any competitor of the Firm;
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Either you or a Family Member receives any compensation from, or has a direct or indirect Material Economic
Interest in, any Business Partner or competitor of the Firm;
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Either you or a Family Member is employed by a Government Entity; or
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•
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Either you or a Family Member is involved in any other activity, relationship, or association that could be
perceived as a potential Conflict of Interest of your duties to Clients or the Firm.
|
A “Material Economic Interest” means an
economic interest that could, or might reasonably be thought to, influence judgment or action. As an example, an investment representing less than one-tenth of 1% of a class of outstanding securities of a
publicly held company would generally not be considered a Material Economic Interest.
20
|
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2.
|
Restrictions on Outside Business Activities and Other Activities, Interests, and Relationships
|
Employees are prohibited from participating in an Outside Business Activity if the proposed activity could:
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•
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Violate any law or regulation;
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•
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Involve prolonged absences during business hours;
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Interfere with, or give the appearance of interfering with, the employee’s ability to act in the best
interests of Clients or the Firm or perform work for Clients or the Firm objectively and effectively; or
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•
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Create adverse publicity or potential liability for, or potentially harm the reputation of, the Firm.
|
No employee may:
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•
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Improperly cause the Firm to take action, or fail to take action, for their personal benefit rather than the
benefit of Clients or the Firm;
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Misuse their position with the Firm, or confidential information that belongs to Clients or the Firm, for
personal gain; or
|
For example, an employee may not:
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Commit the Firm to any agreement or arrangement with any entity in which they, directly or through a Family
Member, have any Material Economic Interest;
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Appropriate any business opportunity for personal gain;
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Enter into any business or financial relationship personally with a Business Partner if such employee is
responsible for the relationship between the Firm and the Business Partner;
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Make any investment or enter into any transaction that, because of the employee’s position, is offered as a
personal favor or is made available on terms or conditions more favorable than those generally available to the public; or
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Engage in personal investment transactions to an extent that diverts the employee’s attention from or
impairs the performance of their duties in relation to the business of the Firm and its Clients.
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|
3.
|
Pre-Clearance Requirement
|
Employees must inform their immediate supervisor and obtain pre-clearance from the CCO via ELF before they engage in
any Outside Business Activity.
All approved Outside Business Activities are subject to the following conditions:
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The employee is prohibited from implying that they are acting on behalf of, or as a representative of, the Firm;
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The employee is prohibited from using the Firm’s offices, equipment, or stationery for any purpose not
directly related to the Firm’s business; and
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The employee must immediately report to the CCO any material changes with respect to the Outside Business
Activity, as well as any Conflicts of Interest that may arise after the activity is approved.
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21
Since changing circumstances may require a reappraisal of an employee’s Outside Business Activities, WIC
reserves the right to revoke a prior consent to engage in any Outside Business Activity at any time.
|
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4.
|
Reporting Requirements
|
Employees are required to report all Outside Business Activities and any other activity, interest, or relationship that could present a potential Conflict of
Interest or potentially harm the Firm’s reputation.
Employees have an ongoing obligation to provide updated information in ELF relating to any
previously approved Outside Business Activity or potential Conflict of Interest should there be a material change to their title, position, or association with an organization or other relevant facts and circumstances.
Employees are required to disclose any affiliation with any company or fund that the Firm is considering for investment or is invested in on behalf of a
Client.
Employees must also make all certifications via ELF required by Compliance pertaining to Outside Business Activities and potential Conflicts of
Interest.
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I.
|
Political Contributions and Activities
|
Federal, state, and local laws and regulations place certain restrictions on Political Contributions and Political Activities of companies and their employees.
Such laws and regulations include, but are not limited to, Rule 206(4)-5 under the Advisers Act (also known as
the “Pay-to-Play Rule”), all national, state, provincial, and other municipal election and campaign laws, all laws and regulations relating to the solicitation
of investment advisory services from Government Entities, the FCPA (which generally prohibits US firms from making payments to non-US Officials for the purpose of obtaining or retaining business with, or
directing business to, any person), and the UK Bribery Act (which governs how companies can behave when seeking overseas contracts).
As a result, a
violation of these laws and regulations, including this policy, could cause the Firm to forfeit compensation, bar WIC from doing business (including forcing WIC to resign from an existing Client mandate), subject WIC to fines or penalties (including
the two-year “time-out” provision in Rule 206(4)-5 under the Advisers Act), and damage WIC’s reputation.
All Political Contributions, including in-kind contributions and other payments made to Public Officials, and all
Political Activities engaged in by the Firm or by employees of the Firm must comply with this policy and all applicable laws and regulations in the jurisdictions in which such Political Contributions are made or such Political Activities are engaged
in.
Moreover, employees engaging in Political Activities are expected to do so as private citizens and must always make clear that their views and
actions are their own, and not those of the Firm.
22
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A.
|
General Restrictions and Prohibitions
|
The Firm and its employees are prohibited from engaging in the following activities:
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•
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Soliciting or Coordinating Political Contributions – The Firm and its employees are prohibited from
solicitating or coordinating a Political Contribution from another employee or any other person or coercing or pressuring another employee or person to support or oppose any political candidate or election;
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•
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Use of Firm Facilities or Resources – The Firm and its employees are prohibited from using Firm
assets, funds, equipment (e.g., letterhead, copy machines, phones, computers, fax machines, email, etc.), personnel, workplace or other resources for political campaigns, fundraising, or other similar political purposes without pre-approval from the CCO;
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•
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Political Office – No employee may seek political office or accept political appointment without
first obtaining the requisite pre-approval(s) for Outside Business Activities;
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•
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Gifts and Entertainment – The Firm and its employees may not give or provide Gifts and/or
Entertainment directly or indirectly to a Public Official (including immediate family members of the Public Official) without pre-approval from the CCO; and
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•
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Kickbacks and Bribes – The Firm and its employees are prohibited from making a Political Contribution
or engaging in a Political Activity for the purpose of influencing a Public Official’s decision to hire or retain the Firm. Neither the Firm nor its employees may make any payment to a Public Official without
pre-approval from the CCO.
|
Employees may not engage in pay-to-play conduct indirectly, such as by directing or funding Political Contributions through third parties such as spouses, lawyers, or companies affiliated with the Adviser, if that conduct would violate
any law, rule, or regulation if the Adviser or employee did it directly.
Moreover, the Firm may not pay a third party, such as a solicitor or placement
agent, to solicit a Government Entity on behalf of the Adviser, unless that third party is an SEC-registered investment adviser, broker-dealer, or municipal advisor subject to similar pay-to-play restrictions and the requirements for paid solicitation arrangements as described in the Firm’s Advertising and Marketing Policy are satisfied.
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B.
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Rule 206(4)-5 under the Advisers Act
|
Rule 206(4)-5 under the Advisers Act prohibits investment advisers from providing advisory services for compensation to
a US Government Entity (i.e., any state or political subdivision or any agency, authority, or instrumentality thereof) either directly or through a covered investment pool14 if the adviser or its
Covered Associates have made a Political Contribution within the previous two years to an elected official of a state (or political subdivision of a state) who is in a position to influence the selection of the adviser.
Exceptions - Political Contributions that would otherwise disqualify an adviser from providing investment advisory services to a US Government Entity
can be made under the following circumstances:
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14
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A “covered investment pool” means: (i) any investment company registered under the 1940 Act that
is an investment option of a plan or program of a US Government Entity; or (ii) any company that would be an investment company under section 3(a) of the 1940 Act but for the exclusion provided from that definition by either section 3(c)(1),
section 3(c)(7), or section 3(c)(11) of the 1940 Act (e.g., the Private Funds offered by the Firm).
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23
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•
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De Minimis Contributions – SEC rules permit a Covered Associate to make contributions to US
State/Local Officials for whom they were entitled to vote at the time of the contribution if, in the aggregate, the contributions do not exceed US$350 to any one official, per election. If the Covered Associate was not entitled to vote for the
official at the time of the contribution, such contribution may not exceed US$150, in the aggregate, to any one official, per election.
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•
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New Covered Associates – Contributions made by new Covered Associates more than six months prior to joining
the adviser will not disqualify the adviser, as long as such Covered Associates do not solicit Clients for the adviser.
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•
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Returned Contributions – In very limited circumstances, an adviser might not be disqualified from providing
investment advisory services to a US Government Entity if the prohibited contribution was less than US$350, is discovered within four months of the date of the contribution, and returned within 60 days after the date of discovery. The Firm may not
take advantage of this exception more than two times per calendar year, and not more than once per Covered Associate regardless of the time period.
|
For the purpose of this policy, “lobbying” is defined as the attempt to influence, or supporting the attempt to influence, the decisions of a Public
Official or public entity, including but not limited to decisions surrounding the award or terms of a business contract or business arrangement. These activities can occur at the federal, state, or local levels and include activities done on behalf
of the Firm by third parties.
Any employee who engages in lobbying activities may be construed as a lobbyist under relevant laws. The employee, third
party, and/or the Firm may be required to register as a lobbyist with the relevant authorities and satisfy such authorities’ reporting requirements.
Lobbying activities engaged in or conducted by employees for personal or individual reasons are not subject to this policy as long as the employee does not
(i) act as a representative of the Firm, or (ii) use Firm facilities or resources to promote any lobbying activity.
Employees should contact
Compliance prior to engaging in any activities that could be construed as lobbying.
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2.
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Pre-Clearance Requirement
|
All employees must obtain pre-approval from Compliance for all Political Contributions (whether at the federal,
state, or local level) via the ELF system, including:
|
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•
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Political Contributions that are paid from accounts held in the name of the employee and those jointly held with
others; and
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•
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Political Contributions that are made by the employee’s spouse, domestic partner, and/or minor children.
|
Employees must also obtain pre-approval from Compliance prior to engaging in any
Political Activity or lobbying activity.
24
|
|
3.
|
Reporting Requirements
|
After obtaining pre-clearance, employees must ensure that all Political Contributions that they or their spouse,
domestic partner, and/or minor children have made and all Political Activities they have engaged in are properly reported in ELF within 30 calendar days of the date the Political Contribution was made or the Political Activity occurred.
New employees are required to report all Political Contributions made within the two years preceding the start of employment with the Firm.15
Employees must also make all certifications via ELF required by Compliance pertaining to Political
Contributions and Political Activities.
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4.
|
Recordkeeping Requirements
|
Advisers that have US Government Entity Clients, or that provide investment advisory services to a covered investment pool in which a US Government Entity
investor invests, are required to make and keep records for five years of:
|
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•
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The names, titles, and business and residence addresses of all Covered Associates;
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•
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All direct or indirect Political Contributions made by the Firm or Covered Associates to an official of a US
Government Entity, or direct or indirect payments to a Political Party of a state or political subdivision thereof, or to a Political Action Committee. These records must include the name and title of each contributor, the amount and date of each
contribution or payment, the name and title of each recipient (including any city/county/state or other political subdivision) of a contribution or payment, and whether any such contribution was the subject of the exception for certain returned
contributions;
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•
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The name and business address of any person or entity to whom the Firm provides or agrees to provide, directly or
indirectly, payment to solicit a US Government Entity for investment advisory services on its behalf;
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•
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All US Government Entities whose accounts were identified as those of a US Government Entity at or around the
time of the initial investment to the Firm or one of its Client servicing employees or Covered Associates;
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•
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All US Government Entities that sponsor or establish a 529 Plan and have selected a fund advised by the Firm as
an option to be offered by such 529 Plan;
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•
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All US Government Entities that have been solicited to invest in a fund advised by the Firm either (i) by a
Covered Associate, or (ii) by an intermediary of the fund if a Covered Associate or Client servicing employee of the Firm participated in or was involved in such solicitation, regardless of whether such US Government Entity invested in the
fund; and
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•
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All US Government Entities that invest in funds advised by the Firm whose accounts can reasonably be identified
as being held in the name or for the benefit of such US Government Entity on the records of the fund or the transfer agent.
|
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15
|
Rule 206(4)-5 under the Advisers Act includes a two-year “look back” provision for certain Covered Associates.
|
25
Compliance will monitor all requests for new Client Accounts and subscriptions to identify any US federal, state, or local Government Entities (including
pension and other benefit plans of such entities) that may become Clients of the Firm or investors in its funds. Compliance will review Political Contributions made by Covered Associates for the prior two years to determine whether the Firm will be
permitted to provide services to such Clients or investors, and if contributions have been made, whether corrective action, including seeking a return of the contribution, should be taken. With respect to investment companies advised by the Firm,
Compliance will obtain from the transfer agent, on a quarterly basis, a list of shareholder accounts that may be coded as Government Entities. Compliance will assess such information and make a reasonable determination as to whether the accounts are
deemed to be a state or local US Government Entity.
|
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J.
|
Anti-Bribery and Anti-Corruption
|
WIC and its employees are subject to and must comply with the FCPA and, when applicable, the anti-bribery and anti-corruption laws of other jurisdictions in
which the Firm does business (e.g., the UK Bribery Act).
The FCPA prohibits improper payment to, or other improper transactions with, non-US Officials to influence performance of official duties. The FCPA prohibits offering to pay, paying, promising to pay, or authorizing the payment, directly or indirectly through a third party, of money or
anything of value to any non-US Official in order to influence any act or decision of the Official in his or her official capacity or to secure any other improper advantage in order to obtain or retain
business. The FCPA applies to US entities and persons and their officers, directors, and employees. Non-US persons are also subject to the FCPA to the extent that they carry out any part of any prohibited
activity in or from the US.
Business and Client-related investment activities of the Firm that may raise issues under the FCPA include:
|
|
•
|
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Raising funds or capital or seeking investment management Clients outside the US (including from foreign
government or state-owned investment entities or sovereign wealth funds);
|
|
|
•
|
|
Acquisition of a significant or controlling interest in a non-US company;
|
|
|
•
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|
Investment in an entity or joint venture owned or partially owned by a
non-US government; and
|
|
|
•
|
|
Use of consultants, agents, or other third parties in soliciting non-US
investors or Clients or in seeking or making non-US investments.
|
The Firm’s policy
prohibits employees from offering or paying any Bribes or other types of improper inducements to any person for any purpose, nor shall employees solicit or accept any Bribes or improper inducements. This prohibition also includes Bribes or
inducements indirectly offered or paid through an agent or another third party, and it applies irrespective of the source of the funds, item of value, or other advantage.
WIC also expects employees to act in accordance with the appropriate standards of professional and ethical conduct and to not engage in any corrupt activities
or behavior.
26
Employees are prohibited from paying, offering to pay, or promising to pay money or anything of value (including Gifts, Meals, Entertainment, and Travel) to a
Public Official, directly or indirectly, with the intent to induce the recipient to misuse his or her official position, to obtain any improper advantage or to direct business wrongfully to the Firm. Additional examples of the types of payments that
may be considered payments of value that can violate the FCPA include:
|
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•
|
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Investment opportunities; o Subcontracts;
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•
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Positions in joint ventures; o Favorable contracts;
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•
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Business opportunities or employment (hiring) opportunities for family members of Public Officials;
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•
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Political contributions; and
|
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•
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Charitable donations and sponsorships.
|
In certain cases, providing a payment or other inducement to a person known to be an immediate family member of a Public Official may be the equivalent of
providing a thing of value to the Public Official directly. Similarly, providing a payment or other inducement to any person knowing that all or part of its will be passed on to a Public Official is equally subject to these restrictions.
The FCPA permits payment or reimbursement of reasonable and bona fide expenses of a non-US Official (e.g., travel and
lodging expenses) relating to the promotion, demonstration, or explanation of a product or service or to the execution or performance of a contract with a foreign government. Even though not expressly permitted under the UK Bribery Act, guidance has
been put forth by the regulator that it will not take action against a company if such expenditures are reasonable. Travel costs and modest and reasonable business Meals and Entertainment that are incidental to business discussions generally will
fit within this exception.16
The giving of customary Gifts, or the provision of modest Meals or
Entertainment in connection with business discussions to Public Officials, is not barred by the FCPA or UK Bribery Act so long as the provision of such benefits is not “corrupt”, meaning not intended to wrongfully influence the recipient.
It is not likely that the giving of a customary and modest Gift, Meal, or Entertainment item is intended to influence the decision-making of a Public Official or to be perceived as such.
Gifts generally should be given to Public Officials only in connection with national, traditional, or religious holidays or, where customary, to celebrate
significant personal events such as marriages or births. Gifts branded with the Firm’s logo are preferred if such Gifts are socially acceptable in the jurisdiction. Even
|
16
|
A Public Official generally should be invited to Meals and Entertainment events only when the Meal or
Entertainment is incidental to genuine, necessary business discussions with the Public Official. For example, a modest Meal or Entertainment may be provided to a Public Official when it is incidental to lawful lobbying and complies with the laws and
regulations of the local jurisdiction.
|
27
branded Gifts should be given in small quantities having low cash value. Gifts should be given openly, so that
supervisors of a Public Official can see that a Gift is being tendered. For example, it is preferable that Gifts be sent to the office of employment of a Public Official and not to his or her home, hotel, or other address.
The FCPA permits certain small “facilitating” or “expediting” payments to non-US Officials to
ensure that they perform routine, non-discretionary governmental duties (e.g. expediting permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing
police protection, mail pick-up and delivery; providing phone service, power and water supply, or protecting perishable products; and scheduling inspections associated with contract performance or transit of
goods across country). However, the UK, Canada, and certain other jurisdictions do not recognize the legality of Facilitation Payments and may not draw any distinction from Bribes.17
|
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4.
|
Compliance Pre-Approval
|
Employees are required to obtain written approval from Compliance prior to:
|
|
•
|
|
Entering into an arrangement on behalf of the Firm or any of its Clients with a third-party intermediary who will
act as placement agent or otherwise assist in the solicitation of investors or Clients outside the US;
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•
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Entering into a transaction on behalf of the Firm or any of its Clients for the acquisition of a significant or
controlling interest in a non-US company;
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•
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Entering into a joint venture on behalf of the Firm or any of its Clients to be owned or to be partially owned by
a foreign government or Public Official; and
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•
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Providing any Gift, Meal, Entertainment, or Travel item to a Public Official or immediate family member or guest
of a Public Official.
|
For the avoidance of doubt, in the event an employee or agent determines that a failure to make a payment may
result in personal harm or detention, the employee of agent should make such payment and report the incident to the CCO as soon as practicable for documentation as a possible exception to this policy.
|
|
5.
|
Use and Appointment of Agents
|
If the Firm uses a third-party agent, including a placement agent, to assist with introductions to investors, identifying potential investments, or marketing
and distribution of the Firm’s funds and services, such agent will be subject to:
|
|
•
|
|
Due diligence prior to appointment;
|
|
|
•
|
|
A written agreement between the Firm and the agent. This agreement will contain an anti-bribery and
anti-corruption clause which outlines the standards of conduct WIC expects from the agent based on this policy; and
|
|
17
|
Technically illegal under the UK Bribery Act, the UK Ministry of Justice guidance recognizes that total
eradication is a long-term objective and will need to be worked towards over a period of time. The Organisation for Economic Co-operation and Development (OECD) in its Recommendation of the Council for
Further Combating Bribery of Foreign Public Officials in International Business Transactions (November 2009) encourages companies to prohibit or discourage small Facilitation Payments.
|
28
|
|
•
|
|
Periodic attestations from the agent that they are in compliance with their written agreement with the Firm.
|
The type and scope of due diligence and number and type of attestations or certifications to be required in any case may vary depending
on the circumstances and relative risk of each particular situation.
|
|
K.
|
Administration of the Code of Ethics
|
|
|
1.
|
Administering and Monitoring Compliance
|
The CCO is responsible for administering and monitoring compliance with the Code. The CCO shall:
|
|
•
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|
Develop policies and procedures reasonably designed to implement and enforce the Code;
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•
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Be authorized to grant and document exceptions or exemptions on an individual or group basis, to any provision of
the Code, provided that such exceptions or exemptions are consistent with the spirit of the principles of the Code and of the Firm (e.g., they would not be inconsistent with Clients’ interests) and applicable law;
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•
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Be authorized to designate one or more persons to have the authority and responsibility when necessary and
appropriate to handle, without limitation, the compliance functions outlined within the Code, compliance manual, and other policies and procedures, including reviewing transaction and holdings reports and other reporting and certifications submitted
by Access Persons;
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•
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Be authorized to resolve issues of whether information received by an employee constitutes MNPI;
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•
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Investigate any suspected violation of the Code and shall communicate promptly to an Access Person/employee any
suspected violation of the Code by such person;
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•
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Be authorized to determine disciplinary sanctions or remedial action for violations of the Code;
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•
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Bring material violations of the Code to the Ethics Committee’s and Management Committee’s attention;
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•
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Conduct periodic training to explain and reinforce the terms of the Code;
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•
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Answer questions regarding the Code, and keep
up-to-date on changes in applicable laws and regulations;
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•
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Maintain confidential information regarding personal transactions and holdings and only disclose such information
to persons with clear need-to-know, including regulators and other parties when required or deemed necessary or appropriate by the CCO in conformance with law or the
provisions of the Code; and
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•
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|
Review the Code on at least an annual basis for adequacy and the effectiveness of its implementation and
recommend to the Management Committee any amendments as are necessary or appropriate.
|
No member of Compliance may review his or her own
transactions.18
The CCO will also review the Adviser’s Form ADV, Part 2A brochure on at least
an annual basis to ensure that the brochure accurately described the Firm’s Code and any Conflicts of Interest that may arise from the personal trading and other activities by Access Persons/employees.
|
18
|
The Firm currently has two compliance officers. The Compliance Officer is responsible for reviewing the
CCO’s transaction reports and vice versa. In the absence of the Compliance Officer, the Firm’s Managing Member will be responsible for reviewing the CCO’s compliance with the Code.
|
29
Compliance will use its best efforts to assure the personal holdings information of Access Persons is treated confidentially. However, the Firm is required by
law to review, retain, and, in certain circumstances, disclose documents containing personal holdings information. Therefore, such information will be available for inspection by appropriate regulatory agencies and by other parties within and
outside the Firm as necessary to evaluate compliance with the Code or other requirements applicable to the Firm.
Information relating to violations of
the Code and certain employee activities (e.g., Outside Business Activities and Conflicts of Interest) may be reportable to Clients, regulators, and other parties as required by law.
All Access Persons/employees are required to attend any mandatory training sessions conducted by Compliance concerning the Code.
|
|
4.
|
Recordkeeping Requirements
|
Copies of Access Person/employee reports and certifications, pre-clearance requests, confirmations, and account
statements, compliance reviews, and each version of the Code will be maintained as required by applicable recordkeeping requirements. A record of all persons who are or were required to make reports pursuant to the Code, and the period(s) they were
required to do so, and a record of each violation of the Code, and of any action taken as result of the violation, will also be maintained.
Failure of any Access Person/employee to obtain proper approvals or make any report as required under the Code may result in sanctions. Sanctions or remedies
could include, but are not necessarily limited to, a letter of reprimand, escalation to management, fines donated to charity, forced sale of Securities, forfeiture of or reimbursement for any item received, profit disgorgement, suspension of
personal trading rights, and/or suspension or termination of employment. In addition, violators may be subject to civil or criminal penalties.
Final
disciplinary sanctions or remedial action will be determined by the CCO and/or the Firm’s Ethics Committee, which may take into account certain factors, including, but not limited to, whether the violation was inadvertent, any pattern or
practice of violations, the materiality of the activity, and any harm caused.
Where an Access Person is required to reverse a transaction in question and
forfeit any profit or absorb any loss associated or derived as a result, the amount of profit shall be calculated by Compliance and shall be remitted by the Access Person to a charitable organization or other place selected by the Firm. The Access
Person must provide evidence of the remittance no later than 10 calendar days after being notified in writing by Compliance of the amount to be remitted.
30
Failure to abide promptly to a directive from the CCO or management to reverse a trade or forfeit profits or to
take other corrective steps requested by the Firm (e.g., actively seeking the return of a Political Contribution in violation of the Code) may result in the imposition of additional sanctions.
As required by Rule 204A-1 under the Advisers Act, Access Persons are required to report any violation, whether actual
or suspected, of the Code promptly to the CCO. It will be considered a violation of the Code for an Access Person to fail to report a known violation or withhold relevant or material information concerning a known violation of the Code.
Any reports of violations from Access Persons/employees will be treated confidentially to the extent permitted by law and investigated promptly and
appropriately.
Reports of violations of the Code may be submitted to the CCO on an anonymous basis. Access Persons/employees who wish to report a
violation anonymously may do so by sending a letter to the CCO marked as “Personal and Confidential”. If the CCO is involved in the violation or is unreachable, Access Persons/employees may report a violation to the Firm’s Managing
Member.
Retaliation against any Access Person/employee who reports a violation in good faith is prohibited and constitutes a further violation of the
Code. Furthermore, nothing in this section of the Code, or in any other Firm policy, restricts the ability of an Access Person/employee to report matters to the SEC, or to take any other action in conformance with the SEC’s
Whistleblower Rules under Section 21F of the 1934 Act.
|
|
L.
|
Mutual Fund Board Reporting and Approval of the Code of Ethics
|
The Firm serves as adviser or sub-adviser to a number of mutual funds and ETFs. The Board of Trustees of each mutual
fund and ETF advised or sub-advised by the Firm, including a majority of the independent trustees/directors, must approve the Firm’s Code of Ethics. In addition, no less frequently than annually, the Firm
must provide each mutual fund Board a written report that:
|
|
•
|
|
Describes any issues arising under the Code since the previous report to the Board, including, but not limited
to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations; and
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|
•
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|
Certifies that the Firm has adopted procedures reasonably necessary to prevent Access Persons from violating the
Code.
|
The Firm’s CCO is required to notify the Board of each mutual fund and ETF advised or
sub-advised by the Firm of any material changes to the Code of Ethics within six months of adoption of any such change. The CCO will also provide a memorandum describing the changes to the Code and the reasons
for the changes, if applicable.
31
The Blackstone Group Inc.
Code of Business Conduct and
Ethics
January 2020
The Blackstone Group Inc.
Table of Contents
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A Message from Stephen A. Schwarzman
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1
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Business Ethics and Compliance Standards and Procedures
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2
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Employee and Reporting Hotline
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4
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Waivers of the Code
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5
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Respect at Blackstone
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5
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Confidential Information
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5
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Conflicts of Interest
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7
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Family Members and Close Personal Relationships
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7
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Outside Employment / Directorships
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7
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Consultants and Agents
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7
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Other Situations
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7
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Corporate Opportunities
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8
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Protection and Proper Use of Firm Assets
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8
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Fair Dealing
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8
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Relationships with Suppliers
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8
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Compliance with Laws
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8
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Governmental Filings and Responding to Governmental and Regulatory Requests
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9
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Insider Trading
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9
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Document Retention
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10
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Taxes
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10
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Disparaging Remarks
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10
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Doing Business Internationally
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11
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Foreign Corrupt Practices Act / U.K. Bribery Act
|
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11
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Disclaimer
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12
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Code of Business Conduct and Ethics
A Message from Stephen A. Schwarzman
All of us have every reason to be proud of Blackstone’s high standards. The Firm is committed to preserving its reputation for excellence and integrity in
everything we do. Our reputation today is a tribute to all of you and the manner in which you conduct the Firm’s business, and for that we want to thank you wholeheartedly.
It has taken the Firm since 1985 to build that reputation, but we should be fully aware that reputations can be destroyed in a fraction of that time by one
brief shortcoming.
None of you can be unaware of the trials and tribulations that have beset Wall Street. More than a few of these problems have arisen
because of poor ethical judgments or simply a lack of appropriate standards.
To ensure that everyone fully understands the Firm’s approach and the
standards by which we measure ourselves, the enclosed comprehensive Code of Business Conduct and Ethics has been prepared to help guide you in your decision-making.
It is imperative that you read and abide by these standards so that we can continue to be a successful and admired organization in the years ahead.
Thank you again for your diligence and cooperation in helping Blackstone maintain its stellar reputation.
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Stephen A. Schwarzman
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Chairman and
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Chief Executive Officer
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1
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Code of Business Conduct and Ethics
Integrity, honesty and sound judgment are fundamental to the reputation and success of The Blackstone Group
Inc. and its respective subsidiaries and affiliates (collectively, “Blackstone”, “TBG”, the “Company” or the “Firm”). The policies outlined in this Code of Ethics (the “Code”) are designed to ensure
that all Blackstone directors, officers and employees not only conduct themselves lawfully at all times, but also maintain the highest ethical standards in every aspect of their dealings with other employees, the business community, clients,
suppliers and government authorities.
The Firm is committed to providing equal employment opportunities to all employees and applicants for employment
without regard to race, color, religion, creed, gender, sex, pregnancy, sexual orientation, self-identified or perceived sex, gender identity or expression, the status of being transgender, national origin or ancestry, ethnicity, alienage or
citizenship status, age, disability, marital, familial, or partnership status, military or veteran status, predisposing genetic characteristics, status as a victim of domestic violence, sex offense, stalking, arrest or conviction record, caregiver
status, credit history, unemployment status, uniformed service, or any other class or status protected by law in accordance with applicable federal, state and local laws. This policy applies to all terms and conditions of employment, including but
not limited to hiring, placement, promotion, termination, transfer, leave of absence, compensation and training. In addition, Blackstone prohibits any discriminatory conduct of its agents and non-employees who
have contact with employees during working hours or at work-related events.
No employee should be misguided by any sense of false loyalty to the Firm or
a desire for profitability that might cause him or her to disobey any applicable law or Firm policy. Violation of Firm policy will constitute grounds for disciplinary action, including, when appropriate, termination of service.
The Firm believes our people are our most important resource. We seek to hire the brightest and most talented and empower them to be better.
Management seeks to (1) foster a stimulating culture where there is a commitment to excellence; (2) promote and reward our personnel for their
contributions and achievements; and (3) promote an ethical environment and a sense of mutual trust and shared responsibility.
The material contained
in this Code and the Firm’s Global Compliance Policies Manual, Investment Advisor Compliance Policies & Procedures (and related supplements), and Code of Business Conduct and Ethics (such material referred to herein as the “Code
of Conduct” or the “Code”) serves as a guide for employees when faced with legal or ethical questions. The Code is not all-inclusive, and the Firm expects employees to use their own judgment at
all times to follow the high ethical standards to which the Firm is committed.
The Firm takes this Code of Conduct very seriously. All employees must
follow the ethical standards set forth in this Code and are obligated to report, in a timely fashion, any possible violations of law or of our ethical standards that they may witness or have a reasonable basis to believe exist. Reporting in good
faith possible ethical violations by others will not subject you to reprisal. An employee retaliating or punishing another employee for reporting suspected unethical or illegal conduct or any questionable situation may be subject to disciplinary
action, up to and including termination, and may be acting in violation of the law. As discussed below, all reports and
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2
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Code of Business Conduct and Ethics
It is the responsibility of employees to read carefully and understand this Code, but we do not expect this Code to answer every possible question an employee may have in the course of conducting
business. To this end, employees should keep in mind the following steps as they consider a particular problem or concern:
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Always ask first, act later: If you are unsure of what to do in any situation, seek guidance before you
act.
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Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as
possible.
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Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will
enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is.
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Clarify your responsibility and role. In most situations, there is shared responsibility. Are your
colleagues informed? It may help to get others involved and discuss the problem.
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Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases,
your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems.
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Seek help from individuals other than your supervisor. In situations where it may not be appropriate to
discuss an issue with your supervisor, or where you do not feel comfortable approaching your supervisor with your question, consider discussing the issue with someone from the Human Resources department. If the issue relates to a specific Financial
Industry Regulatory Authority (“FINRA”) or Investment Advisers Act of 1940 (as amended) matter, consider discussing the issue with the Legal and Compliance Department (“LCD”). In the case of accounting, internal accounting
controls or auditing matters, consider discussing the issue with the Chief Financial Officer or the audit committee of the board of directors. Interested parties may also communicate directly with the Firm’s
non-management directors through contact information located in the Firm’s annual proxy statement.
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If employees are concerned about an ethical situation or are not sure whether specific conduct meets the Firm’s standards of conduct, employees are
responsible for asking their supervisors or managers, the Chief Legal Officer (“CLO”) or any other representative of the LCD, or the Human Resources Department any questions that they may feel are necessary to understand the Firm’s
expectations of them.
If you believe you or another employee may have violated the law or our ethical standards, it is your responsibility to immediately
report the violation to your supervisor or manager, a representative of the LCD or the Human Resources Department, or, to the extent permitted by applicable law, the Employee and Reporting Hotline or website described below. Similarly, if you are a
supervisor or manager and you have received information from an employee concerning activity that he or she believes may violate the Code or that you believe may violate the Code, you should report the matter to a representative of the LCD or the
Human Resources Department, the Audit Committee or the Employee and Reporting Hotline or website described below.
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Code of Business Conduct and Ethics
Employees who fail to comply (either in letter or spirit) with these policies, including supervisors or
managers who fail to detect or report wrongdoing, may be subject to disciplinary action, up to and including termination of employment. The following are examples of conduct that may result in discipline:
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Actions that violate a Firm policy;
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Requesting others to violate a Firm policy;
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Failure to promptly disclose a known or suspected violation of a Firm policy;
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Failure to cooperate in Firm investigations of possible violations of a Firm policy;
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Retaliation against another employee for reporting a good faith integrity concern; and
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Failure to demonstrate the leadership and diligence needed to ensure compliance with Firm policies and applicable
law.
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It is important to understand that a violation of certain of these policies may subject the Firm and the individual employee to
civil liability and damages, regulatory sanction and/or criminal prosecution.
Employee and Reporting Hotline
Employees interested in communicating a concern anonymously may call the Employee and Reporting Hotline toll-free, 24 hours a day from any country in which
Blackstone has an office. The hotline is hosted by a third party provider, EthicsPoint (also known as NAVEX Global). In the U.S., the hotline can be reached by dialing 1-855-657-8027. Callers from outside the U.S. can find country-specific dialing instructions at www.blackstone.ethicspoint.com by choosing the relevant location from the drop-down menu. Employees may
also submit a report online at www.blackstone.ethicspoint.com.
At no time will the Employee Hotline utilize “Caller ID” technologies to
identify an employee who wishes to remain anonymous. In order to facilitate positive action in response to employees’ concerns, callers may give their names and work locations. Callers from the European Economic Area are encouraged to give
their names and work locations.
All reports and inquiries will be handled confidentially to the maximum extent practicable under the circumstances. As
mentioned above, no employee will be subject to retaliation or punishment for good faith reporting of suspected violations of law or of our ethical standards by another employee or for coming forward to alert the Firm of any questionable situation.
Furthermore, any person who participates in retaliation against such employee will be subject to disciplinary action, up to and including termination of employment.
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Code of Business Conduct and Ethics
Waivers of the Code
Any waiver of any provision of this Code for executive officers or directors of The Blackstone Group Inc. must be approved by the board of directors or a
committee of the board of directors of The Blackstone Group Inc. and will be promptly disclosed as required by applicable securities law and/or stock exchange rules.
Respect at Blackstone
When Steve Schwarzman and Pete
Peterson formed the Firm in 1985, their aim was to build a group of related businesses, to attract the very best people and to provide an environment in which we could grow to become among the leaders in our respective business areas. That has meant
fostering an environment in which there was and is freedom of expression, constant interaction, attentive listening and consideration to personal and business issues at all levels.
All personnel should treat everyone, including fellow employees, clients, vendors and guests, with respect and dignity. We are all individually responsible
for creating and maintaining a work environment that is built on these values.
Confidential Information
The Firm regularly comes into possession of Confidential Information (as that term is defined below) in the course of the Firm’s business. The Firm is
strongly committed to protecting Confidential Information, whether entrusted to the Firm by an actual or prospective client, investor or portfolio company, generated within the Firm or obtained from some other source. The Firm is also strongly
committed to avoiding the misuse, or the appearance of misuse, of such information, whether in connection with the trading of securities or otherwise.
During the course of employment by or association with TBG, employees may learn of or have access to information concerning the (i) business, (ii)
affairs, (iii) operations, (iv) strategies, (v) policies, (vi) procedures, (vii) organizational and personnel matters related to any present or former employee of TBG, including compensation and investment arrangements,
(viii) terms of agreements, (ix) financial structure, (x) financial position, financial results or other financial affairs, (xi) actual or proposed transactions or investments, (xii) investment results, (xiii) existing
or prospective clients or investors, (xiv) computer programs or (xv) other confidential information related to the business of TBG or to its affiliates, actual or prospective portfolio companies or other third parties. Such information may
have been or may be provided in written or electronic form or orally or otherwise accessed via a data room portal such as Intralinks. All of such information, from whatever source learned or obtained and regardless of the Company’s connection
to the information, is “Confidential Information.”
Without limiting the foregoing, Confidential Information includes any information, whether
public or not, which (1) represents, or is aggregated in such a way as to represent, or purport to represent, all or any portion of the investment results of, or any other information about the investment “track record” of,
(a) the Firm, (b) a business group of the Firm, (c) one or more funds managed by affiliates of the Firm or (d) any individual or group of individuals during their time at the Firm, or (2) describes an individual’s role in
achieving or contributing to any such investment results.
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Code of Business Conduct and Ethics
Confidential Information does not include information that has been made generally available to the public,
but information that when viewed in isolation may be publicly known or can be accessed by a member of the public will still constitute Confidential Information for these purposes if such information has become proprietary to TBG through TBG’s
aggregation or interpretation of such information.
Because all of its Confidential Information constitutes a valuable asset of TBG and/or TBG’s
clients, without the prior written consent of TBG (which may be given or withheld in TBG’s sole discretion) or TBG’s clients, as applicable, no employee of TBG or any of its affiliates may, while he or she is employed by or associated with
TBG or at any time thereafter, (a) disclose any Confidential Information to any person except at the direction of TBG or its clients, as applicable, (b) make any other use of any Confidential Information except in the
business of TBG and in a manner which at all times is intended to serve the interests of TBG or its clients, or (c) disclose any information (whether or not Confidential Information) concerning TBG or its affiliates or its present or former
employees, clients or investors to any reporter, author or similar person or entity or take any other action likely to result in such information being made available to the public in any form, including books, articles or writings of any other
kind, film, videotape, electronic means of communication or any other medium, except in compliance with TBG policy.
Any Firm personnel who fail to
comply, either in letter or spirit, with these important policies may be subject to disciplinary action, up to and including termination of employment. The Firm may pursue appropriate legal action against present or former employees or members to
enforce these policies.
In addition to complying with the important policies set forth above, employees and members are required to execute a
confidentiality agreement prior to the commencement of employment and familiarize themselves with and acknowledge that agreement by their signature, as well as adhere to the policies and procedures set forth in the Firm’s Global Compliance
Policies Manual and Investment Adviser Compliance Policies and Procedures. The latter documents contain important additional policies and procedures concerning Confidential Information and related matters.
Notwithstanding any confidentiality or non-disclosure agreement (whether in writing or otherwise, including without
limitation as part of an employment agreement, separation agreement or similar employment or compensation arrangement) applicable to a current or former employees, the Firm does not restrict any current or former employee from reporting,
communicating, cooperating or filing a complaint on possible violations of federal, state or local law or regulation to or with any governmental agency or regulatory authority (collectively, a “Governmental Entity”), including, but not
limited to, the, SEC, FINRA, EEOC or NLRB, or from making other disclosures to any Governmental Entity that are protected under the whistleblower provisions of federal, state or local law or regulation, provided that in each case such communications
and disclosures are consistent with applicable law. Moreover, employees do not need to give prior notice to (or get prior authorization from) Blackstone regarding any such communication or disclosure. In addition, the Firm does not restrict
employees from discussing, disclosing or inquiring about wages to the extent consistent with applicable pay equity laws, or from engaging in activity protected by the National Labor Relations Act; for example,
non-managerial and non-supervisory employee discussions regarding their terms and conditions of employment.
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Code of Business Conduct and Ethics
Conflicts of Interest
A conflict of interest occurs when an individual’s private interest interferes, or even appears to interfere, with the interests of the Firm as a whole. A
conflict of interest may arise when an employee takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest also arise when an employee, officer or director, or a member of
his or her family, receives improper personal benefits as a result of his or her position in the Firm. Loans to, or guarantees of obligations of, such persons are of special concern.
Business decisions and actions must be based on the best interests of the Firm and its clients. Employees may not have outside interests that conflict or
appear to conflict with their ability to make business decisions in the best interests of the Firm or its clients. Employees are expected to act solely for the benefit of the Firm and its clients and must not be influenced by a personal interest
that may result from other individual or business concerns. Conflicts of interest are to be scrupulously avoided and, if unavoidable, must be disclosed to the LCD at the earliest opportunity. If you have any uncertainty about whether your actions or
relationships present a conflict of interest, contact the LCD for guidance.
Family Members and Close Personal Relationships
Conflicts of interest may arise when doing business with organizations in which employees’ family members have an ownership or employment interest. Family
members include spouses, parents, children, siblings and in-laws. Employees may not conduct business on behalf of the Firm and may not use their influence to get the Firm to do business with family members or
an organization with which an employee or an employee’s family member is associated unless specific written approval has been granted in advance by the Chairman and Chief Executive Officer or the CLO.
Outside Employment / Directorships
All employees are
expected to devote their best efforts to their job at all times. Employees may not maintain outside employment activities that compromise job performance or that may present a conflict of interest. All outside business activities are subject to the
prior approval of the Firm’s LCD.
Consultants and Agents
Whenever it becomes necessary to engage the services of an individual or firm to consult for or represent the Firm, special care must be taken to ensure that
no conflicts of interest exist between the Firm and the person or firm to be retained. Employees must also ensure that outside consultants and agents of the Firm are reputable and qualified. Agreements with consultants or agents should be in writing
and should be approved by the CLO.
Other Situations
Because other conflicts of interest may arise, it would be impractical to attempt to list all possible situations. Any employee, officer or director who
becomes aware of a conflict of interest or a potential conflict of interest should bring it to the attention of a supervisor, manager or other appropriate personnel, the LCD or the CLO.
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Code of Business Conduct and Ethics
Corporate Opportunities
It is the Firm’s policy that employees, officers and directors may not take opportunities for themselves that are discovered through the use of Firm
property, information or position, or use Firm property, information or position for personal gain. Furthermore, employees may not compete with the Firm directly or indirectly. Employees, officers and directors have a duty to the Firm to advance its
legitimate interests when the opportunity to do so arises.
Protection and Proper Use of Firm Assets
Theft, carelessness and waste have a direct impact on the Firm’s profitability. Employees, officers and directors have a duty to safeguard Firm assets and
ensure their efficient use. Firm assets should be used only for legitimate business purposes and employees and directors should take measures to ensure against their theft, damage, or misuse.
Firm assets include intellectual property such as trademarks, business and marketing plans, salary information and any unpublished financial data and reports.
Unauthorized use or distribution of this information is a violation of Firm policy.
Fair Dealing
Each employee, officer and director shall endeavor to deal fairly with the Firm’s equity holders, competitors, suppliers and employees. No employee or
director shall take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair practice.
No bribes, kickbacks or other similar payments in any form shall be made directly or indirectly to or for anyone for the purpose of obtaining or retaining
business or obtaining any other favorable action. The Firm and the employee, officer or director involved may be subject to disciplinary action as well as potential civil or criminal liability for violation of this policy.
Relationships with Suppliers
The Firm encourages good
supplier relations. However, employees may not benefit personally, whether directly or indirectly, from any purchase of goods or services for the Firm. Employees whose responsibilities include purchasing (be it merchandise, fixtures, services or
other), or who have contact with suppliers, must not exploit their position at the Firm for personal gain. Generally, employees may not receive cash or other items of value from any supplier, whether directly or indirectly unless it is not pursuant
to a quid pro quo and is not related to hiring or other business decisions (e.g. random chance raffle). Ordinary and customary periodic holiday gifts of a de-minimis amount are also permitted, subject to compliance with any requirements of TBG as
well as the business group in question
Compliance with Laws
The Firm operates strictly within the bounds of the laws, rules and regulations that affect the conduct of our business. All employees are expected to know and
to follow the law. Supervisors, managers or other appropriate personnel must ensure that employees understand and are informed of the requirements relating to their jobs. They must also be available to answer employee questions or concerns and, when
necessary, to guide them to other subject-matter experts, including the Firm’s outside counsel. There are serious consequences for failing to follow any applicable laws, rules and regulations, up to and including termination of employment and
potential criminal and civil penalties.
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Code of Business Conduct and Ethics
Governmental Filings and Responding to Governmental and Regulatory Requests
It is Firm policy to cooperate with all reasonable requests concerning Firm business from U.S. federal, state, municipal and foreign government agencies, such
as the Federal Trade Commission, the Securities and Exchange Commission and the Department of Justice, and from regulatory organizations such as FINRA and the New York Stock Exchange. All contacts, inquiries, or requests – written or oral
– for information or documents by governmental or self-regulatory authorities, including representatives of the SEC, FINRA, the states and non-U.S. regulators, should be reported immediately to the
applicable CCO. In the case of telephone requests, the employee receiving the request should make sure to obtain the name, agency, address, and telephone number of the representative making such request and refer the inquiry to the LCD. With respect
to filings made with U.S. federal, state, municipal and foreign governmental agencies, particularly those filings (e.g., Hart-Scott-Rodino filings) that are made in connection with an investment by the Firm, it is Firm policy that counsel retained
by the Firm must generally be consulted prior to the submission of the filing with such agencies. In the event a decision not to contact outside counsel is made, written notification must be made to the CLO.
Insider Trading
The Firm’s policy against insider
trading is designed to promote compliance with securities laws and to protect the Firm as well as Firm representatives from the very serious liability and penalties that can result from violations of these laws. The Firm is committed to maintaining
its reputation for integrity and ethical conduct and this policy is an important part of that effort. It is TBG’s policy that directors, executive officers and other employees of TBG may not trade securities, of the Firm or otherwise, about
which they learn material, non-public information. They are also prohibited from passing on such information to others who might make an investment decision based on it. Any questions as to whether information
is material or has been adequately disclosed should be directed to the LCD.
In addition, directors, executive officers and employees are prohibited from
engaging in transactions in TBG’s securities that are inconsistent with a long-term investment in TBG, signal a lack of confidence in TBG or may lead to the appearance of insider trading. Such transactions include any trading activity designed
to profit from fluctuations in the price of these securities, such as “day trading” and arbitrage trading, short sales, buying securities on margin, and the use of forward contracts, equity swaps, collars, exchange funds, puts, calls,
options and other derivative securities or any instruments designed to increase in value as a result of, or hedge or offset any decrease in, the market value of TBG’s securities.
Any violation of the Firm’s policies and procedures regarding personal securities trading by an employee or an employee’s family member may result
in dismissal, suspension, with or without pay, or other disciplinary sanctions against the employee, whether or not the violation of the Firm’s policy also constitutes a violation of law.
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Code of Business Conduct and Ethics
Document Retention
Destruction or falsification of any information that the Firm is required to retain pursuant to legal or regulatory requirements, or that is potentially
relevant to any violation of law, government investigation or civil legal matter, may lead to prosecution for obstruction of justice, regulatory action, legal sanctions or other adverse consequences for the Firm. The Firm’s Information
Management and Legal Holds Policies govern the Firm’s retention, preservation or destruction of information. Employees are required to manage, retain and dispose of Firm information in accordance with those policies. Questions with regard to
retention or destruction of information should be directed to the CLO. Please refer to the Firm’s Information Management Policy, Legal Holds Policy, and various compliance manuals for other provisions relating to information retention and
disposal.
Taxes
The Firm and its employees, whether
acting on behalf of the Firm or individually, are not permitted to attempt to evade taxes or the payment of taxes. Neither should employees solicit clients on the basis of nor actively participate in assisting clients in attempting to evade the tax
laws. The Firm and its employees, whether acting on behalf of the Firm or individually, are not permitted to (i) make false statements to tax authorities regarding any matter, (ii) file fraudulent returns, statements, lists or other
documents, (iii) conceal property or withhold records from tax authorities, (iv) willfully fail to file tax returns, keep required records or supply information to tax authorities or (v) willfully fail to collect,
account for or pay a tax.
None of this prevents you from arranging your personal affairs in a manner serving to lawfully minimize the tax you are
required to pay, and in so doing, you can consider all allowable deductions and credits that you may be entitled to claim.
In addition to complying with
the tax laws, employees must cooperate fully with any regulatory entity or governmental authority and may not interfere with the administration of the tax laws. Payments and gifts to tax agents and other government officials are strictly prohibited.
To this end, employees are required to refer business inquiries to the CLO and respond immediately to personal inquiries from a tax authority, including summons to testify or produce books, accounts, records, memoranda or other papers.
Maliciously False, Defamatory, or other Unlawful Remarks
Maliciously false, defamatory, or other unlawful remarks or statements about the Firm or any of its personnel are strictly prohibited. No employee of the Firm,
directly or indirectly, may make, while in the employ of the Firm or at any time thereafter, any such remarks or statements (whether of a professional or personal nature) to any individual or other third party (including without limitation any
present or former member, partner or employee of the Firm) or entity regarding the Firm or any of their respective affiliates, members, partners or employees, or regarding such employee’s relationship with the Firm or the termination of such
relationship.
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Code of Business Conduct and Ethics
Employees who violate this policy may be subject to disciplinary action, up to and including termination of
employment. The Firm may also pursue appropriate legal action against present or former employees or members to enforce this policy.
This policy does not
prohibit employees from making truthful disclosures to governmental agencies.
Doing Business Internationally
While the Firm must adapt to business customs and market practices in global markets, all employees worldwide should adhere to applicable U.S. laws and
regulations and Firm standards. Every employee involved in non-U.S. operations should also respect the laws, cultures and customs of all countries in which the Firm operates and should conduct the Firm’s
overseas activities in a way that contributes to development in all such locales.
Foreign Corrupt Practices Act / U.K. Bribery Act
Blackstone and its employees, agents and representatives must conduct their activities in full compliance with all applicable anti-corruption laws, including
without limitation, the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act, and any other anti-corruption laws that are in effect in the country in which the Blackstone employee, agent or representative operates.
The FCPA reaches conduct occurring outside of the territorial boundaries of the United States and applies to domestic and foreign subsidiaries of Blackstone
and to both U.S. citizens and non-U.S. citizens. Under the FCPA:
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Blackstone and its Senior Managing Directors, agents, officers and employees are prohibited from making or
authorizing the payment of either money or anything of value, directly or indirectly, to government officials, political parties or candidates for political office outside the United States to win or retain business or influence any act or decision
of such officials;
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All books, records and accounts, domestic and overseas, must accurately and fairly reflect business transactions
and dispositions of Blackstone’s assets;
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A system of internal accounting controls must be maintained to provide adequate corporate supervision over the
accounting and reporting activities at all levels.
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Code of Business Conduct and Ethics
Disclaimer
This Code is designed to acquaint directors, executive officers and employees with the Firm’s policies with respect to business conduct and ethics.
The information contained in this Code is not intended to represent all of the Firm’s policies. In addition, directors, executive officers and employees
should be aware that the Firm may revise, supplement or rescind any policies or portions of this Code at any time as it deems appropriate, in its sole and absolute discretion. This Code is the property of the Firm.
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Sponsor
Guggenheim
Partners Investment Management, LLC
Chief Compliance Officer
Owner
GPIM Director of Policies & Procedures
Contact
Arik.Hirschfeld@GuggenheimPartners.com
Effective Date
September 15, 2020
By receiving, reading or reviewing this Code of Ethics (the “Code”) in whole or in part, you agree to the following terms and conditions:
The Code and all of its contents are the proprietary and confidential property of Guggenheim Partners Investment Management, LLC and its affiliated entities
(“Guggenheim”), and may not be used by any other person, firm or individual and may not be redistributed except with the written permission of Guggenheim.
It is being provided to you in connection with the conduct of due diligence and for no other purpose or use.
IT MAY NOT BE REPRODUCED OR REDISTRIBUTED; IS NOT INTENDED AS A DISCLOSURE OF ANY SORT; IT MAY BE CHANGED AT ANY TIME IN ANY MANNER WITHOUT THE CONSENT OF ANY
PERSON AND WITHOUT NOTICE, IN THE SOLE DISCRETION OF GUGGENHEIM; THERE IS NO COMMITMENT TO FOLLOW ANY PROCESS OR PROVISIONS DESCRIBED IN THIS CODE OTHER THAN THOSE SPECIFICALLY REQUIRED BY APPLICABLE LAW, RULES OR REGULATIONS; GUGGENHEIM MAY, IN ITS
DISCRETION, DEVIATE FROM THE PROCESSES AND PROVISIONS DESCRIBED IN THIS CODE AT ANY TIME, INCLUDING WITHOUT LIMITATION, WHERE GUGGENHEIM DETERMINES THAT SUCH A DEVIATION IS PERMISSIBLE, NECESSARY, APPROPRIATE AND/OR DESIRABLE.
Table of Contents
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1.
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Objectives of the Code of Ethics
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2.
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Who is Subject to the Code?
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3.
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Who Administers the Code?
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3.1.
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Chief Compliance Officer
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5
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3.2.
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Code of Ethics Compliance Platform
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6
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4.
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Fiduciary Duty to Clients
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7
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4.1.
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Managing Conflicts
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7
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4.2.
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Confidentiality and Safeguarding Information
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7
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4.3.
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Prohibition on Front Running
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8
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4.4.
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Compliance with the Code of Ethics
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8
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5.
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Reporting of Personal Trading
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8
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5.1.
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Which Investment Accounts Do Access Persons Need to Report?
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8
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5.2.
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Required Initial Holdings Reports and Certifications
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10
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5.3.
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Required Quarterly Transaction Reports
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11
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5.4.
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Annual Holdings Reports and Certifications
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13
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6.
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Pre-clearance for Personal Trading
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13
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6.1.
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Trades Requiring Pre-Clearance
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14
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6.2.
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Trades Not Requiring Pre-Clearance
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15
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6.3.
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Prohibited Transactions
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16
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7.
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Trading Restrictions
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17
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7.1.
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For All Trading
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17
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7.2.
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Excessive Trading in Reportable Accounts
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18
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7.3.
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Holding Period – Thirty-Day Prohibition on Buying/Selling Covered Securities
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18
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7.4.
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Section 16 Reporting for Certain Closed-End Mutual Funds
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19
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8.
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Annual Review
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19
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9.
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Retention of Records
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19
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10.
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Sanctions
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20
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11.
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Interpretations and Exceptions
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20
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12.
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Appendix A – Reference Guide for Covered Security Pre-Clearance and Reporting Requirements
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21
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13.
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Appendix B – Option Trading Pre-Clearance Requirements
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23
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1.
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Objectives of the Code of Ethics
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Guggenheim Partners Investment Management, LLC (“GPIM” or the “Advisor”), its subsidiaries and affiliated
investment advisers are committed to conducting our investment advisory business with the highest legal and ethical standards. We aim to uphold our reputation of integrity and professionalism in the furtherance of the interests of our clients and in
a manner that is consistent with all applicable laws, rules and regulations. This reputation is a vital business asset and has generated the trust and confidence of GPIM’s clients.
Accordingly, the Advisor has adopted this Code of Ethics (the “Code”) to effectuate the purposes and objectives of Rule 204A-1 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and in accordance with industry best practices. All persons associated with the Advisor are responsible for
knowing and understanding the policies and guidelines contained in the Code. Our conduct should reflect GPIM’s values, demonstrate ethical leadership, and promote a work environment that upholds our reputation for integrity, ethical conduct and
trust. The Code sets forth the general principles and standards of conduct expected from you. It cannot and is not intended to cover every scenario or circumstances under which you may face business and personal conflicts. Technical compliance is
not enough and you are expected to comply with the spirit of the Code.
The GPIM Compliance Department monitors, surveils and escalates
to the business when appropriate. The GPIM Chief Compliance Officer (“CCO”) and GPIM Compliance Department should be contacted for advice and recommendations as to compliance with regulatory requirements, the Code and together with
the GPIM Compliance Manual (“Manual”), the Compliance Program. However, the business has primary authority and control over the investment activities and operation of GPIM and for managing employees. Access Persons should contact
Guggenheim Partners’ Central Compliance – Employee Activities Group (“Central Compliance”) with any questions on employee trading and activities.
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2.
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Who is Subject to the Code?
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As a condition of employment, all individual employees, officers, principals, partners and directors of GPIM (generally referred to as
“Employees”) are required to comply with the Code. In addition, the following categories of persons are considered to be Access Persons and are required to comply with the Code together with Employees. “Access
Person”1 includes any:
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a.
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Employee, Director, officer, manager, principal and partner of the Advisor (or other persons occupying a
similar status or performing similar functions), or other person who provides advice on behalf of the Advisor or is subject to the Advisor’s supervision and control; or
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1
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This includes any arrangement where the Access Person serves as an agent, executor, trustee or in
another capacity.
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i.
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Has access to nonpublic information regarding any of the Advisor’s client’s purchases or sales of
securities, or nonpublic information regarding the portfolio holdings of any client account the Advisor or their affiliates manage, or any fund which is advised or sub-advised by the Advisor (or certain
affiliates, where applicable);
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ii.
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Makes recommendations or investment decisions on behalf of the Advisor;
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iii.
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Has the power to exercise a controlling influence over the management and policies of the Advisor, or over
investment decisions, who obtains information concerning recommendations made to a client account with regard to the purchase or sale of a security;
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iv.
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The CCO shall determine on a
case-by-case basis whether a temporary employee (e.g., consultant or intern) should be considered an Access Person. Such determination shall be made based upon an
application of the criteria provided above, whether an appropriate confidentiality agreement is in place, and such other information as may be necessary to ensure that proprietary information is protected. As such, temporary employees may only be
subject to certain sections of the Code, such as certifying to it, or may be exempt from certain reporting requirements such as not having to hold their reportable accounts at the permitted broker-dealers; or
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v.
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Any person deemed to be an Access Person by the CCO.
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3.
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Who Administers the Code?
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3.1.
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Chief Compliance Officer
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The Advisor’s Compliance Department (the “GPIM Compliance Department”) is responsible for administering the Code of
Ethics under the auspices and responsibility of the CCO and the Advisor’s senior management. The CCO will delegate appropriate responsibilities to designated members of the GPIM Compliance Department. Central Compliance administers certain
sections of the Code of Ethics pertaining to Employee activities.2
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3.1.2.
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Reporting of Violations
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If an Access Person becomes aware of a violation of the Code, the Access Person has an obligation to report the matter promptly to the CCO.
Nothing in this policy prohibits an Access Person from contacting a securities regulator.
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2
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Central Compliance – Employee Activities Group can be contacted at:
GPIMEmployeeActivities@GuggenheimPartners.com
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3.1.3.
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Review of Violations
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The GPIM Compliance Department will review all violations of the Code and oversee any appropriate investigation and subsequent response. As
the designee of senior management, the CCO shall have the right to make final and binding interpretations of the Code and may grant, using his/her discretion, exceptions to certain of the Code’s requirements and restrictions.
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•
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No Employee, who in good faith reports a violation of the Code, shall suffer harassment, retaliation or with
respect to a report concerning a violation by another Employee, adverse employment consequences.
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•
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An Employee who retaliates against someone who has reported a violation in good faith may be subject to
disciplinary action. Alternatively, the Advisor will treat any malicious or knowingly false report of a violation to be a serious offense and may discipline the Employee making such a report.
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3.1.4.
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Review of CCO Compliance with Code
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A member of senior management of the Advisor or any other person designated (e.g., a member of the Legal Department or the Global Head of
Compliance or his/her designee), who may or may not be an Employee of the Advisor, is responsible for reviewing the CCO’s personal trading reports and Code certifications required under the Code. If the CCO is in violation of the Code, senior
management will impose the appropriate sanction(s).
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3.1.5.
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Employee Cooperation
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Employees are encouraged to share questions, concerns, suggestions or complaints with the GPIM Compliance Department. Reports of violations or
suspected violations will be kept confidential to the extent possible, but consistent with the need to conduct an adequate investigation.
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3.2.
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Code of Ethics Compliance Platform
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3.2.1.
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Use of Compliance Platform
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The Advisor utilizes an electronic Compliance Platform, to manage the Code’s reporting and certification obligations. Access Persons are
required to use the Compliance Platform, to the extent practical.
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•
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Code reporting requirements are to be completed through the Compliance Platform (including certifications,
personal securities transactions covered by the Code, disciplinary disclosures, outside business affiliations, private transactions, board memberships, and gifts and entertainment) or through an alternate manner approved by the GPIM Compliance
Department.
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•
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At the time of designation as an Access Person, Central Compliance will provide all Access Persons with login
information and instructions for using the Compliance Platform.
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3.2.2.
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Electronic Reporting
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Quarterly personal securities transaction reporting and annual holdings reporting will be completed electronically, to the extent practical.
In order for duplicate brokerage statements to be sent directly to the Compliance Platform or for electronic feeds to be established, Access Persons may need to provide appropriate authorization to their brokers.
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3.2.3.
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Exceptions to Electronic Reporting
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On a case by case basis and at the discretion of Central Compliance, paper reports and certifications may be accepted in lieu of electronic
reporting on the Compliance Platform.
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4.
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Fiduciary Duty to Clients
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Access Persons owe a fiduciary duty to clients and have an obligation to act in their clients’ best interests. Access Persons must
scrupulously avoid serving personal or conflicted interests ahead of the interests of clients. Conflicts and potential conflicts can arise in a variety of situations. All Access Persons must also seek to identify and appropriately address potential
conflicts between and among client accounts as well. One client’s interests may not be favored over the interests of another. The Manual, available via OneGuggenheim, includes the Private Transactions Conflicts of Interests Review Policy that
provides additional guidance and procedures for addressing potential conflicts within a business transaction context.
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4.2.
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Confidentiality and Safeguarding Information
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Unless permitted in writing prior to disclosure, information regarding clients or their accounts may not be shared with persons outside of the
Advisor, such as vendors, family members, or market participants. In particular, information regarding the trading intentions of clients or the Advisor on behalf of its clients may not be shared. Access Persons may have information regarding
clients, their investment strategies, strategic plans, assets, holdings, transactions, personnel matters and other information. This information must remain confidential and may not be shared outside the Advisor.
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4.3.
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Prohibition on Front Running
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Front-running, trading opposite the Advisor’s client account(s), or engaging in conduct that may be construed as front-running, is
strictly prohibited under the Code. For example, front-running would include an Access Person purchasing a Covered Security any time within seven days ahead of when the Advisor’s client account(s) purchases the same Covered Security, or the
sale of a Covered Security any time within seven days ahead of when the Advisor’s client account(s) sells the same Covered Security. An example of trading opposite the Advisor’s client account(s) would include the sale of a Covered
Security any time within seven days after the Advisor’s client account(s) purchases the same Covered Security or the purchase of a Covered Security any time within seven days after the Advisor’s client account(s) sells the same Covered
Security. Proprietary, Access Persons’, and discretionary accounts will be monitored for front-running.
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4.4.
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Compliance with the Code of Ethics
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Each Access Person will receive a copy of the Code and any subsequent material amendments to the Code, and each Access Person must acknowledge
receipt of the Code in writing not less frequently than on an annual basis, and generally on a quarterly basis. Each Access Person is required to certify that he/she (i) has read and understands the Code, (ii) is aware that he/she is
subject to the provisions of the Code, (iii) has complied with the Code at all times during the previous calendar year, and (iv) has, during the previous calendar year, reported all holdings and transactions that he/she is required to
report pursuant to the Code. The acknowledgement of receipt and certification may be made electronically through a manner specified by the GPIM Compliance Department. A current copy of the Code is available via OneGuggenheim.
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5.
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Reporting of Personal Trading
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It is the sole responsibility of the Access Person to ensure that all reporting requirements are completed by the timeframes set forth by the
Code. This may mean that the Access Person may have to enter information manually, provide statements or follow up with his/her broker-dealer or bank.
5.1. Which Investment Accounts Do Access Persons Need to Report?
Generally, any account which is in the name of the Access Person and members of his/her Immediate Family3, which can, even if the account does not currently, hold Covered Securities (as defined in Section 5.3.1 below) will need to be reported.
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5.1.1.
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Report any of the following Investment Accounts:
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a.
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The Access Person has Beneficial Ownership4 over an
Investment Account.
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3
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Immediate Family includes, but is not limited to, a spouse, child, grandchild, stepchild, parent, grandparent,
sibling, mother or father-in-law, son or daughter-in-law, or brother or sister-in-law, and adoptive relationships, living in the same household, or otherwise dependent on the Access Person. Access Persons may rebut this presumption if they are
able to provide the Advisor with satisfactory assurances that they have no material interest in the account and exercise no control over investment decisions made regarding the account. Access Persons should consult with Central Compliance for
guidance regarding this process.
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4
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A person has Beneficial Ownership if he or she, directly or indirectly through any contract, arrangement,
understanding, relationship or otherwise, has or shares a direct or indirect pecuniary (financial) interest in a (i) security or (ii) accounts which can hold securities, including but not limited to: individual, joint, partnership,
custodial, trust, IRA, UGMA and KEOGH accounts. The determination of
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b.
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Any Investment Account with a broker-dealer or bank over which the Access Person has investment decision-making
authority (including accounts that the Access Person is named on, such as being a guardian, executor or trustee, as well as accounts that Access Person is not named on such as an account owned by another person but for which the Access Person has
been granted trading authority).
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c.
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Any Investment Account with a broker-dealer or bank established by a partnership, corporation, or other entity
in which the Access Person has a direct or indirect interest through any formal or informal understanding or agreement.
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d.
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Any college savings account in which the Access Person has investment discretion and where the account has the
ability to invest in Covered Securities.
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e.
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Any account in which the Access Person’s Immediate Family is the owner. Access Persons are presumed to
have investment decision-making authority for, and therefore should report, any Investment Account of a member of their Immediate Family if they live in the same household.
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f.
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Any 401(k) accounts from a previous employer which can, or offer the ability to, hold Covered Securities.
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g.
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Any other account that the CCO deems appropriate in light of the Access Person’s interest or involvement.
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All Investment Accounts of new Access Persons and any Investment Accounts of current Access Persons must be maintained
with brokerage firms designated and approved by Central Compliance.5 The CCO or his designee may grant exceptions in writing to this policy on a limited basis. However, in general, personal
trading in such accounts will be prohibited. Further, Access Person will be responsible for ensuring that the account statements and trade confirmations for Investment Accounts held away from designated brokerage firms are received by Central
Compliance within 20 days after each quarter-end and reflect current account information as of the respective quarter-end.
Existing Investment Accounts of new Access Persons which are not held at the permitted broker-dealers must be transferred within 90
calendar days from the date the Access Person is so designated; the failure to transfer within this time will be considered a violation of the Code. Any request to extend the 90 day transfer deadline must be
accompanied by a written explanation by the current broker-dealer as to the reason for delay. Central Compliance may grant specific exceptions in writing.
Beneficial Ownership is the responsibility
of each Access Person: it is a fact-based decision.
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5
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The list of designated Broker Dealers is available on OneGuggenheim at:
http://oneguggenheim/Compliance/Pages/Designated-Broker-Dealers.aspx?type=GPIM?Source=http://oneguggenheim/compliance/Pages/default.aspx
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5.1.2.
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Independently managed/third-party discretionary account reporting:
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a.
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Access Persons must disclose independently managed/third-party discretionary accounts, i.e., where the person
has “no direct or indirect influence or control”.
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b.
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Access Persons are required to obtain a signed copy of the Managed Account Letter (provided by Central
Compliance) from their third-party investment advisor confirming that the advisor has authority to effect transactions on behalf of the account without obtaining prior consent of the Access Person and that the Access Person does not direct trades in
the account. Access Persons are required to annually renew their Managed Account Letters confirming third-party discretion.
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c.
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Access Persons should immediately notify Central Compliance in writing if there are any changes in control over
the account or if there are any changes to the relationship between the trustee or third-party investment advisor and the Access Person (i.e., independent professional or friend or relative, unaffiliated versus affiliated firm). Please note that an
immediate family member with discretion over a covered account is not considered a third-party advisor.
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d.
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Trades in independently managed/third-party discretionary accounts, including trades in Covered Securities, are
not subject to the pre-clearance requirements and trading restrictions of the Code.
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e.
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Certain Access Persons (as determined and communicated by Central Compliance) are required to maintain
independently managed/third-party discretionary accounts with brokerage firms designated and approved by Central Compliance.
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5.1.3.
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New Investment Accounts
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Prior to opening a new Investment Account, Access Persons are required to submit a Personal Account
Pre-Clearance Form through the Compliance Platform and obtain written approval to establish the Investment Account from Central Compliance. Upon opening a reportable Investment Account or obtaining an interest
in an Investment Account that requires reporting, the account number must be reported within 5 calendar days of funding the Investment Account via the Compliance Platform or as otherwise permitted by Central Compliance.
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5.2.
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Required Initial Holdings Reports and Certifications
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Information that is required when you initially become subject to the Advisor’s Code:
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a.
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Access Persons must report all of their Investment Accounts. (See Section 5.1.1 for
more information.)
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b.
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The report must include copies of statements which include the name of the broker/dealer or bank, title on the
account, security names (and as applicable the exchange ticker symbol or CUSIP number), and the number of shares and principal amount of all holdings.
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i.
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If the Access Person’s brokerage firm provides automatic feeds to the Compliance Platform, the Advisor
will obtain account information electronically, after the Access Person has completed the appropriate authorizations as required by the brokerage firm.
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c.
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All required account information must be reported within 10 calendar days from the date on
which the Access Person becomes an Employee of the Advisor and is so designated as an Access Person, and the information must be current as of a date no more than 45 calendar days prior to the date the person becomes an Access
Person.
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d.
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Access Persons must complete a form certifying receipt and acknowledgement of the Code.
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5.3.
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Required Quarterly Transaction Reports
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5.3.1.
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Information required on a quarterly basis:
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Access Persons must report all their quarterly transactions in Covered Securities in which they have a direct or indirect beneficial
ownership, within at least 30 calendar days after each quarter end. The report must include transaction details consistent with regulatory requirements, including: (i) the date of the transaction, the
title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and principal amount of each reportable Covered Security involved; (ii) the nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition); (iii) the price of the Covered Security at which the transaction was effected; (iv) the name of the broker, dealer or bank with or through which the transaction was effected; and (v) the
date the Access Person submits the report.
“Covered Securities” for purposes of the Code, are any financial instrument
related to a security, including:
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•
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Corporate, U.S. (Government) Agency and Municipal Bonds and Notes
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•
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High-Quality Short-term Bonds (maturity at issuance of less than 366 days)
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•
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Exchange Traded Funds (ETFs)6
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6
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See Section 6.2 Trades Not Requiring
Pre-Clearance, for an exception from pre-clearance for certain broad-based ETFs.
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•
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Options7 and Futures on any Covered Security, ETF or on any
group or (broad-based) index of securities (e.g., put, call or straddle)
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•
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Futures on U.S. Government obligations, Currencies and
Commodities8
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•
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Private Investments (as defined in Section 6.1 below). Please note that a Private Investment and
Loan Pre-Clearance Form (available via OneGuggenheim) must be completed prior to any new private investment.
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•
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Closed-end Mutual Funds
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•
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Open-end Mutual Funds managed, advised or
sub-advised by the Advisor or an affiliate
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•
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Unit Investment Trusts (UIT)
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•
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Foreign Unit Trust (i.e., UCITs) and Foreign Mutual Fund
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•
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Indirect investments in cryptocurrencies through products deemed a “security” under applicable law
(e.g., cryptocurrency-related entities deriving a substantial amount of revenue therefrom) or private investments, ETFs and Investment Trusts that invest directly and primarily in
cryptocurrencies.9 Note: The regulatory landscape around cryptocurrencies and related products is evolving and GPIM’s policy towards such products is subject to change depending on
emerging regulatory requirements and firm and client activity. Certain cryptocurrencies may be restricted and require pre-clearance and reporting in the future.
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•
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Miscellaneous: Treasury Stock; Debentures; Evidence of Indebtedness; Investment Contracts; Voting Trust
Certificates; Certificates of Deposit for a Security; Limited Partnerships; Certificates of Interest or Participation in any Profit-Sharing Agreement; Collateral RIC-Certificates; Fractional Undivided
Interests in Oil, Gas or other Mineral Rights; Pre-Organizational Certificates or Subscriptions; or Transferable Shares.
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•
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Any other instrument that is considered a “security” under the applicable securities laws.
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The term “Covered Securities” does not include obligations/debt of the U.S. Government, bank loans,
bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements, money-market funds, shares issued by unit investment trusts that are invested exclusively in one or more
open-end funds, none of which are reportable funds, or open-end mutual funds which the Advisor or its affiliates, as applicable, do not manage, advise or sub-advise.
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7
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See Appendix B for pre-clearance requirements applicable
to certain option trading strategies and transaction legs.
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8
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See Section 6.3 Prohibited Transactions for permitted categories of trading in certain
futures on currencies and commodities.
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9
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For direct investments in cryptocurrencies, see Section 6.2 Trades Not Requiring Pre-Clearance. Private Investments that invest directly and primarily in cryptocurrencies should be pre-cleared in accordance with Section 6.1.2
Trades Requiring Pre-Clearance. For any questions on whether an investment is an indirect security-related investment in cryptocurrencies, please contact Central Compliance.
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Note: Access Persons should be aware that investments in Guggenheim Funds
through its Employee Investment Program are reportable as Covered Securities. From time to time, the Compliance Platform may not receive all duplicate statements from brokers or may not receive them on a timely basis. In those cases, Access
Persons will be notified by Central Compliance and must provide copies of the statements to Central Compliance who will forward the information to the Compliance Platform. If the brokerage firm does not provide automatic feeds to the Compliance
Platform, Access Person will be responsible for providing duplicate statements for such Investment Accounts to Central Compliance within 20 days after each quarter-end and reflect
current account information as of the respective quarter-end. The CCO or designee may provide exceptions to this policy on a limited basis.
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5.4.
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Annual Holdings Reports and Certifications
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5.4.1.
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Information required on an annual basis:
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•
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Access Persons must provide a list of all Covered Securities in which they or their Immediate Family have a
direct or indirect interest, including those not held in an account at a broker-dealer or bank. The list must include the title, number of shares and principal amount of each Covered Security. Access Persons must report the account number, account
name and financial institution for each Investment Account with a broker-dealer or bank for which they are required to report.
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•
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Access Persons must report all accounts and holdings within 30 calendar days after each year
end via the Compliance Platform, or as otherwise permitted by Central Compliance, and the information must be current as of a date no more than 45 calendar days prior to the date the report is submitted.
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•
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Access Persons must also certify annually that they have complied with the requirements and have disclosed all
holdings required to be disclosed pursuant to the requirements of the Code. In addition, Access Persons must respond to personal disciplinary history questions.
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6.
|
Pre-clearance for Personal Trading
|
All Access Persons must pre-clear all trades in their Investment Accounts (except as provided below)
through the Compliance Platform prior to execution. Prior to participating in any Private Investments (as defined below), all Access Persons must pre-clear (i.e., receive approval for) the proposed
transactions through Central Compliance. This is necessary in order to verify that there is no conflict between the desired trade and the Advisor’s current activities or the interests of the Advisor and its clients. For the avoidance of doubt,
Access Persons must also pre-clear any trades in Investment Accounts and Private Investments in the name of or on behalf of members of their Immediate Family (see footnote 3).
Approvals to trade in an Investment Account are generally only good on the day they are
sought. If an Access Person receives approval to trade a security and does not execute the trade on the day the approval is received, the trade will need to be pre-cleared again if the
Access Person still wants to execute the trade.
If an Access Person is in possession of material
non-public information about any security, the Access Person must not trade on it, in accordance with GPIM’s Insider Trading Policy (see the Manual for more information), despite pre-clearing the trade and receiving approval.
|
|
6.1.
|
Trades Requiring Pre-Clearance
|
|
|
1.
|
Covered Securities: Unless excluded below, Access Persons must
pre-clear all trades in Covered Securities through the Compliance Platform, which checks the trade against the Guggenheim Investments Restricted List and any other applicable rules and guidelines. (See
Section 5.3.1 for a list of Covered Securities and Appendix A for reference guide on pre-clearance and reporting requirements for Covered Securities.)10
|
|
|
2.
|
Private Investments: Private Investments include, but are not limited to investments in: hedge funds,
private equity funds, venture capital funds, other private fund vehicles, privately-held companies and investments in commercial properties or residential properties (excluding primary residence) where income is earned on the property (e.g., a
secondary residence that is used as rental property or listed as vacation rental on Airbnb). Private Investments also include: (i) loans to or from such entities, and any other entities formed for the purpose of engaging in business activity;
(ii) loans to or from individuals who are not Immediate Family of the Access Person; and (iii) loans to or from individuals who are Immediate Family of the Access Person for the purpose of engaging in business activity. Loans to or from
Immediate Family of the Access Person that are entirely of a personal nature and loans that are covered within the Standing Exceptions per Section 6.3 in the Manual (Personal Loans) do not need to be
pre-cleared.
|
Access Persons should contact Central Compliance with any
questions as to which loans need to be pre-cleared.11 New Access Persons must disclose all of their existing Private Investments, as well as those of their
Immediate Family members, within 10 days of becoming an Access Person. The Central Compliance Employee Activities
|
10
|
Certain Covered Securities may need to be pre-cleared in accordance
with requirements for pre-clearance of private investments (see below in Section 6.1 Trades Requiring Pre-Clearance) – i.e., by completing
the Private Investment and Loan Pre-Clearance Form.
|
|
11
|
For the avoidance of doubt, certain personal loans remain prohibited as more fully described in
Section 6.3 Personal Loans in the Manual, and any financing for Private Investments, including properties and loans must be consistent with this policy.
|
Group will send an email to all new Access Persons with the Private Investment
Disclosure Form, which they must complete. Existing Access Persons are required to disclose existing Private Investments that were entered into prior to policy changes and seek prior written approval to invest in any new Private
Investments on their own behalf, and on behalf of their Immediate Family members, and must complete the Private Investment and Loan Pre-Clearance Form (available via OneGuggenheim) and provide
information about the investment to assist Central Compliance with the review of the request.
The Guggenheim Capital Conflicts Review
Committee (“CRC”) may also review Private Investment requests for approval, as necessary. Approval by the CRC is required in the event that it is determined that a proposed or existing Private Investment involves one or more
potential or actual significant conflicts of interest.
|
|
6.2.
|
Trades Not Requiring Pre-Clearance
|
|
|
1.
|
Government Securities/Certain Other Debt Instruments: Trades in any direct obligations of the U.S.
Government (including futures on U.S. Government obligations), bankers’ acceptances, bank certificates of deposit, commercial paper and repurchase agreements are not required to be pre-cleared.
|
|
|
2.
|
Money Market Funds: Trades in any investment company or fund that is a money market fund are not
required to be pre-cleared.
|
|
|
3.
|
Open-End Mutual Funds: Trades in
open-end mutual funds that are advised or sub-advised by the Advisor or affiliates are not required to be pre-cleared.
|
|
|
4.
|
Broad-based Exchange Traded Funds (“ETFs”): A list of these ETFs is available on the GPIM
Compliance page on OneGuggenheim and available here:
|
|
|
5.
|
Direct Investments in Cryptocurrencies12:
Cryptocurrencies (e.g. virtual currency such as bitcoin (BTC), litecoin (LTC) and ethereum (ETH)) are considered currencies and not securities, under current regulatory guidance. Therefore, similar to currency and foreign exchange trading, direct
investments in cryptocurrencies are currently outside the scope of the Code and do not require pre-clearance or reporting. Indirect investments in cryptocurrencies through investment entities or products
deemed a security, are Covered Securities requiring pre-clearance under the Code (See Section 5.3.1).
|
Note: The regulatory landscape around cryptocurrencies and related products is evolving and GPIM’s policy towards such
products is subject to change depending on emerging regulatory requirements and firm and client activity. Certain cryptocurrencies may be restricted and require pre-clearance and reporting in the future.
|
12
|
Cryptocurrency generally means any virtual currency (e.g., bitcoin, litecoin, ethereum, etc.) or digital
representation of value that functions as a medium of exchange, a unit of account, and/or a store of value that does not have indicia of being a security under the federal securities laws.
|
|
|
6.
|
No Knowledge: Securities transactions where no knowledge of the transaction exists before it is
completed are not required to be pre-cleared. For example, a transaction effected by a trustee of a blind trust or discretionary trades involving an investment partnership, when the Access Person is neither
consulted nor advised of the trade before it is executed, are not required to be pre-cleared.
|
|
|
7.
|
Certain Corporate Actions: Any acquisition of securities through stock dividends, automatic dividend
reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, exercise of rights, tender offer transactions or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of
securities are not required to be pre-cleared.
|
|
|
8.
|
Non-volitional transactions: Any transaction which is non-volitional (i.e., the Access Person did not have any direct influence or control), such as acquisitions in automatic investment and stock purchase plans, automatic dividend reinvestments or sales from a margin
account due to a bona fide margin call, or acquisition by gift or inheritance are not required to be pre-cleared.
|
|
|
9.
|
Miscellaneous: Any transaction in any other securities as the CCO or Central Compliance may designate.
|
|
|
6.3.
|
Prohibited Transactions
|
|
|
1.
|
Investment Clubs: Participation in Investment Clubs is prohibited. Generally, an Investment Club is a
group of people who pool their money to make investments. Usually, Investment Clubs are organized as partnerships and after members study different investments, the group decides to buy or sell based on a majority vote of the members. If you have
any questions regarding whether an arrangement is an Investment Club, please contact Central Compliance.
|
|
|
2.
|
Initial Public Offerings (“IPOs”): Trades in IPOs are prohibited. Access Persons are
prohibited from acquiring any securities offered in connection with an IPO.
|
|
|
3.
|
Commodity Interests: Trading in Commodity Interests and related Futures are generally prohibited, except
for the following types of futures: (i) Futures referencing broad-based securities indices (for example; S&P 500; NASDAQ 1000; and Russell 2000); (ii) Futures referencing major currencies (for example: Euro; Yen; Australian Dollar; and
British Pound); (iii) Futures referencing the following physical commodities: Gold; Silver; Oil; and Natural Gas; and (iv) Futures referencing U.S. Government debt obligations (for example: 30 year Treasury bond; 10/5 year Treasury Notes; and
long-term Treasury Bonds).
|
Access Persons should consult with Central Compliance with regard to whether a particular
instrument is a commodity interest. Senior management, together with the CCO, may grant exceptions to this prohibition on a case-by-case basis and such exceptions will
be conditioned on compliance with certain requirements.
|
|
4.
|
Initial Coin Offerings and Virtual Coin Futures and Options: Trading in Initial Coin Offerings
(“ICO”)13 and in futures and options on virtual coins or tokens are prohibited. Access Persons may not acquire beneficial ownership of any cryptocurrencies offered in connection with an
ICO or purchase or sell virtual coin futures and options. The prohibition on trading ICOs and futures and options on virtual coins and tokens extends to Immediate Family, as defined in Section 5.1.
|
Access Persons should consult with Central Compliance with regard to whether a particular instrument is an ICO or future or option on a
virtual coin.
|
|
5.
|
Blackout Period: Access Persons are prohibited from purchasing or selling, directly or indirectly, any
Covered Security in which you had (or by reason of such transaction acquire) any beneficial ownership, at any time within seven (7) calendar days before or after the time that the same or related Covered Security is purchased or sold in a GPIM
client account.
|
Exception to Blackout Period
The blackout period does not apply to trading in a Covered Security meeting the following criteria:
|
|
•
|
|
the market value of the proposed transaction is less than $25,000;
|
|
|
•
|
|
the 30-day rolling average trading volume is over 1 million shares;
and
|
|
|
•
|
|
Guggenheim Investments’ trade activity is less than 5% of the security’s
7-day rolling average volume.
|
The exception to the blackout period does not
apply to the purchase or sale of options, transactions in a Covered Security listed on the Guggenheim Investments Restricted List, and any derivatives and futures.
Note: Access Persons should request pre-clearance of the proposed transaction in the
Compliance Platform, which will calculate whether the transaction in the Covered Security meets the exception criteria and approve or deny the trade accordingly.
|
13
|
An ICO is generally the first sale of a cryptocurrency or virtual coin to the public, conducted for the
purpose of raising funds.
|
In addition to reporting and pre-clearance
obligations, the Code also includes restrictions regarding the manner in which Covered Securities may be traded and held in any reportable Investment Accounts. (See Section 5.1.1 for more information.)
Regardless of whether a transaction is specifically prohibited in the Code, no person subject to the Code may engage in any personal securities
transactions that (i) impact their ability to carry out their assigned duties or (ii) increase the possibility of an actual or apparent conflict of interest. Access Persons are prohibited from the following under any circumstances:
|
|
7.1.1.
|
Market Manipulation
|
Securities transactions may not be executed with the intent to raise, lower, or maintain the price of any security or to falsely create the
appearance of trading activity.
|
|
7.1.2.
|
Trading on Inside Information
|
Transactions (e.g., purchases or sales) of any security cannot be made if in possession of material
non-public information about the security or the issuer of the security. (Please also refer to the Manual for the Insider Trading Policy.)
No Access Person may trade ahead of a client transaction. (See Section 4.3 for more information.)
|
|
7.2.
|
Excessive Trading in Reportable Accounts
|
Access Persons may not engage in excessive trading in their reportable Investment Accounts. Access Persons shall not make more than 60 Covered
Securities trades in any reporting quarter. Transactions that do not require pre-clearance are not included in the total, and buy or sell transactions respectively, executed in the same security on the same
day, are considered to be one transaction (i.e., an approved transaction executed in lots throughout the day is considered one transaction).
Option Strategies
The
multiple transactions that make up an option trading strategy, such as option spreads, will be counted as individual transactions towards the excessive trading limit.
|
|
7.3.
|
Holding Period – Thirty-Day Prohibition on Buying/Selling
Covered Securities
|
Access Persons are prohibited from purchasing and then selling, or selling and then purchasing
the same Covered Security within 30 calendar days of the initial transaction.
This prohibition does not apply to
independently managed/third-party discretionary accounts or transactions that are not subject to pre-clearance requirements.
In situations where multiple transactions have occurred in the same covered security, the
holding period will calculate from the date of the most recent purchase of the relevant covered security across all accounts, regardless of the holding period of prior transactions in the same covered security.
|
|
7.4.
|
Section 16 Reporting for Certain Closed-End Mutual Funds
|
Section 16 of the Securities Exchange Act of 1934 requires insiders (directors and officers or the issuer of
the securities) to file (i) an initial report with the SEC disclosing status as an insider (reporting person) and beneficial ownership of securities at the time of attaining such status (Form 3); (ii) changes in beneficial ownership (Form 4);
and (iii) annual statement of changes in beneficial ownership (Form 5).
Access Persons must promptly email:
Section16Filings@guggenheimfunds.com, but in no event more than 24 hours, after any transaction in CEFs advised or sub-advised by the Advisor or an affiliate. Such reporting is required to make mandatory
regulatory filings within the required time period.
The GPIM Compliance Department will review the adequacy of the policies and procedures contained in the Code and the effectiveness of its
implementation on an annual basis. This review will consider any changes in the business activity of the Advisor and any changes to the Advisers Act or applicable regulations that might suggest a need to revise the policies and procedures contained
herein. In addition, the GPIM Compliance Department will consider the need for interim reviews in response to significant compliance events, changes in business arrangements or regulatory developments.
GPIM will maintain records as set forth below in accordance with Rule 204-2(a)(12) and (13) under
the Advisers Act and will make available for examination by the SEC.
|
|
•
|
|
A copy of the Code and any other Code which is, or at any time within the past five years has been, in effect,
will be preserved in an easily accessible place;
|
|
|
•
|
|
A list of all Access Persons who are, or within the past five years have been, required to submit reports under
the Code, will be preserved in an easily accessible place;
|
|
|
•
|
|
A copy of each report made by an Access Person under the Code will be preserved for a period of not less than
five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place;
|
|
|
•
|
|
A copy of each duplicate brokerage confirmation and each periodic statement provided under the Code will be
preserved for a period of not less than five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place.
|
|
|
•
|
|
A record of any Code violation and of any sanctions taken will be preserved in an easily accessible place for a
period of not less than five years following the end of the fiscal year in which the violation occurred;
|
|
|
•
|
|
A copy of all Acknowledgements of Receipt and Annual Certifications as required by the Code for each Access
Person who is currently, or within the past five years was required to provide such Acknowledgement of Receipt or Annual Certification; and
|
|
|
•
|
|
GPIM will maintain a record of any decision, and the reasons supporting the decision, to approve the acquisition
of a Private Investment, for at least five years after the end of the fiscal year in which the approval is granted.
|
Central Compliance will use best efforts to assure that all requests for pre-clearance, all personal
securities transaction reports and all reports of securities holdings are treated as “Personal and Confidential.” However, such documents will be available for inspection by appropriate regulatory agencies, and by other parties within the
Advisor and its affiliates as are necessary to evaluate compliance with, or sanctions under, the Code.
The Code is designed to facilitate compliance with applicable laws and to reinforce the Advisor’s reputation for integrity in the conduct
of their businesses. For violations of the Code, sanctions may be imposed as deemed appropriate by the GPIM Compliance Department with Central Compliance and as applicable in coordination with senior management. Escalation will depend on the
severity and frequency of the infraction considering the facts and circumstances such as potential or actual harm or reputational risk to clients, prospects or the Advisor. A pattern of violations that individually do not violate the law, but which
taken together demonstrate a pattern of lack of respect for the Code, may result in disciplinary action, including termination of employment.
Specifically, the Access Person shall be subject to remedial actions which may include, but are not limited to, any one or more of the
following: (1) personal trading restriction; (2) verbal warning and/or letter of instruction; (3) written memo or letter of caution (including requirement for additional training) or other measures; (4) enhanced supervision or
management plan; (5) decrease in compensation, performance measure or other penalty; (6) termination of employment; or (7) referral to civil or governmental authorities for possible civil or criminal prosecution. If the Access Person
is normally eligible for a discretionary bonus, violations of the Code may also reduce or eliminate the discretionary portion of his/her bonus.
|
11.
|
Interpretations and Exceptions
|
The GPIM Compliance Department shall have the right to make final and binding interpretations of the Code and may grant, at its discretion,
exceptions to certain of the prohibited transactions as described in the Code. Any memorandum created regarding the granting of any such exceptions will be retained. Each Access Person must obtain written approval from the GPIM Compliance Department
before taking any action regarding such an exception.
|
12.
|
Appendix A – Reference Guide for Covered Security Pre-Clearance
and Reporting Requirements
|
|
|
|
|
|
|
|
Security / Financial Instrument
Type
|
|
Pre-Clearance
Required
|
|
Reporting (Quarterly
Transactions / Annual
Holdings)
|
|
|
|
|
|
Equities / Stocks
|
|
YES
|
|
YES
|
|
|
|
|
|
Corporate, U.S. (Government) Agency and Municipal Bonds and Notes
|
|
YES
|
|
YES
|
|
|
|
|
|
U.S. Government Obligations and Debt
|
|
NO
|
|
NO
|
|
|
|
|
|
High Quality Short-term Bonds (maturity at issuance of less than 366 days)
|
|
YES
|
|
YES
|
|
|
|
|
|
Broad-based Exchange-Traded Funds (ETFs) meeting certain criteria (see current list of applicable ETFs on OneGuggenheim – available here)
|
|
NO14
|
|
YES
|
|
|
|
|
|
All other Exchange Traded Funds (i.e., not broad-based ETFs meeting criteria)
|
|
YES
|
|
YES
|
|
|
|
|
|
Options15 and Futures on any Covered Security, ETF or on any group or (broad-based) index of securities
|
|
YES
|
|
YES
|
|
|
|
|
|
Futures on U.S. Government Obligations
|
|
NO
|
|
YES
|
|
|
|
|
|
Certain Futures on Currencies and Commodities16
|
|
YES
|
|
YES
|
|
|
|
|
|
Private Investments, certain Loans and secondary Commercial and Residential Property17
|
|
YES
|
|
YES
|
|
|
|
|
|
Unit Investment Trusts (UITs)
|
|
YES
|
|
YES
|
|
|
|
|
|
Unit Investment Trusts (UITs) investing exclusively in open-end mutual funds.
|
|
NO
|
|
NO
|
|
14
|
See Section 6.2 Trades Not Requiring
Pre-Clearance, for an exemption from pre-clearance for certain broad-based ETFs.
|
|
15
|
See Appendix B for pre-clearance requirements
applicable to various option trading strategies and transaction legs.
|
|
16
|
See Section 6.3 Prohibited Transactions for permitted categories of trading in
certain futures on currencies and commodities.
|
|
17
|
See Section 6.1 Trades Requiring
Pre-Clearance for further guidance.
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Unit Trusts (i.e. UCITS) or Foreign Mutual Fund
|
|
YES
|
|
YES
|
|
|
|
|
|
Closed-end Mutual Funds (regardless of whether advised or sub-advised by the Advisor or an affiliate)
|
|
YES
|
|
YES
|
|
|
|
|
|
Open-end Mutual Funds
|
|
NO
|
|
NO
|
|
|
|
|
|
Open-end Mutual Funds advised or sub- advised by the Advisor or an affiliate
|
|
NO
|
|
YES
|
|
|
|
|
|
Money Market Funds
|
|
NO
|
|
NO
|
|
|
|
|
|
Indirect investments in Cryptocurrencies18
|
|
YES
|
|
YES
|
|
|
|
|
|
Direct investments in Cryptocurrencies
|
|
NO
|
|
NO
|
|
|
|
|
|
Miscellaneous: Treasury Stock; Debenture; Evidence of Indebtedness; Investment Contract; Voting Trust Certificate; Certificate of Deposit for a Security; Limited Partnerships; Certificate of Interest or Participation in any
Profit-Sharing Agreement; Collateral-RIC Certificate; Fractional Undivided interest in Oil, Gas or other Mineral Right; Pre-Organizational Certificate or Subscription;
Transferable Shares
|
|
YES
|
|
YES
|
|
|
|
|
|
Bank Loans; Bankers’ Acceptances; Bank Certificates of Deposit; Commercial Paper; Repurchase Agreements
|
|
NO
|
|
NO
|
|
18
|
Cryptocurrency-related entities deriving a substantial amount of revenue therefrom, or private investments,
ETFs and investment trusts investing directly and primarily in cryptocurrencies.
|
|
13.
|
Appendix B – Option Trading Pre-Clearance Requirements
|
|
|
|
|
|
Buying a Call Option
|
|
Pre-Clearance
Required
|
|
|
|
|
Entering into Transaction
|
|
|
|
|
|
|
Buy to Open
|
|
YES
|
|
|
|
|
Closing Transaction
|
|
|
|
|
|
|
Sell to Close
|
|
YES
|
|
|
|
|
Let it Expire
|
|
NO
|
|
|
|
|
Exercise (i.e. buy underlying) and Hold
|
|
YES
|
|
|
|
|
Exercise (i.e. buy underlying) and Immediately Sell
|
|
YES for each trade (prohibited because of 30-day holding period)
|
|
|
|
|
|
Writing/Selling a Call Option
|
|
Pre-Clearance
Required
|
|
|
|
|
Entering into Transaction
|
|
|
|
|
|
|
Write/Sell Option
|
|
YES
|
|
|
|
|
Closing Transaction
|
|
|
|
|
|
|
Expires
|
|
NO
|
|
|
|
|
Exercised (if own underlying)
|
|
NO
|
|
|
|
|
Exercised (if naked/do not own underlying – i.e. buy security to deliver)
|
|
YES
|
|
|
|
|
Buy same Call Option
|
|
YES
|
|
|
|
|
|
Buying a Put Option
|
|
Pre-Clearance
Required
|
|
|
|
|
Entering into Transaction
|
|
|
|
|
|
|
Buy to Open
|
|
YES
|
|
|
|
|
Closing Transaction
|
|
|
|
|
|
|
Sell to Close
|
|
YES
|
|
|
|
|
Let it Expire
|
|
NO
|
|
|
|
|
Exercise (if own underlying - i.e. sell underlying)
|
|
YES
|
|
|
|
|
Exercise (if do not own underlying - i.e. buy underlying first)
|
|
YES for each trade (prohibited because of 30-day holding period)
|
|
|
|
|
|
Writing/Selling a Put Option
|
|
Pre-Clearance Required
|
|
|
|
|
Entering into Transaction
|
|
|
|
|
|
|
Write/Sell Option
|
|
YES
|
|
|
|
|
Closing Transaction
|
|
|
|
|
|
|
Expires
|
|
NO
|
|
|
|
|
Exercised (i.e. buy underlying)
|
|
NO
|
NEUBERGER BERMAN
CODE OF ETHICS
|
|
|
|
|
Last Updated:
|
|
26 January 2021
|
|
Policy Owner:
|
|
NB Central Compliance
|
|
Previous Versions:
|
|
January 2019
|
|
|
|
January 2018
|
|
|
|
January 2016
|
|
|
|
January 2013
|
|
|
|
May 2011
|
CODE OF ETHICS
This Code of Ethics (the “Code”) is adopted by the North-American based registered investment advisers (the “NB Advisers”)1 of Neuberger Berman Group LLC (the “Firm”) pursuant to Rule 204A-1 under the Investment Advisers Act of 1940 (the “Advisers Act”), the
Neuberger Berman Group of Funds (the “NB Funds”) and any NB Adviser that serves as investment adviser or sub-adviser to the NB Funds or other non-NB Funds
(collectively, the “Funds”) pursuant to Rule 17j-1 under the Investment Company Act of 1940 (the “Company Act”).
Any questions relating to this document should be brought to the attention of your designated Chief Compliance Officer or the firm’s Head of Compliance,
Brad E. Cetron. A list of Chief Compliance Officers and other Compliance contacts of the NB Advisers is attached here as Exhibit A.
By accepting
employment with the Firm, you have agreed to be bound by this Code of Ethics. On an annual basis you will be required to certify in writing your understanding of, and adherence to, this Code and your intention to comply with its requirements
(including any amendments).
|
1
|
Neuberger Berman Investment Advisers LLC (“NBIA”), NB Alternatives Advisers LLC (“NBAA”),
Neuberger Berman Breton Hill ULC and Neuberger Berman BD LLC (“NBBD”). This Code also applies to Neuberger Berman Trust Company N.A. and Neuberger Berman Trust Company of Delaware N.A.
|
2
Table of Contents
|
|
|
|
|
|
|
|
|
Statement of General Principles
|
|
5
|
|
A. General Prohibitions
|
|
6
|
|
B. Definitions
|
|
6
|
|
C. Code Policies
|
|
12
|
|
1.
|
|
Covered Accounts
|
|
12
|
|
2.
|
|
Initial Public Offerings
|
|
12
|
|
3.
|
|
Insider Trading
|
|
12
|
|
4.
|
|
Transactions in Restricted List Securities
|
|
12
|
|
5.
|
|
Private Placements
|
|
12
|
|
6.
|
|
Dissemination of Client Information
|
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13
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|
7.
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Gifts
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13
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8.
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Related Issuer
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13
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9.
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Trading Opposite Clients
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13
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10.
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|
Service on a Board of Directors
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14
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|
11.
|
|
Limitations on Short and Long Positions
|
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14
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12.
|
|
Transactions in Shares of Funds
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15
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13.
|
|
Transactions in Futures Contracts, Swaps, Forwards, and Commodities
|
|
15
|
|
14.
|
|
Sanctions
|
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15
|
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15.
|
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Violations
|
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15
|
|
D. Reporting Requirements
|
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16
|
|
1.
|
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Reports by Access Persons
|
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16
|
|
2.
|
|
Reports by Disinterested Directors/Trustees
|
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17
|
|
3.
|
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Exceptions to Reporting Requirements
|
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17
|
|
4.
|
|
Notification of Reporting Obligations
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18
|
|
E. Code Procedures
|
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18
|
|
1.
|
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Maintenance of Covered Accounts
|
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18
|
|
2.
|
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Pre-Clearance of Securities Transactions
|
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18
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|
a.
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Access Persons
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18
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|
b.
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Advisory Persons
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19
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|
|
|
c.
|
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NB CEF Insiders
|
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19
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|
|
|
d. Exceptions from Pre-clearance Requirement
|
|
19
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|
3.
|
|
Blackout Period
|
|
19
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|
|
|
a.
|
|
Same Day - Advisory Persons of a Fund
|
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19
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|
|
|
b.
|
|
Research Personnel
|
|
19
|
|
4.
|
|
Price Restitution
|
|
20
|
|
|
|
a.
|
|
Same Day Price Restitution
|
|
20
|
|
|
|
b.
|
|
Five(5)/One(1) Day Price Restitution - Advisory Persons
|
|
20
|
|
|
|
c.
|
|
Price Restitution Execution
|
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20
|
|
|
|
d. Exceptions to Price Restitution
|
|
21
|
|
5. Holding Periods
|
|
21
|
|
|
|
a. Thirty (30) Day Holding Period
|
|
21
|
|
|
|
b. Sixty (60) Day Holding Period
|
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21
|
|
|
|
c. Exceptions to the Holding Periods
|
|
22
|
3
|
|
|
|
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|
|
6. Code Procedures Monitoring
|
|
|
22
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|
|
F. NB Funds’ Ethics and Compliance Committee
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|
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22
|
|
|
G. Annual Report to the NB Funds’ Board
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|
|
23
|
|
|
H. Administration
|
|
|
23
|
|
|
I. Recordkeeping
|
|
|
24
|
|
|
EXHIBIT A - Compliance Contacts
|
|
|
25
|
|
|
EXHIBIT B - Applicability of Code Procedures to Temporary Access Persons
|
|
|
26
|
|
4
Statement of General Principles
The Code is designed to ensure, among other things, that employees put Client interests first and conduct their activities in a manner consistent with
applicable Federal Securities Laws. The following principles shall govern the personal investment activities of all individuals subject to this Code:
|
|
•
|
|
Employees must at all times place the interests of Clients ahead of their personal interests - Client trades
have priority over personal securities trades.
|
|
|
•
|
|
Personal securities transactions must be conducted in accordance with this Code and in such a manner as to
avoid any actual, perceived or potential conflict of interest or abuse of an employee’s position of trust and responsibility.
|
|
|
•
|
|
Employees should not take advantage of their position to benefit themselves at the expense of any Client.
|
|
|
•
|
|
In personal securities investing, employees should follow a philosophy of investment rather than trading.
|
|
|
•
|
|
Employees must comply with applicable Federal Securities Laws.
|
5
A. General Prohibitions
No person associated with the NB Advisers or the Firm, in connection with the purchase or sale, directly or indirectly, of a security held or to be acquired by
a Client, shall:
|
|
•
|
|
Employ any device, scheme or artifice to defraud any Client;
|
|
|
•
|
|
Make any untrue statement of a material fact to any Client or omit to state to such Client a material fact
necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
|
|
|
•
|
|
Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon
any Client;
|
|
|
•
|
|
Engage in any manipulative practice with respect to any Client;
|
|
|
•
|
|
Engage in any transaction in a security while in possession of material nonpublic information regarding the
security or the issuer of the security; or
|
|
|
•
|
|
Engage in any transaction intended to raise, lower, or maintain the price of any security or to create a false
appearance of active trading.
|
The following words have the following meanings in this Code:
Access Person
|
a.
|
Any employee, officer, director of any NB Adviser or NB Fund (or any company controlled by the NB Advisers) and
their Immediate Family Members; and
|
|
b.
|
Any director, officer or general partner of a principal underwriter who, in the ordinary course of business,
makes, participates in or obtains information regarding the purchase or sale of Covered Securities by any NB Fund for which the principal underwriter acts, or whose functions or duties in the ordinary course of business relate to the making of any
recommendation to the NB Fund regarding the purchase or sale of Covered Securities.
|
|
c.
|
Any temporary employee, consultant, contractor, intern or other person who will be on the Firm’s premises
for a period of ninety (90) days or more. See Exhibit B for applicability of Code Procedures to Temporary Access Persons.
|
Advisory Person
An Access Person of the NB Advisers who,
in connection with his or her regular functions or duties, makes, or participates in making, recommendations regarding the purchase or sale of Covered Securities by a Related Client. The determination as to whether an individual is an Advisory
Person shall be made by the Legal and Compliance Department, taking into consideration the following roles and responsibilities: Portfolio Manager, Traders, Analysts (credit/research) and any member on any of their respective teams, including
Administrative Assistants.
6
Beneficial Interest
An employee has a Beneficial Interest in an account if they may profit or share in the profit from transactions. In general, a person is regarded as having
direct or indirect Beneficial Interest in securities held in his or her name, as well as:
|
|
•
|
|
in the name of an Immediate Family Member;
|
|
|
•
|
|
in his or her name as trustee for himself or herself or for his or her Immediate Family Member;
|
|
|
•
|
|
in a trust in which he or she has a Beneficial Interest or is the settlor with a power to revoke;
|
|
|
•
|
|
by another person and he or she has a contract or an understanding with such person that the securities held in
that person’s name are for his or her benefit;
|
|
|
•
|
|
in the form of acquisition rights of such security through the exercise of warrants, options, rights, or
conversion rights;
|
|
|
•
|
|
by a partnership of which he or she is a member;
|
|
|
•
|
|
by a corporation which he or she uses as a personal trading medium;
|
|
|
•
|
|
by a holding company which he or she controls; or
|
|
|
•
|
|
any other relationship in which a person would have beneficial ownership under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect Beneficial Interest shall apply to all securities which an Access
Person has or acquires.
|
Any employee who wishes to disclaim a Beneficial Interest in any securities must submit a written request to
the Legal and Compliance Department explaining the reasons therefore. Any disclaimers granted by the Legal and Compliance Department must be made in writing. Without limiting the foregoing, if a disclaimer is granted to any employee with respect to
an account of an Immediate Family Member, the provisions of this Code applicable to such employee shall not apply to the Immediate Family Member for which such disclaimer was granted. However, if the Immediate Family Member whose account was
disclaimed is also an employee of an NB Adviser, the sections of this Code applicable to employees would still be applicable to the employee’s Immediate Family Member.
Blind Trust
A trust in which an Access Person has
Beneficial Interest or is the settlor with a power to revoke, with respect to which the Legal and Compliance Department has determined that such Access Person has no direct or indirect influence or control over the selection or disposition of
securities and no knowledge of transactions therein, provided, however, that direct or indirect influence or control of such trust is held by a person or entity not associated with the Firm and not a relative of such Access Person.
Client
An investment advisory account, including, but
not limited to, the Funds, other commingled investment vehicles and separate accounts for which any of the NB Advisers provides investment advice, management or exercises discretion.
7
“Control” means the power to exercise a controlling influence over the management or policies
of a company, unless such power is solely the result of an official position with such company. Generally, any person who owns beneficially, either directly or through one or more controlled companies, more than 25 percent of the voting
securities of a company shall be presumed to control such company (Section 2(a)(9) of the Company Act).
Covered Account
An account held in the name of an Access Person where the Access Person has, or is deemed to have, a Beneficial Interest, including investments held outside of
an account over which an Access Person has physical control, such as a stock certificate.
Covered Security
|
a.
|
Any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security,
fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on
the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate
of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing;
|
|
b.
|
Shares of any Fund; and
|
|
c.
|
Exchange Traded Funds and closed-end funds registered under the Company
Act.
|
The term Covered Security does not include:
|
a.
|
Direct obligations of the Government of the United States, its territories or States or Related Securities
thereof, (including short term debt securities that are government securities within the meaning of the law);
|
|
b.
|
Bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt
instruments including repurchase agreements; and
|
|
c.
|
Shares issued by registered open-end investment companies for which any
NB Adviser does not act as investment adviser, sub-adviser or distributor provided such shares are held directly with the fund company in a mutual fund account and not in a third party brokerage account unless
the Access Person has obtained prior written approval from the Legal and Compliance Department to maintain such account.
|
De minimis Restitution
Price
restitutions that result in less than $1000 collectively or where the gain to be received by each underlying Client account is less than $100.
Disinterested Director/Trustee
A person who serves as
director/trustee of an NB Fund and is not otherwise affiliated with an NB Fund.
8
Domestic Partnership
An interpersonal relationship between two individuals who live together and share a common domestic life (“Domestic Partners”).2
Ethics and Compliance Committee
The Ethics and Compliance Committee of the NB Funds (except the NB Registered Private Equity Funds).
Exchange Traded Fund
Unit investment trusts or
open-ended investment companies registered under the Company Act that trade on a national stock exchange.
Exempt Transactions
Transactions that may be exempt from certain provisions of the Code such as, pre-clearance, minimum holding periods, or
blackout periods. Exempt Transactions are not exempt from the general provisions of the Code including reporting requirements. The following have been defined as Exempt Transactions:
|
a.
|
Transactions in Managed Accounts.
|
|
b.
|
Transactions made automatically in accordance with a predetermined schedule and allocation, such as part of a
dividend reinvestment plan (“DRIP”).
|
|
c.
|
An involuntary purchase effected upon the exercise of rights issued by an issuer pro rata to all holders of a
class of its securities, to the extent such rights were acquired from such issuer, and sales of rights so acquired.
|
|
d.
|
The acquisition or disposition of securities through stock dividends, stock splits, reverse stock splits,
mergers, margin calls, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of securities.
|
|
e.
|
Securities transactions effected in Blind Trusts.
|
|
f.
|
A transaction by an NB Fund Disinterested Director/Trustee unless at the time of such transaction, the
Disinterested Fund Director/Trustee, knew or should have known that, during the fifteen calendar day period immediately preceding or, after the date of the transaction by the Disinterested Director/Trustee, such security was purchased or sold by the
NB Fund or was being considered for purchase or sale for Clients of the NB Adviser.
|
|
g.
|
Transactions in the following broad-based security indices: S&P 500, NASDAQ,
7-10 Year Treasury Bond Index, 20+ Year Treasury Bond Index, Russell 2000 and Dow Jones Industrial Average. 3
|
|
h.
|
Other transactions designated in writing by the Legal and Compliance Department.
|
Federal Securities Laws
The Securities Act of 1933
(“Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), the Company Act, the Advisers Act, the Sarbanes-Oxley Act of 2002 (as applicable), Title V of the Gramm- Leach-Bliley Act, any rules adopted by the
Securities and Exchange Commission (“SEC”) under any of these statutes, the Bank Secrecy Act as it applies to registered investment companies and investment advisers, and any rules adopted thereunder by the SEC or the Department of the
Treasury.
|
2
|
The above definition is being used solely for purposes of this Code of Ethics and should not be construed as
the applicable definition for other purposes (e.g., employee benefits).
|
|
3
|
Transactions involving a futures contract or swap on the broad-based security indices are prohibited.
|
9
Fund
Any
investment company, and series thereof, registered under the Company Act for which any NB Adviser is the investment manager, investment adviser, sub-adviser, administrator or distributor.
iCompliance
The Firm’s proprietary employee
compliance dashboard managed by the Legal and Compliance Department. iCompliance facilitates the reporting and monitoring of a number of key compliance requirements including: the Firm’s annual personal securities holding affirmation; tracking
of employee outside investments, outside activities, political contributions and employee licenses and registrations; and a pre-trade approval process for employee trading activity that occurs at third party
broker-dealers.
Immediate Family Member
|
a.
|
An Access Person’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, Domestic
Partner, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in- law, including adoptive relationships who share the same household as the Access Person or to whom the employee provides material financial support; and
|
|
b.
|
Any other relative or person who shares the same household as the Access Person or to whom the employee
provides material financial support and is deemed to be an Immediate Family Member by the Legal and Compliance Department.
|
Legal and
Compliance Department
The Neuberger Berman Legal and Compliance Department.
Limited Access Person
An Access Person’s Immediate
Family Member who would otherwise be an Access Person but who is determined by the Legal and Compliance Department to be a Limited Access Person considering factors including, but not limited to, whether the Immediate Family Member shares the same
household as the Access Person and is financially dependent on the Access Person.
Limited Access Person Account
An account in the name of a Limited Access Person held at the Firm. A Limited Access Person Account may be treated as a Managed Account at the discretion of
the Legal and Compliance Department.
Managed Account
A Covered Account where full control and investment discretion has been delegated pursuant to an investment advisory agreement that includes the payment of a
management fee to: 1) an unrelated third party investment manager, or 2) a Neuberger Berman portfolio management team of which the employee is not a member. A Limited Access Person Account may be treated as a Managed Account at the discretion of the
Legal and Compliance Department.
10
NB Advisers
The Firm’s North-American-based investment advisers: Neuberger Berman Investment Advisers LLC, Neuberger Berman Breton Hill ULC, Neuberger Berman BD LLC,
NB Alternatives Advisers LLC, Neuberger Berman Trust Company N.A., Neuberger Berman Trust Company of Delaware N.A.
NB
Closed-End Fund (“CEF”) Insider
An Access Person who is a director, officer or principal stockholder
(holder of more than 10% of a class of reportable securities) of any company that has a class of equity securities registered pursuant to Section 12 of the Exchange Act and is subject to beneficial ownership reporting obligations under
Section 16. Obligations apply to all insiders of the closed-end funds (“NB CEF”) as well as to NBIA and certain of its affiliated persons.
NB Funds
The NB Group of Funds.
Private Placement
An offering that is exempt from
registration under the Securities Act pursuant to Section 4(2) or Section 4(6) or pursuant to Rules 504, 505 or 506 under the Securities Act.
Related Client
A Client account, including a proprietary
account consisting of seed capital during the incubation period, for which an Advisory Person or the portfolio management team of which the Advisory Person is a member, has or is deemed to have, investment decision-making authority or is responsible
for maintaining and/or reviewing information pertaining to the account.
Related Issuer
An issuer with respect to which an Advisory Person or their Immediate Family Member: (i) has a material business relationship with such issuer or any
promoter, underwriter, officer, director, or employee of such issuer; or (ii) is an Immediate Family Member of any officer, director or senior management employee of such issuer.
Related Security
A Related Security is one whose value
is based on or derived from the value of another security, including convertible securities and derivative securities such as options and warrants.
Security Held or to be Acquired by a Client
Any Covered
Security (or Related Security) that within the most recent fifteen (15) days:
|
|
•
|
|
is or has been held by a Client, or
|
|
|
•
|
|
is being or has been considered by a NB Adviser for purchase by such Client.
|
Trading Desk
The Neuberger Berman Trading Desk.
11
C. Code Policies
Access Persons who are not Advisory Persons are generally permitted to maintain their Covered Accounts at Neuberger Berman, or with prior
approval from the Legal and Compliance Department, at Fidelity Investments (“Fidelity”). Advisory Persons are generally required to maintain their Covered Accounts at Neuberger Berman. 4
Canadian Employees Only. Employees in Canada are required to maintain their Covered
Accounts at RBC and to ensure that any accounts opened are added to the electronic feed between Neuberger Berman and RBC.
|
|
2.
|
Initial Public Offerings
|
Access Persons are generally prohibited from acquiring direct or indirect beneficial ownership of any equity security in an initial public
offering.
The Firm has adopted Information Barrier Policies and Procedures (the “Policy”). All Access Persons are required to be familiar with
the Policy and shall certify, on an annual basis, that they have read, understood and complied with the requirements of this Code and the Policy.
|
|
4.
|
Transactions in Restricted List Securities
|
Access Persons may obtain material non-public information (“MNPI”) or establish special or
“insider” relationships with one or more issuers of securities (e.g., the employee may become an officer or director of an issuer, a member of a creditor committee that engages in material negotiations with an issuer, and so forth). In
such cases, the Access Person should keep in mind that they are subject to the Firm’s Information Barrier Policies and Procedures.
Access Persons may not acquire direct or indirect Beneficial Interest in any Private Placement without prior written approval from the Legal
and Compliance Department and such other persons as may be required. Private Placements include, but are not limited to, any interest in a hedge fund, private equity vehicle or other similar private or limited offering investment. Pre-approval for NB-sponsored private securities transactions made through the firm’s Employee Investment Solutions (EIS) team are submitted by the Legal and Compliance
Department on the employee’s behalf.
|
4
|
See Section E(1) for information related to Maintenance of Employee Covered Accounts.
|
12
Approval of a Private Placement shall take into account, among other factors, whether: i) the
investment opportunity should be reserved for a Client, and ii) the opportunity is being offered to the individual by virtue of his or her position with the Firm, the NB Adviser or his or her relationship with or to the Client or the issuer of the
Private Placement. Additional capital investments (other than capital calls related to the initially approved investment) in a previously approved Private Placement require a new approval.
Advisory Persons who hold a previously approved Private Placement and are subsequently involved, or play a part in the consideration of the
same Private Placement as an investment for a Related Client, must inform the Legal and Compliance Department of their personal investment (or their Immediate Family Member’s investment). The decision to invest in the Private Placement for a
Related Client will be determined by the Legal and Compliance Department and other relevant parties as deemed necessary for the review process.
Access Persons’ private placement redemptions are subject to review and approval by the Legal and Compliance Department.
|
|
6.
|
Dissemination of Client Information
|
Access Persons are prohibited from revealing material information relating to current or anticipated investment intentions, portfolio
transactions or activities of Client/Funds except to persons whose responsibilities require knowledge of such information.
Access Persons are prohibited from giving or receiving any gift or other item of value to or from any one person or entity that does business
with the Firm without prior approval from the Legal and Compliance Department. Generally, promotional items valued at $25 or less do not require prior approval although certain recipients may be subject to stricter gift limits under state rules or
rules applicable to ERISA fiduciaries. The Firm has adopted gift and entertainment policies to which all employees are subject. See the NB Code of Conduct and the Political Activity Policy for additional information.
Advisory Persons are required to disclose to the Legal and Compliance Department when they play a part in any consideration of an investment by
a Client in a Related Issuer. The decision to purchase securities of the Related Issuer for a Client will be determined by the Legal and Compliance Department and other relevant parties as deemed necessary for the review process.
|
|
9.
|
Trading Opposite Clients
|
No Advisory Person or Advisory Person of a Fund may execute transactions in a Covered Security held in a Covered Account that would be on the
opposite side of any trade in a Related Client account that was executed within 5 business days prior to the trade in the Covered Account (“Opposite Side Trade”). For example, if an Advisory Person executes a purchase of shares of Company
XYZ on Monday, February 1st for a Related Client account(s), that Advisory Person and their team will be prohibited from executing a sale of shares of Company XYZ for their Covered Accounts between the time when the Related Client order was
submitted on Monday, February 1st through the close of trading on Monday, February 8th.
13
Notwithstanding the foregoing, an Advisory Person or Advisory Person of a Fund (or their team
member) may execute an Opposite Side Trade for the following reasons:
|
|
•
|
|
to capture a gain or loss for tax purposes;
|
|
|
•
|
|
the Advisory Person or Advisory Person of a Fund sold the security for the Related Client account in order to
raise cash;
|
|
|
•
|
|
securities transactions effected in Blind Trusts;
|
|
|
•
|
|
securities transactions that are non-volitional on the part of the
Advisory Person or Advisory Person of a Fund. Non-volitional transactions include shares obtained or redeemed through a corporate action (e.g. stock dividend) or the exercise of rights issued by an issuer pro
rata to all holders of a class of securities; or
|
|
|
•
|
|
other such exceptions as may be granted by the Legal and Compliance Department.
|
|
|
10.
|
Service on a Board of Directors
|
Access Persons are prohibited from serving on the board of directors of any public or private company without prior written approved from the
Legal and Compliance Department.5
|
|
11.
|
Limitations on Short and Long Positions
|
Advisory Persons are not permitted to: a) sell short any security (or Related Security) that they hold or intend to hold for a Related Client;
or b) buy a long position in a security (or Related Security) if they have or intend to create a short position in the same security for a Related Client. Notwithstanding the foregoing, certain types of transactions may be permitted with prior
approval from the Legal and Compliance Department and the CIO (or designee), such as
|
|
i.
|
A purchase to cover an existing short position, except that if an Advisory Person intends to create a long
position for a Related Client in the same security, all Related Client transactions must be completed before the Advisory Person can cover their short position.
|
|
|
ii.
|
A short sale against a broad-based index. Approved broad-based indices include the S&P 500, NASDAQ, 7-10 Year Treasury Bond Index, 20+ Year Treasury Bond Index, Russell 2000 and Dow Jones Industrial Average. Any other index must be approved by the Legal and Compliance Department before engaging in any short sales
against such index.
|
|
|
iii.
|
A short sale to hedge an existing security position provided the hedging activity is proportionate to the
account.
|
|
5
|
Request must be made through iCompliance by completing the Outside Affiliation request form.
|
14
|
|
iv.
|
Any approvals granted under this section will not relieve the Advisory Person from being subject to Price
Restitution.
|
|
|
12.
|
Transactions in Shares of Funds
|
|
|
a.
|
All trading in shares of a Fund is subject to the terms of the prospectus and the Statement of Additional
Information of the Fund.
|
|
|
b.
|
No Access Person may engage in excessive trading or market timing in any shares of any Fund.
|
|
|
13.
|
Transactions in Futures, Swaps, Forwards and Commodities
|
The Firm is subject to regulatory requirements mandating the monitoring of certain financial instruments positions held by client accounts, and
in some cases, employee personal accounts. To minimize the regulatory risk to the Firm and ensure the focus is on required client monitoring, Access Persons are prohibited from entering into any transaction (long or short) involving a futures
contract, swap, forward contract (including currency forwards), and commodities. Access Persons who join the Firm with such holdings must close out the positions at the earliest opportunity. Adding to, or rolling such positions is not permitted.
The Firm shall have the authority to impose sanctions for violations of this Code. Such sanctions may include a letter of censure, suspension
or termination of the employment of the violator, forfeiture of profits, forfeiture of personal trading privileges, forfeiture of gifts, or any other penalty deemed to be appropriate.
Access Persons must report apparent or suspected violations in addition to actual or known violations of the Code to the Legal and Compliance
Department. Access Persons are encouraged to seek advice from the Legal and Compliance Department with respect to any action or transaction which may violate this Code and to refrain from any action or transaction which might lead to the appearance
of a violation. The types of reporting that are required under this Code include:
|
|
•
|
|
Non-compliance with applicable laws, rules, and regulations;
|
|
|
•
|
|
Fraud or illegal acts involving any aspect of the Firm’s business;
|
|
|
•
|
|
Material misstatements in regulatory filings, internal books and records, client records or reports;
|
|
|
•
|
|
Activity that is harmful to clients, including fund investors; and
|
|
|
•
|
|
Deviations from required controls and procedures that safeguard clients and the Firm.
|
15
|
D.
|
Reporting Requirements6
|
|
|
1.
|
Reports by Access Persons
|
|
|
i.
|
All Access Persons must disclose their Covered Accounts within 10 calendar days of becoming an Access Person.
The initial holdings disclosure must include all Covered Accounts in which the Access Person has a direct or indirect Beneficial Interest. Access Persons may satisfy this requirement by providing copies of their account statements for all Covered
Accounts to the Legal and Compliance Department (as applicable).
|
|
|
ii.
|
The information provided must be current as of a date no more than 45 days prior to the date the person became
an Access Person.
|
|
|
iii.
|
Access Persons will be provided with a copy of the Code of Ethics and be required to acknowledge receipt of the
Code.
|
|
|
i.
|
Within 30 days of the end of each calendar quarter, Access Persons must disclose securities transactions in any
Covered Security in which such Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Interest that occurred during the previous quarter. For each transaction executed during the quarter, the following
information must be provided:
|
|
|
•
|
|
the date of the transaction;
|
|
|
•
|
|
type of transaction (buy, sell, short, cover, etc.);
|
|
|
•
|
|
name of security, exchange ticker, symbol or CUSIP number;
|
|
|
•
|
|
the number of shares, price and principal amount; and
|
|
|
•
|
|
the interest rate and maturity date (as applicable).
|
|
|
ii.
|
The above requirement may be satisfied if information is being received by Neuberger Berman as stated in
Section D(3).
|
|
|
i.
|
On an annual basis, Access Persons must affirm that all Covered Accounts have been reported and are reflected
in iCompliance.
|
|
|
ii.
|
Access Persons are required to certify that they have read, understand, and complied with the Code of Ethics
and the Information Barrier Policies and Procedures, and have disclosed or reported all personal securities transactions, holdings and accounts required to be disclosed or reported pursuant to the requirements of the Code.
|
|
6
|
All Code reporting disclosures are done through iCompliance.
|
16
|
|
iii.
|
The information provided must be current as of a date no more than 45 days of the date the report is submitted.
|
|
|
iv.
|
With respect to any Blind Trust in which an Access Person has a Beneficial Interest, such Access Person must
certify that they do not exert any direct or indirect influence or control over the trustee by: a) suggesting or directing any particular transactions in the account, or b) consulting with the trustee regarding the allocation of investments in the
account.
|
|
|
v.
|
With respect to any Managed Account managed by a third-party, Access Persons must certify that they do not
exert any direct or indirect influence or control over the third-party manager by: a) suggesting or directing any particular transactions in the account, or b) consulting with the third-party manager regarding the allocation of investments in the
account.
|
|
2.
|
Reports by Disinterested Directors/Trustees
|
A director/trustee of a NB Fund who is not an “interested person” of the NB Fund within the meaning of section 2(a)(19) of the Company Act, and who
would be required to make a report solely by reason of being a NB Fund director/trustee, need not make:
|
|
a.
|
An initial holdings disclosure and annual holdings disclosure under Section D(1)(a) and
|
|
|
b.
|
A quarterly transactions disclosure under Section D(1)(b) above, unless the director/trustee knew or, in the
ordinary course of fulfilling their official duties as a NB Fund director/trustee, should have known that during the 15-day period immediately before or after the director/trustee’s transaction in a
Covered Security, the NB Fund purchased or sold the Covered Security, or the NB Fund or its investment adviser considered purchasing or selling the Covered Security.
|
|
3.
|
Exceptions to Reporting Requirements
|
With regards to Section D(1)(b), Access Persons need not disclose holdings if such disclosure would duplicate information contained in trade confirmations or
account statements (including electronic feeds of such information) received by Neuberger Berman. For purposes of the foregoing, the Legal and Compliance Department maintains (i) electronic records of all securities transactions effected
through Neuberger Berman and Fidelity, and (ii) copies of any duplicate confirmations that have been provided to the Legal and Compliance Department under this Code of Ethics with respect to securities transactions that, pursuant to exceptions
granted by the Legal and Compliance Department, have not been effected through Neuberger Berman.
17
|
4.
|
Notification of Reporting Obligations
|
The Legal and Compliance Department shall identify all Access Persons who are required to make reports under the Code and inform them of their
reporting obligations.
|
|
1.
|
Maintenance of Covered Accounts
|
|
|
i.
|
Access Persons who are not Advisory Persons may maintain their Covered Accounts at Neuberger Berman or
Fidelity. Prior written approval from the Legal and Compliance Department is required for Fidelity accounts.
|
|
|
ii.
|
Advisory Persons are required to maintain their Covered Accounts at Neuberger Berman.
|
|
|
iii.
|
Limited Access Persons are not required to keep their securities accounts at Neuberger Berman or Fidelity.
|
|
|
b.
|
Exceptions to Maintenance of Covered Accounts at Neuberger Berman or Fidelity:
|
|
|
i.
|
Managed Accounts. Any Access Person granted approval to maintain an external Managed Account is required to
direct their broker, adviser or trustee to provide duplicate copies of all trade confirmations, as well as copies of account statements to the Legal and Compliance Department.
|
|
|
ii.
|
DRIPs established directly with the issuer that have been approved by the Legal and Compliance Department and
for which duplicate copies of confirmations and periodic statements are provided.
|
|
|
iii.
|
Other accounts as may be permitted by the Legal and Compliance Department.
|
|
|
2.
|
Pre-Clearance of Securities Transactions
|
|
|
i.
|
Access Persons are required to obtain prior approval for transactions in Covered Accounts not maintained at
Neuberger Berman by submitting a pre-clearance request in iCompliance that is compared with the Firm’s Restricted List.
|
|
|
ii.
|
Access Persons are required to obtain prior approval from the Trading Desk before executing any transactions in
Covered Accounts held at Neuberger Berman. Before granting approval, the Trading Desk, subject to oversight by the Legal and Compliance Department, will determine whether:
|
|
|
•
|
|
the employee is an Advisory Person of a Fund that is a Related Client with a pending “buy” or
“sell” order in the same (or Related Security);
|
18
|
|
•
|
|
the security is on the Firm’s Restricted List(s); or
|
|
|
•
|
|
the transaction is de minimis
|
|
|
iii.
|
The Legal and Compliance Department reviews transactions for required trade
pre-clearance and all transactions are subject to the Price Restitution review, subject to certain exceptions (see section E(4)).
|
Advisory Persons who are members of the Firm’s Equity Research Department are subject to additional
pre-approval requirements for their personal trading. Members of the Research Department should refer to the Equity Research Department’s Procedures for specific details.
Access Persons who are NB CEF Insiders must obtain prior approval from mutual fund compliance before placing any transactions in the NB CEFs.
|
|
d.
|
Exceptions from Pre-clearance Requirement
|
|
|
ii.
|
Other securities designated in writing by the Legal and Compliance Department
|
|
|
a.
|
Same Day – Advisory Persons of a Fund
|
|
|
i.
|
An Advisory Person of a Fund may not buy or sell a Covered Security (or a Related Security) on a day during
which any Related Client executes either a “buy” or “sell” order in the same security (“Same Day Blackout Period”).
|
|
|
ii.
|
Purchases that occur within the Same Day Blackout Period will be required to be “broken.” Any losses
will be incurred by the Covered Account and any gains (including gains disgorged from a sale within the Same Day Blackout Period) may be donated to a charitable organization designated by the Firm.
|
|
|
iii.
|
Certain Limited Access Person Accounts may be subject to the Same Day Blackout Period.
|
Advisory Persons who are members of the Firm’s Equity Research Department may be subject to a blackout period for their personal trading.
Members of the Research Department should refer to the Equity Research Department’s Procedures for specific details.
19
|
|
a.
|
Same Day Price Restitution
|
|
|
•
|
|
If an Access Person purchases or sells a Covered Security in a Covered Account and a Client purchases or sells
the same security during the same day, the Access Person may not receive a more favorable price than that received by the Client.
|
|
|
ii.
|
Limited Access Persons
|
|
|
•
|
|
If an Advisory Person related to a Limited Access Person purchases or sells a Covered Security in the Limited
Access Person Account and such Advisory Person purchases or sells the same security during the same day for a Related Client, the Limited Access Person Account may not receive a more favorable price than that received by the Related Client.
|
|
|
iii.
|
For the avoidance of doubt, a “purchase” includes a long buy, as well as a cover short, and a
“sell” includes a long sell, as well as a short sale.
|
|
|
b.
|
Five(5)/One(1) Day Price Restitution – Advisory Persons
|
|
|
i.
|
If an Advisory Person purchases or sells a Covered Security within five (5) business days prior, or one
(1) business day subsequent to a Related Client (“5/1 Price Restitution”), the Advisory Person may not receive a more favorable price than that received by the Related Client.
|
|
|
ii.
|
Certain Limited Access Person Accounts may be subject to the 5/1 Price Restitution.
|
|
|
iii.
|
For the avoidance of doubt, a “purchase” includes a long buy, as well as a cover short, and a
“sell” includes a long sell, as well as a short sale.
|
|
|
c.
|
Price Restitution Execution
|
|
|
i.
|
Price restitution will generally be executed when there is a total gain of at least $1000 from the difference
in price received by the Access Person vs. the Related Client(s), and a gain of at least $100 to each underlying Client Account.
|
20
|
|
ii.
|
With respect to the Funds, the Legal and Compliance Department reserves the right to review the individual
restitutions below $1000 and may require payment of these amounts if facts and circumstances warrant.
|
|
|
iii.
|
Where restitution is required, preference shall be to provide the economic benefit to Clients where
operationally, contractually or legally permitted. Where otherwise not feasible or permitted, restitution may be made by transfer, wire or check and shall be remitted to the Firm for donation to a charitable organization designated by the Firm.
|
|
|
d.
|
Exceptions to Price Restitution
|
|
|
ii.
|
De minimis Restitution.
|
|
|
iii.
|
Transactions in non-Covered Securities.
|
|
|
iv.
|
Transactions arising through hedged options trading.
|
|
|
v.
|
Transactions in the Firm’s retirement contribution program.
|
|
|
vi.
|
Certain transactions related to the initial investment of a Related Client account or investments made as a
result of additional funds contributed to an existing Related Client account communicated to the Legal and Compliance Department.
|
|
|
vii.
|
Other exceptions designated in writing by the Legal and Compliance Department.
|
|
|
a.
|
Thirty (30) Day Holding Period
|
All securities positions, including both long and short positions, established in any Covered Account must be held for at least 30 calendar
days (beginning on the day of the transaction) measured on a Last In-First Out (“LIFO”) basis.
|
|
b.
|
Sixty (60) Day Holding Period
|
Access Persons are required to hold shares of any Fund for at least 60 days, measured on a LIFO basis. After the holding period has lapsed,
Fund shares may be redeemed or exchanged; however, the redemption or exchange of such shares will result in a new 60-day holding period.
21
|
|
c.
|
Exceptions to the Holding Periods
|
|
|
i.
|
Transactions in Managed Accounts
|
|
|
ii.
|
U.S. Treasury obligations
|
|
|
iii.
|
Bona fide hedging transactions, identified as such to the Legal and Compliance Department prior to execution,
on the following broad-based indices: S&P 500, NASDAQ, 7-10 Year Treasury Bond Index, 20+ Year Treasury Bond Index, Russell 2000 and Dow Jones Industrial Average.
|
|
|
iv.
|
Positions where at time of order entry, there is an expected loss of at least 10%. This exclusion does not
apply to losses in options on equities.
|
|
|
v.
|
Notwithstanding the foregoing, on a limited basis and with the prior approval of the Legal and Compliance
Department and CIO (or designee), shares that have been held for at least one year may be sold even if additional shares of the same security were purchased in the last 30 calendar days.
|
|
|
vi.
|
The 60-day holding period shall not apply to:
|
|
|
•
|
|
Taxable and tax-exempt money market funds;
|
|
|
•
|
|
Variable annuity contracts for which a Fund does not serve as the underlying investment vehicle; and
|
|
|
•
|
|
Shares of an investment company that are purchased through an automatic investment program or payroll deduction.
|
|
|
vii.
|
The above exclusions shall not apply if, in the opinion of the Legal and Compliance Department, a pattern of
excessive trading exists.
|
Any requests for exceptions to the above holding periods must be submitted to the Legal and
Compliance Department.
|
|
6.
|
Code Procedures Monitoring
|
The Legal and Compliance Department will conduct post-trade monitoring of employee trades to ascertain that such trading conforms to the
procedures above, and where required, that employees have obtained the necessary pre-trade approvals as may be applicable.
|
F.
|
NB Funds’ Ethics and Compliance Committee7
|
|
|
1.
|
The Ethics and Compliance Committee shall be composed of at least two members who shall be Disinterested
Director/Trustees selected by the Board of Directors/Trustees of the Company/Trust (the “Board”).
|
|
7
|
The Ethics and Compliance Committee is a committee for all the NB Funds except the NB Registered Private Equity
Funds. On a quarterly basis, the NB Funds’ Chief Compliance Officer reviews with the Board of Directors/Trustees of the NB Registered Private Equity Funds (“PE Funds Board”) violations of the Code, if any; and on a quarterly basis the
Chief Compliance Officers of NBIA, NBAA and NBBD provide certifications to the PE Funds’ Board with respect to whether there were any material violations of the Code.
|
22
|
|
2.
|
The Ethics and Compliance Committee shall consult regularly with the Legal and Compliance Department and/or the
NB Funds Chief Compliance Officer and either the Committee or the Board shall meet no less frequently than annually with the Legal and Compliance Department and/or the NB Funds Chief Compliance Officer regarding the implementation of this Code. The
Legal and Compliance Department shall provide the Ethics and Compliance Committee with such reports as are required herein or as are requested by the Ethics and Compliance Committee.
|
|
|
3.
|
On a quarterly basis, i) the NB Funds’ Chief Compliance Officer reviews with the Ethics and Compliance
Committee violations of the Code, if any, and ii) the Chief Compliance Officers of NBIA and NBBD provide certifications to the NB Funds’ Board with respect to whether there were any material violations of the Code.
|
|
G.
|
Annual Report to the NB Funds’ Board
|
No less frequently than annually and concurrently with reports to the Board, the NB Funds Chief Compliance Officer shall furnish to the Funds, and the Board
must consider a written report that:
|
|
•
|
|
describes any issues arising under this Code or procedures concerning personal investing since the last such
report, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations;
|
|
|
•
|
|
certifies that NBIA, the NB Funds or any NB Adviser, as applicable, have adopted procedures reasonably necessary
to prevent Access Persons from violating the Code; and
|
|
|
•
|
|
identifies any recommended changes in existing restrictions or procedures based upon the fund’s experience
under the Code, evolving industry practices, or developments in applicable laws or regulations.
|
|
|
1.
|
All Access Persons must be presented with a copy of this Code of Ethics upon commencement of employment and any
amendments thereafter.
|
|
|
2.
|
All Access Persons are required to read this Code of Ethics and to acknowledge in writing that they have read,
understood and agreed to abide by this Code of Ethics, upon commencement of employment and on an annual basis thereafter. In addition, Access Persons are required to read and understand any amendments thereto.
|
|
|
3.
|
All Access Persons are required to provide a list of their Covered Accounts.
|
|
|
4.
|
Access Persons who violate the rules of this Code of Ethics are subject to sanctions, which may include
censure, suspension or termination of employment.
|
|
|
5.
|
Nothing contained in this Code of Ethics shall be interpreted as relieving any Covered Account from acting in
accordance with the provisions of any applicable law, rule or regulation or any other statement of policy or procedure governing the conduct of Access Persons.
|
23
|
|
6.
|
If any Access Person has any question with regard to the applicability of the provisions of this Code of Ethics
generally or with regard to any securities transaction, he or she should consult with Legal and Compliance.
|
|
|
7.
|
The Legal and Compliance Department may grant exceptions to the requirements of this Code based upon individual
facts and circumstances. Exceptions granted will be documented and retained in accordance with record-keeping requirements. Exceptions will not serve as precedent for additional exceptions, even under similar circumstances.
|
The Firm shall maintain the following records:
|
|
1.
|
A copy of this Code of Ethics and any Code of Ethics that has been in effect within the previous five years.
|
|
|
2.
|
Any record of any violation of this Code of Ethics and any action taken as a result of the violation. These
records shall be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs.
|
|
|
3.
|
A copy of each report made by an Access Person as required by this Code of Ethics, including any information
provided in lieu of the monthly reports. These records shall be maintained for at least five years after the end of the fiscal year in which the report is made or the information provided, the first two years in an easily accessible place.
|
|
|
4.
|
A record of all persons, currently or within the past five years, who are or were required to make reports
under this Code of Ethics, or who are or were responsible for reviewing these reports. These records shall be maintained in an easily accessible place.
|
|
|
5.
|
A copy of each decision to approve an acquisition by an Access Person of any Private Placement. These records
must be maintained for at least five years after the end of the fiscal year in which the approval is granted.
|
24
EXHIBIT A
Compliance Contacts
|
|
|
|
|
|
|
NB Adviser
|
|
Compliance Contact
|
|
Contact
Information
|
|
NB Alternatives Advisers LLC and Neuberger
|
|
Mark Salzberg, CCO
|
|
(212) 476-5781
|
|
Berman Investment Advisers LLC -
|
|
David Leimgruber
|
|
(212) 476-8992
|
|
Alternatives
|
|
Kim Yuhas
|
|
(646) 497-4639
|
|
Neuberger Berman Breton Hill ULC
|
|
Viviana Beltrametti Walker, CCO
|
|
(646) 497-4354
|
|
Neuberger Berman Investment Advisers LLC -
|
|
Brian Lord, CCO
|
|
(312) 325-7707
|
|
Fixed Income
|
|
Paul Carter
|
|
(312) 325-7765
|
|
|
|
MaryAnn McCann
|
|
(312) 627-4338
|
|
Neuberger Berman Investment Advisers LLC -
|
|
Brad Cetron, CCO
|
|
(646) 497-4654
|
|
Equity
|
|
Henry Rosenberg
|
|
(646) 497-4668
|
|
Neuberger Berman BD LLC
|
|
Joshua Blackman
|
|
(646) 497-4791
|
|
|
Jason Hauptman
|
|
(646) 497-4681
|
|
|
|
Stacy Miller
|
|
(646) 497-4663
|
|
|
|
Cathy Collier
|
|
(212) 476-8120
|
|
|
|
Christopher Altieri
|
|
(646) 497-4677
|
|
|
|
Paula Roman
|
|
(646) 497-4667
|
|
|
|
Ayesha Malik
|
|
(646) 497-4098
|
|
Neuberger Berman Investment Advisers LLC -
|
|
Savonne Ferguson, CCO
|
|
(646) 497-4934
|
|
Mutual Funds
|
|
Chris Connor
|
|
(212) 476-5430
|
|
|
|
Brandi Sinkovich
|
|
(646) 497-4665
|
|
|
|
Noel Daugherty
|
|
(646) 497-4653
|
|
|
|
Emily Campbell
|
|
(646) 497-4938
|
|
Neuberger Berman Trust Company N.A.
|
|
Benedykt Szwalbenest, CCO
|
|
(212) 476-9869
|
|
Neuberger Berman Trust Company of
|
|
|
|
|
|
Delaware N.A
|
|
|
|
|
|
|
|
|
|
Registration Department Contacts
|
|
|
|
|
|
|
|
|
|
Robert Ciraola
|
|
(646) 497-4656
|
|
|
|
Tara Rodrigues
|
|
(646) 497-4694
|
|
|
25
EXHIBIT B
Applicability of Code Procedures to Temporary Access Persons
This section describes the requirements under the Code procedures applicable to Temporary Access Persons who will be on the Firm’s premises for ninety
(90) days or more and will have access to certain types of firm information. The Legal and Compliance Department reserves the right to treat persons who will be on the Firm’s premises for less than ninety
(90) days as Temporary Access Persons if it deems so appropriate. Absent specific mention in this section, Temporary Access Persons are subject to all other provisions of the Code.
|
D.1.
|
Reporting Requirements – Temporary Access Persons
|
|
|
a.
|
All Temporary Access Persons must disclose their Covered Accounts within 10 calendar days of becoming a
Temporary Access Person. The initial holdings disclosure must include all Covered Accounts in which the Temporary Access Person has a direct or indirect Beneficial Interest. Temporary Access Persons may satisfy this requirement by providing copies
of their account statements for all Covered Accounts to the Legal and Compliance Department (as applicable).
|
|
|
b.
|
The information provided must be current as of a date no more than 45 days prior to the date the person became
an Access Person.
|
|
|
c.
|
Temporary Access Persons will be provided with a copy of the Code of Ethics and be required to acknowledge
receipt of the Code.
|
|
|
a.
|
Temporary Access Persons must provide the Legal and Compliance Department with duplicate statements of all
Covered Accounts disclosed, on a monthly basis (or quarterly, as may be applicable) for their duration at the Firm.
|
|
E.1.
|
Maintenance of Covered Accounts
|
|
|
1.
|
Temporary Access Persons are not required to hold their Covered Accounts at Neuberger Berman, but must either
1) direct their broker, adviser or trustee, as applicable, to provide duplicate copies of all trade confirmations, as well as copies of account statements to the Legal and Compliance Department for their duration at the Firm, or 2) provide copies of
their trade confirmations and account statements to the Legal and Compliance Department.
|
|
E.2.
|
Pre-Clearance of Securities Transactions
|
|
|
1.
|
Temporary Access Persons are required to obtain prior approval for transactions in Covered Accounts by
submitting a pre-clearance request in iCompliance.
|
26
|
E.3.
|
Same-Day Blackout Period
|
|
|
1.
|
A Temporary Access Person of a Fund may not buy or sell a Covered Security (or Related Security) on a day
during which any Related Client executes either a “buy” or “sell” order in the same security (“Same Day Blackout Period”).
|
|
|
2.
|
Purchases that occur within the Same Day Blackout Period will be required to be “broken.” Any losses
will be incurred by the Covered Account and any gains (including gains disgorged from a sale within the Same Day Blackout Period) may be donated to a charitable organization designated by the Firm.
|
|
|
1.
|
Same Day Price Restitution
|
|
|
a.
|
If a Temporary Access Person purchases or sells a Covered Security in a Covered Account and a Client purchases
or sells the same security during the same day, the Temporary Access Person may not receive a more favorable price than that received by the Client.
|
|
|
2.
|
Five(5)/One(1) Day Price Restitution
|
|
|
a.
|
If a Temporary Access Person purchases or sells a Covered Security within five (5) business days prior, or
one (1) business day subsequent to a Related Client (“5/1 Price Restitution”), the Temporary Advisory Person may not receive a more favorable price than that received by the Related Client.
|
|
|
1.
|
Thirty (30) Day Holding Period
|
|
|
a.
|
All securities positions, including both long and short positions, established in any Covered Account must be
held for at least 30 calendar days (beginning on the day of the transaction) measured on a Last In-First Out (“LIFO”) basis.
|
|
|
2.
|
Sixty (60) Day Holding Period
|
|
|
a.
|
Temporary Access Persons are required to hold shares of any Fund for at least 60 days, measured on a LIFO
basis. After the holding period has lapsed, Fund shares may be redeemed or exchanged; however, the redemption or exchange of such shares will result in a new 60-day holding period.
|
27
