2023-10-31ABFYE_10_31_PRO
Statement
of Additional Information
March
1, 2024
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Ticker |
Share
Class |
A |
C |
Y |
R6 |
Advisor |
R5 |
Investor |
American
Beacon Balanced Fund |
ABFAX |
ABCCX |
ACBYX |
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ABLSX |
AADBX |
AABPX |
American
Beacon Garcia Hamilton Quality Bond Fund |
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GHQYX |
GHQRX |
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GHQIX |
GHQPX |
American
Beacon International Equity Fund |
AIEAX |
AILCX |
ABEYX |
AAERX |
AAISX |
AAIEX |
AAIPX |
American
Beacon Large Cap Value Fund |
ALVAX |
ALVCX |
ABLYX |
AALRX |
AVASX |
AADEX |
AAGPX |
American
Beacon Small Cap Value Fund |
ABSAX |
ASVCX |
ABSYX |
AASRX |
AASSX |
AVFIX |
AVPAX |
This
Statement of Additional Information (“SAI”) should be read in conjunction with
the prospectus dated March 1, 2024
(the “Prospectus”) for the American
Beacon Balanced Fund, American Beacon Garcia Hamilton Quality Bond Fund,
American Beacon International Equity Fund, American Beacon Large
Cap Value Fund, and
American Beacon Small Cap Value Fund (each individually a “Fund,” and
collectively, the “Funds”), each a separate series of
the American Beacon Funds, a Massachusetts business trust. Copies of the
Prospectus may be obtained without charge by calling 1-800-658-5811.
You
also may obtain copies of the Prospectus without charge by visiting the Funds’
website at www.americanbeaconfunds.com. This SAI is incorporated
by reference into the Funds’ Prospectus. In other words, it is legally a part of
the Prospectus. This SAI is not a prospectus and is authorized for
distribution to prospective investors only if preceded or accompanied by the
current Prospectus. Capitalized terms in this SAI have the same definition
as in the Prospectus, unless otherwise defined. Capitalized
terms that are not otherwise defined in this SAI or the Prospectus are
defined
in Appendix D.The
financial
statements
and accompanying notes appearing in the Funds’ Annual
Reports to shareholders for the fiscal year ended October 31,
2023
are
incorporated by reference in this SAI. Copies of the Funds’ Annual and
Semi-Annual Reports may be obtained, without charge, upon request by
calling
1-800-658-5811
or visiting www.americanbeaconfunds.com.
ORGANIZATION
AND HISTORY OF THE FUNDS
Each
Fund is a separate series of American Beacon Funds, an open-end management
investment company organized as a Massachusetts business trust on
January 16, 1987.
Each Fund constitutes a separate investment portfolio with a distinct investment
objective and distinct purpose and strategy. Each
Fund is diversified as defined by the Investment Company Act. Each Fund is
comprised of multiple classes of shares designed to meet the needs of
different
groups of investors. This SAI relates to the A Class, C Class, Y Class, R6
Class, Advisor Class, R5 Class, and Investor Class shares of the Funds,
as
applicable. Prior to February 28, 2020, the R5 Class shares were known as the
Institutional Class shares.
ADDITIONAL
INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS
The
investment objectives,
principal investment strategies,
and principal
risks
of each Fund are described in the Prospectus. This section contains additional
information about the Funds’ investment policies and risks and types of
investments a Fund may purchase. The composition of a Fund’s portfolio
and the strategies that a Fund may use in selecting investments may vary over
time. A Fund is not required to use all of the investment strategies
described below in pursuing its investment objectives. It may use some of the
investment strategies only at some times or it may not use them
at all. Investors should carefully consider their own investment goals and risk
tolerance before investing in a Fund. In the following table, Funds with
an “X” in a particular strategy/risk are more likely to use or be subject to
that strategy/risk than those without an “X”.
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Strategy/Risk |
American
Beacon
Balanced
Fund |
American
Beacon
Garcia
Hamilton
Quality
Bond Fund |
American
Beacon
International
Equity
Fund |
American
Beacon
Large Cap
Value Fund |
American
Beacon
Small Cap
Value Fund |
Asset-Backed
Securities |
X |
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Borrowing
Risks |
X |
X |
X |
X |
X |
Callable
Securities |
X |
X |
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Cash
Equivalents and Other Short-Term Investments |
X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
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X |
X |
X |
X |
X |
Collateralized
Bond Obligations, Collateralized Debt Obligations, and Collateralized
Loan Obligations |
X |
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Contingent
Convertible Securities (“CoCos”) |
X |
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Convertible
Securities |
X |
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X |
X |
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Corporate
Actions |
X |
X |
X |
X |
X |
Cover
and Asset Segregation |
X |
X |
X |
X |
X |
Currencies
Risk |
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X |
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Cybersecurity
and Operational Risk |
X |
X |
X |
X |
X |
Debentures |
X |
X |
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Derivatives |
X |
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X |
X |
X |
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X |
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X |
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X |
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X |
X |
X |
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X |
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X |
X |
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X |
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X |
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X |
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X |
X |
Equity
Investments |
X |
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X |
X |
X |
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Strategy/Risk |
American
Beacon
Balanced
Fund |
American
Beacon
Garcia
Hamilton
Quality
Bond Fund |
American
Beacon
International
Equity
Fund |
American
Beacon
Large Cap
Value Fund |
American
Beacon
Small Cap
Value Fund |
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X |
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X |
X |
X |
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X |
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X |
X |
X |
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X |
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X |
X |
X |
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X |
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X |
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X |
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X |
X |
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X |
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X |
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X |
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X |
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X |
X |
X |
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X |
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X |
X |
X |
ESG
Considerations |
X |
X |
X |
X |
X |
Expense
Risk |
X |
X |
X |
X |
X |
Fixed
Income Investments |
X |
X |
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X |
X |
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X |
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Foreign
Securities |
X |
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X |
X |
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X |
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X |
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X |
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Growth
Companies |
X |
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X |
X |
X |
Illiquid
and Restricted Securities |
X |
X |
X |
X |
X |
Inflation-Indexed
Securities |
X |
X |
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Interfund
Lending |
X |
X |
X |
X |
X |
Investment
Grade Securities |
X |
X |
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Issuer
Risk |
X |
X |
X |
X |
X |
Large-Capitalization
Companies Risk |
X |
X |
X |
X |
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Loan
Interests, Participations and Assignments |
X |
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Micro-Capitalization
Companies Risk |
X |
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X |
X |
X |
Mid-Capitalization
Companies Risk |
X |
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X |
X |
X |
Model
and Data Risk |
X |
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X |
X |
X |
Mortgage-Backed
Securities |
X |
X |
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X |
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X |
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X |
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X |
X |
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X |
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Municipal
Securities |
X |
X |
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X |
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X |
X |
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X |
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Other
Investment Company Securities and Exchange-Traded Products |
X |
X |
X |
X |
X |
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X |
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X |
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X |
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X |
X |
X |
X |
X |
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Strategy/Risk |
American
Beacon
Balanced
Fund |
American
Beacon
Garcia
Hamilton
Quality
Bond Fund |
American
Beacon
International
Equity
Fund |
American
Beacon
Large Cap
Value Fund |
American
Beacon
Small Cap
Value Fund |
Pay-in-Kind
Securities |
X |
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X |
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Preferred
Stock |
X |
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X |
X |
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Quantitative
Strategy Risk |
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X |
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Real
Estate Related Investments |
X |
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X |
X |
X |
Separately
Traded Registered Interest and Principal Securities and Zero Coupon
Obligations |
X |
X |
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Small-Capitalization
Companies Risk |
X |
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X |
X |
X |
Sovereign
and Quasi-Sovereign Government and Supranational Debt |
X |
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Supranational
Risk |
X |
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Trust
Preferred Securities |
X |
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X |
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U.S.
Government Agency Securities |
X |
X |
X |
X |
X |
U.S.
Treasury Obligations |
X |
X |
X |
X |
X |
Valuation
Risk |
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X |
X |
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Value
Companies Risk |
X |
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X |
X |
X |
Variable
or Floating Rate Obligations |
X |
X |
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When-Issued
and Forward Commitment Transactions |
X |
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Asset-Backed
Securities
— Asset-backed securities are securities issued by trusts and special purpose
entities that represent direct or indirect participations
in, or are secured by and payable from, pools of assets. These assets include
automobile,
credit-card and
other categories of receivables,
equipment
leases, home
equity loans and student 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,
loans or accounts-receivable paper are transferred from the originator
to a specially created trust, which repackages the trust’s interests as
securities with a minimum denomination and a specific term. The securities
are then privately placed or publicly offered. A Fund’s investments in
asset-backed securities will be subject to its rating and quality requirements.
Asset-backed securities may be backed by a single asset; however, asset-backed
securities that represent an interest in a pool of assets provide
greater credit diversification. The value of an asset-backed security can be
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. In addition, 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, or
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.
Asset-backed securities may include securities backed by pools of loans
made
to “subprime” borrowers with blemished credit histories. The underwriting
standards for subprime loans may be lower and more flexible than the
standards generally used by lenders for borrowers with non-blemished credit
histories with respect to the borrower’s credit standing and repayment
history.
Certain collateral may be difficult to locate in the event of a default, and
recoveries of depreciated or damaged collateral may not fully recover
payments
due on such collateral. In addition, certain types of collateral, such as credit
receivables, are unsecured, and the debtors are entitled to the protection
of a number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. In addition, if a
Fund purchases asset-backed securities that are “subordinated” to other
interests in the same
pool of assets, a Fund may only receive payments after the pool’s obligations to
other investors have been satisfied.
The
value of asset-backed securities, like that of traditional fixed-income
securities, typically increases when interest rates fall and decreases when
interest
rates rise. However, asset-backed securities differ from traditional
fixed-income securities because of their potential for prepayment. The price
paid
by a Fund for its asset-backed securities, the yield the Fund expects to
receive from such securities and the average life of the securities are based
on
a number of factors, including the anticipated rate of prepayment of the
underlying assets. In a period of declining interest rates, borrowers may
prepay
the underlying assets more quickly than anticipated, thereby reducing the yield
to maturity and the average life of the asset-backed securities. Moreover,
when a Fund reinvests the proceeds of a prepayment in these circumstances, it
will likely receive a rate of interest that is lower than the rate on
the security that was prepaid. To the extent that a Fund purchases asset-backed
securities at a premium, prepayments may result in a loss to the extent
of the premium paid. If a Fund buys such securities at a discount, both
scheduled payments and unscheduled prepayments will increase current
and
total returns and unscheduled prepayments will also accelerate the recognition
of income which, when distributed to shareholders, will be taxable as
ordinary income. In a period of rising interest rates, prepayments of the
underlying assets may occur at a slower than expected rate, creating
extension
risk. This particular risk may effectively change a security that was considered
short- or intermediate-term at the time of purchase into a longer-term
security. Since the value of longer-term securities generally fluctuates more
widely in response to changes in interest rates than does the value
of shorter-term securities, extension risk could increase the volatility of a
Fund. When interest rates decline, the value of an asset-backed security
with
prepayment features may not increase as much as that of other fixed-income
securities, and, as noted above, changes in market rates of interest
may
accelerate or retard prepayments and thus affect maturities.
Borrowing
Risk
— A Fund may borrow money in an amount up to one-third of its total assets
(including the amount borrowed) from banks and other financial
institutions. A Fund may borrow for temporary purposes. Borrowing may exaggerate
changes in a Fund’s NAV and in its total return. Interest expense
and other fees associated with borrowing may impact a Fund’s expenses and reduce
its returns. (See
“Cover and Asset Segregation” disclosure below.)
Callable
Securities
— A Fund may invest in fixed-income
securities with call features. A call feature allows the issuer of the security
to redeem or call the
security prior to its stated maturity date. In periods of falling interest
rates, issuers may be more likely to call in securities that are paying higher
coupon
rates than prevailing interest rates. In the event of a call, a Fund would lose
the income that would have been earned to maturity on that security,
and the proceeds received by a Fund may be invested in securities paying lower
coupon rates. Thus, a Fund’s income could be reduced as a result
of a call. In addition, the market value of a callable security may decrease if
it is perceived by the market as likely to be called, which could have a
negative
impact on a Fund’s total return.
Cash
Equivalents and Other Short-Term Investments —
Cash equivalents and other short-term investments in which a Fund may invest
include the
investments set forth below. Certain
of these investments are issued by and provide exposure to banks. The activities
of U.S. banks and most foreign
banks are subject to comprehensive regulations. The enactment of new legislation
or regulations, as well as changes in interpretation and enforcement
of current laws, may affect the manner of operations and profitability of
domestic and foreign banks. Significant developments in the U.S. banking
industry have included increased competition from other types of financial
institutions, increased acquisition activity and geographic expansion.
Banks may be particularly susceptible to certain economic factors, such as
interest rate changes and adverse developments in the market for real
estate. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
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Bank
Deposit Notes.
Bank deposit notes are obligations of a bank that provide an alternative
to certificates of deposit. Similar to certificates of deposit,
deposit notes represent bank level investment and, therefore, are senior
to all holding company corporate debt. Bank deposit notes rank
junior
to domestic deposit liabilities of the bank and pari passu with other
senior, unsecured obligations of the bank. Typically, bank deposit notes
are not
insured by the Federal Deposit Insurance Corporation or any other
insurer. |
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Bankers’
Acceptances.
Bankers’ acceptances are short-term credit instruments designed to enable
businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by
an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then “accepted” by a bank that,
in effect, unconditionally guarantees to pay the face value of the
instrument
on its maturity date. The acceptance may then be held by the accepting
bank as an earning asset or it may be sold in the secondary market
at the going rate of discount for a specific maturity. Most acceptances
have maturities of six months or less. Bankers’ acceptances rank junior
to
domestic deposit liabilities of the bank and pari passu with other senior,
unsecured obligations of the bank.
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Bearer
Deposit
Notes.
Bearer deposit notes, or bearer bonds, are bonds or debt securities that
entitle the holder of the document to ownership or title
in the deposit. Such notes are typically unregistered, and whoever
physically holds the bond is presumed to be the owner of the instrument.
Recovery
of the value of a bearer bond in the event of its loss or destruction
usually is impossible. Interest is typically paid upon presentment of an
interest
coupon for payment. |
■ |
CDs.
CDs are negotiable certificates issued against funds deposited in an
eligible bank (including its domestic and foreign branches, subsidiaries
and agencies)
for a definite period of time and earning a specified rate of return. U.S.
dollar denominated CDs issued by banks abroad are known as Eurodollar
CDs. CDs issued by foreign branches of U.S. banks are known as Yankee
CDs. |
■ |
Commercial
Paper.
Commercial paper is a short-term debt security issued by a corporation,
bank, municipality, or other issuer, usually for purposes such
as financing current operations. A Fund may invest in commercial paper
that cannot be resold to the public without an effective registration
statement
under the Securities Act. While some restricted commercial paper normally
is deemed illiquid, in certain cases it may be deemed
liquid. |
■ |
Eurodollar
and Yankee CD Obligations.
Eurodollar obligations are U.S. dollar obligations issued outside the
United States by domestic or foreign entities,
while Yankee CDs are U.S. dollar obligations issued inside the United
States by foreign entities. There is generally less publicly available
information
about foreign issuers and there may be less governmental regulation and
supervision of foreign stock exchanges, brokers and listed companies.
Foreign issuers may use different accounting and financial standards, and
the addition of foreign governmental restrictions may affect adversely
the payment of principal and interest on foreign investments. In addition,
not all foreign branches of United States banks are supervised or
examined
by regulatory authorities as are United States banks, and such branches
may not be subject to reserve requirements. Eurodollar (and, to a
limited
extent, Yankee dollar) obligations are subject to certain sovereign risks.
One such risk is the possibility that a sovereign country might prevent
capital,
in the form of dollars, from flowing across its borders. Other risks
include adverse political and economic developments; the extent and
quality
of government regulation of financial markets and institutions; the
imposition of foreign withholding taxes; and the expropriation or
nationalization
of foreign issuers. |
■ |
Government
Money Market Funds. A
Fund may invest cash balances in money market funds that are registered as
investment companies under the
Investment Company Act, including money market funds that are advised by
the Manager. Money market funds invest in highly-liquid, short-term
instruments, which include cash and cash equivalents, and debt securities
with high credit ratings and short-term maturities, such as U.S.
Treasuries.
A
“government money market fund” is required to invest at least 99.5% of its
total assets in cash, U.S. government securities, and/or repurchase
agreements that are fully collateralized by government securities or cash.
Government securities include any security issued or guaranteed
as to principal or interest by the U.S. government and its agencies or
instrumentalities. By investing in a money market fund, a Fund
becomes
a shareholder of that money market fund. As a result, Fund shareholders
indirectly
bear their proportionate share of the expenses of the money
market funds in which a Fund invests
in addition to any fees and expenses Fund shareholders directly bear in
connection with a Fund’s own operations.
These expenses may include, for example, advisory and administrative fees,
including advisory fees charged by the Manager to any applicable
money market funds advised by the Manager. These
other fees and expenses are reflected in the Fees and Expenses Table for a
Fund in its Prospectus,
if applicable. Shareholders
also would be exposed to the risks associated with money market funds and
the portfolio investments of such money
market funds, including that a money market fund’s yield will be lower
than the return that a Fund would have derived from other investments
that would provide liquidity. Although a money market fund is designed to
be a relatively low risk investment, it is not free of risk.
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Despite
the short maturities and high credit quality of a money market fund’s
investments, increases in interest rates and deteriorations in the credit
quality
of the instruments the money market fund has purchased can cause the price
of a money market security to decrease and may reduce the money
market fund’s yield. In addition, a money market fund is subject to the
risk that the value of an investment may be eroded over time by
inflation.
Factors that could adversely affect the value of a money market fund’s
shares include, among other things, a sharp rise in interest rates, an
illiquid
market for the securities held by the money market fund, a high volume of
redemption activity in a money market fund’s shares, and a credit
event
or credit rating downgrade affecting one or more of the issuers of
securities held by the money market fund. There can be no assurance that a
money
market fund will maintain a $1.00 per share net asset value (“NAV”) at all
times. The
failure of an unrelated money market fund to maintain a
stable NAV could create a widespread risk of increased redemption
pressures on all money market funds, potentially jeopardizing the
stability of their
NAVs. Certain money market funds have in the past failed to maintain
stable NAVs, and there can be no assurance that such failures and
resulting
redemption pressures will not impact money market funds in the future. In
the event of negative gross yields as a result of persistent negative
interest rates, government money market funds may consider various options
including but not limited to (1) the implementation of a reverse
distribution or share cancellation mechanism (that would periodically
reduce the number of the fund’s outstanding shares) to maintain a
stable
net asset value per share or (2) the potential conversion to a floating
net asset value per share money market fund. Certain money market
funds
may impose a fee upon sale of shares or may temporarily suspend the
ability to sell shares of the money market fund if the money market
fund’s
liquidity falls below required minimums because of market conditions or
other factors, at the determination of the money market fund’s
board.
Such a determination may conflict with the interest of a Fund. Government
money market funds are generally not permitted to impose liquidity
fees or temporarily suspend redemptions. However, government money market
funds typically offer materially lower yields than other money
market funds. Money market funds and the securities they invest in are
subject to comprehensive regulations. The enactment of new legislation
or regulations, as well as changes in interpretation and enforcement of
current laws, may affect the manner of operation, performance and/or
yield of money market funds. An investment in a money market fund is
not a bank deposit and is not insured or guaranteed by any bank, the
FDIC
or any other government agency. |
■ |
Government
Obligations.
Government obligations may include U.S. Treasury securities, Treasury
inflation-protected securities, and other debt instruments
backed by the full faith and credit of the United States, or debt
obligations of U.S. Government-sponsored
entities. |
■ |
Repurchase
Agreements.
Repurchase agreements are agreements pursuant to which a Fund purchases
securities from a bank that is a member of the
Federal Reserve System (or a foreign bank or U.S. branch or agency of a
foreign bank), or from a securities dealer, that agrees to repurchase the
securities
from a Fund at a higher price on a designated future date. Repurchase
agreements generally are for a short period of time, usually less
than
a week. Costs, delays, or losses could result if the selling party to a
repurchase agreement becomes bankrupt or otherwise
defaults. |
■ |
Short-term
Corporate
Debt Securities.
Short-term corporate debt securities are securities and bonds issued by
corporations with shorter terms to maturity.
Corporate securities generally bear a higher risk than U.S. government
bonds. |
■ |
Time
Deposits.
Time deposits, also referred to as “fixed time deposits,” are
non-negotiable deposits maintained at a banking institution for a
specified
period of time at a specified interest rate. Time deposits may be
withdrawn on demand by the investor, but may be subject to early
withdrawal
penalties which vary depending upon market conditions and the remaining
maturity of the obligation. There are no contractual restrictions
on the right to transfer a beneficial interest in a time deposit to a
third party, although there is no market for such deposits.
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Collateralized
Bond Obligations, Collateralized Debt Obligations, and Collateralized Loan
Obligations
—
A Fund may invest in each of CBOs, CLOs,
other CDOs and other similarly structured securities. CBOs, CLOs and other CDOs
are types of asset-backed securities. CBOs, CLOs and other CDOs
ordinarily are issued by a trust or other special purpose entity (“SPE”), which
is a company founded solely for the purpose of securitizing payment
claims arising out of this diversified asset pool. On this basis, marketable
securities are issued by the SPE which, due to the diversification of
the
underlying risk, are intended to represent a lower level of risk than the
original assets. The redemption of the securities issued by the SPE typically
takes
place at maturity out of the cash flow generated by the collected claims. A CBO
is often backed by a diversified pool of high risk, below-investment
grade fixed income securities. The collateral can be from many different types
of fixed income securities such as high yield debt, residential
privately issued mortgage-related securities, commercial privately issued
mortgage- related securities, trust preferred securities and emerging
markets
debt. CDOs are trusts backed by other types of assets representing obligations
of various parties. Although certain CDOs may benefit from credit
enhancement in the form of a senior-subordinate structure, overcollateralization
or bond insurance, such enhancement may not always be present,
and may fail to protect against the risk of loss upon default of the collateral.
Certain CDO issuers may use derivatives contracts to create “synthetic”
exposure to assets rather than holding such assets directly, which entails the
risks of derivative instruments described elsewhere in this SAI.
A
CLO is 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. CBOs,
CDOs and CLOs are
subject to the risks described elsewhere in this SAI in Senior Loans, Loan
Interests, Participations and Assignments, and Illiquid and Restricted
Securities. CBOs,
CLOs and other CDOs may charge management fees and administrative
expenses.
For
CBOs, CLOs and other CDOs, the cash flows from the trust are split into two or
more portions, called tranches, that offer various maturity, risk and
yield
characteristics. Losses caused by defaults on underlying assets are borne first
by the holders of subordinate tranches. Tranches are typically categorized
as senior, mezzanine and subordinated/ equity, according to their degree of
risk. Senior tranches are paid from the cash flows from the underlying
assets before the junior tranches. If there are defaults or the CBO’s, CLO’s or
other CDO’s collateral otherwise underperforms, scheduled payments
to senior tranches take precedence over those of mezzanine tranches, and
scheduled payments to mezzanine tranches take precedence over those
of subordinated/equity tranches. The riskiest portion is the “equity” tranche,
which bears the bulk of defaults from the bonds or loans in the trust
and serves to protect the other, more senior tranches from default in all but
the most severe circumstances. A Fund may be in a first loss or
subordinated
position with respect to realized losses on the assets of the CLOs in which it
invests. In addition, at the time of issuance, CLO equity securities
are typically under-collateralized in that the liabilities of a CLO at inception
exceed its total assets. Since they are partially protected from defaults,
senior tranches from a CBO trust, CLO trust or trust of another CDO typically
have higher ratings and lower yields than their underlying securities,
and can be rated investment grade. Despite the protection from the equity
tranche, CBO, CLO or other CDO mezzanine, junior or even more senior
tranches can experience substantial losses due to actual defaults, downgrades of
the underlying collateral by rating agencies, forced liquidation of
the collateral pool due to a failure of coverage tests, increased sensitivity to
defaults due to collateral default and disappearance of protecting
tranches,
market anticipation of defaults, as well as aversion to CBO, CLO or other CDO
securities as a class. In the event that a CLO fails certain tests, holders
of CLO senior debt may be entitled to additional payments that would, in turn,
reduce the payments the subordinated tranches would otherwise
be entitled to receive. Interest on certain tranches of a CDO may be paid in
kind or deferred and capitalized (paid in the form of obligations of
the same type rather than cash), which involves continued exposure to default
risk with respect to such payments.
The
risks of an
investment in a CBO, CLO or other CDO depend largely on the type of the
collateral securities and the class, or tranche, of the instrument
in which
a Fund invests. A
Fund may have the right to receive payments only from the CBO, CLO or other CDO,
and generally does not have
direct rights against the issuer or the entity that sold the assets to be
securitized. The underlying loans purchased by CLOs generally are performing
at the time of purchase but may become non-performing, distressed or defaulted.
Normally,
CBOs, CLOs and other CDOs are privately offered
and sold, and thus, are not registered under the securities laws. As a result,
investments in CBOs, CLOs and other CDOs may be characterized as
illiquid securities; however, an active dealer market may exist for CBOs, CLOs
and other CDOs allowing them to qualify as Rule 144A transactions. Please
refer to “Illiquid and Restricted Securities” below for further discussion of
regulatory considerations and constraints related to such securities. In
addition
to the normal risks associated with fixed income securities and asset-backed
securities discussed elsewhere in this SAI and a Fund’s
Prospectus;
(e.g.,
prepayment
and extension risk, credit risk, liquidity risk, market risk, and interest rate
risk), CBOs, CLOs and other CDOs carry additional risks including,
but not limited to: (i) the possibility that distributions from collateral
securities will not be adequate to make interest or other payments; (ii)
the
quality of the collateral may decline in value or default; (iii) the risk that
a Fund
may invest in CBOs, CLOs or other CDOs, or tranches thereof, that are
subordinate to other tranches
thereof;
(iv) the complex structure of the security may not be fully understood at the
time of investment and may produce
disputes with the issuer or unexpected investment results;
(v) the investment return achieved could be significantly different from the
return predicted
by financial models; (vi)
the lack of a readily available secondary market for CDOs;
(vii) risk of forced “fire sale” liquidation due to technical defaults
such as coverage test failures; and (viii) the CBO, CLO or CDO manager may
perform poorly. If the issuer of a CBO, CLO or other CDO uses shorter
term financing to purchase longer term securities, the issuer may be forced to
sell its securities at below market prices if it experiences difficulty
in
obtaining short-term financing, which may adversely affect the value of the CBO,
CLO or other CDO owned by a Fund. If the issuer of a CLO uses shorter
term financing to purchase longer term securities, the issuer may be forced to
sell its securities at below market prices if it experiences difficulty
in
obtaining short term financing, which may adversely affect the value of the CLO
owned by a Fund.
In addition, interest rate risk may be exacerbated if
the interest rate payable on a structured financing changes based on multiples
of changes in interest rates or inversely to changes in interest rates.
Contingent
Convertible Securities (“CoCos”)
—
CoCos are a form of hybrid debt security primarily issued by financial
institutions. A common type of
CoCo is an Additional Tier 1 (or “AT1”) capital security. They are subordinated
instruments that are designed to behave like bonds or preferred equity
in times of economic health for the issuer, yet absorb losses when a
pre-determined “trigger event” affecting the issuer occurs. If an issuer
experiences
an event that causes its capital to fall below a predetermined “trigger” level,
CoCos are either converted into equity securities of the issuer or
undergo a full or partial write-down of their principal. Trigger events vary by
individual security and are defined by the documents governing the contingent
convertible security. The triggering events and conditions are specific to the
issuing institution and its regulatory requirements and may be linked
to regulatory capital thresholds or regulatory actions calling into question the
issuing banking institution’s continued viability as a going concern.
Triggering
events might include, for instance, an issuer failing to maintain a minimum
capital level, a regulator’s determination that the issuer should convert
the security to maintain continued viability, or the issuer receiving high
levels of public support. The value of CoCos is unpredictable and will be
influenced
by many factors including, without limitation: (i) the creditworthiness of the
issuer and/or fluctuations in such issuer ‘s applicable capital ratios;
(ii) supply and demand for the CoCos; (iii) general market conditions and
available liquidity; and (iv) economic, financial and political events that
affect
the issuer, its particular market or the financial markets in
general.
CoCos
have
no stated maturity date, have discretionary interest payments and are usually
subordinated debt instruments. Because CoCos are typically subordinated
debt instruments, in the event the issuer liquidates, dissolves, or winds up
before a triggering event, a Fund’s
claims will generally be junior
to the
claims of all holders of unsubordinated obligations of the issuer and may also
become junior to other obligations and securities of the issuer.
If the CoCo converts to an equity security, a Fund’s
investment would be even further subordinated due
to the conversion from being the holder of
a debt instrument to being the holder of an equity instrument. An
investment by a Fund
in CoCos is subject to the risk that coupon (i.e., interest) payments
may be cancelled by the issuer or a regulatory authority in order to help the
issuer absorb losses. If the issuer converts the CoCo to an equity security,
it is not required to pay a dividend, and a
Fund would lose interest payments and potentially all income. Alternatively, if
the issuer writes down the
principal due on the CoCos, a Fund
could lose some or all of its investment. Under some circumstances, the
liquidation value of certain types of contingent
convertible securities may be adjusted downward to below the original par value.
The write-down of the par value would occur automatically
and would not entitle the holders to seek bankruptcy of the company. Some CoCos
have a set stock conversion rate that would cause an automatic
write-down of capital if the price of the stock is below the conversion price on
the conversion date. CoCos may be subject to redemption at the
option of the issuer at a predetermined price. CoCos are often rated below
investment grade and are subject to the risks of high-yield securities.
Because
CoCos are issued primarily by financial institutions, CoCos may present
substantially increased risks at times of financial turmoil, which could
affect
financial institutions more than companies in other sectors and industries.
CoCos carry the general risks applicable to other fixed income investments,
including interest rate risk, credit risk, market risk and liquidity
risk.
Convertible
Securities
— Convertible securities include corporate bonds, notes, debentures, preferred
stock or other securities that may be converted into
or exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Convertible securities generally have features of, and risks associated with,
both equity and fixed-income
instruments. As such, the value of most
convertible securities will vary with changes in the price of, and will be
subject to the risks associated with, the underlying common stock. Additionally,
convertible securities are also subject to the risk that the issuer may not be
able to pay principal or interest when due and the value of the convertible
security may change based on the issuer’s credit rating.
A
convertible security entitles the holder to receive interest paid or accrued on
debt or dividends paid on preferred stock until the convertible security
matures
or is redeemed, converted or exchanged. Before conversion, such securities
ordinarily provide a stream of income with generally higher yields than
common stocks of the same or similar issuers, but lower than the yield on
non-convertible debt. The value of a convertible security is a function of
(1)
its yield in comparison to the yields of other securities of comparable maturity
and quality that do not have a conversion privilege and (2) its worth if
converted
to the underlying common stock. While no securities investment is without some
risk, investments in convertible securities generally entail
less
risk than investments in the issuer’s common stock, although the extent to which
such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed-income
security. Holders of convertible securities have a claim on the assets of the
issuer
senior to the common stockholders but may be subordinated to holders of similar
non-convertible securities of the same issuer.
If
the convertible security’s “conversion value,” which is the market value of the
underlying common stock that would be obtained upon the conversion
of the convertible security, is substantially below the “investment value,”
which is the value of a convertible security viewed without regard to
its conversion feature (i.e., strictly on the basis of its yield), the price of
the convertible security is governed principally by its investment value. If the
conversion
value of a convertible security increases to a point that approximates or
exceeds its investment value, the value of the security will be principally
influenced by its conversion value. A convertible security will sell at a
premium over its conversion value to the extent investors place value
on
the right to acquire the underlying common stock while holding an
income-producing security.
The
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. While
convertible
securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar quality, they do enable the investor
to
benefit from increases in the market price of the underlying common stock. A
convertible security may have a mandatory conversion feature or a call
feature that subjects it to redemption at the option of the issuer at a price
established in the security’s governing instrument. If a convertible
security
held by a Fund is called for redemption a Fund will be required to convert it
into the underlying common stock, sell it to a third party or permit
the
issuer to redeem the security. Any of these actions could have an adverse effect
on a Fund’s ability to achieve its investment objectives. Because of
the
conversion feature, certain convertible securities may be considered equity
equivalents.
Corporate
Actions
— From time to time, a Fund may voluntarily participate in corporate actions
(for example, acquisitions,
mergers, rights
offerings, conversion
privileges, exchange offers, credit event settlements, etc.) where the issuer or
counterparty offers securities or instruments to holders or counterparties,
such as a Fund, and the acquisition is determined to be beneficial to Fund
shareholders (“Corporate Actions”). In
connection with its holdings
of foreign and emerging markets securities and depositary receipts, a Fund may
not have the same rights afforded to stockholders of a typical domestic
company in the event of a Corporate Action.
Notwithstanding any percentage investment limitation listed under the
“Investment Restrictions”
section or any percentage investment limitation of the Investment Company Act or
rules thereunder, if a Fund has the opportunity to acquire
a permitted security or instrument through a Corporate Action, and by doing so,
a Fund would exceed a percentage investment limitation following
the acquisition, it will not constitute a violation if, prior to the receipt of
the securities or instruments and after announcement of the Corporate
Action, a Fund
sells an offsetting amount of assets that are subject to the investment
limitation in question at least equal to the value of the securities
or instruments to be acquired.
Cover
and Asset Segregation
— A Fund may borrow
money, make
investments or employ trading practices that obligate a Fund, on a fixed or
contingent
basis, to deliver an asset or make a cash payment to another party in the
future. A Fund will comply with rules and guidance from the SEC with
respect to coverage of certain investments and trading practices. A
Fund’s approach to asset coverage may vary depending
on terms within its agreement
with a counterparty.
With respect to certain investments
under the agreement,
a Fund calculates the obligations of the parties to the agreement
on a “net basis” (i.e., the two payment streams are netted out with a Fund
receiving or paying, as the case may be, only the net amount of the
two payments). Under such circumstances, a Fund’s current obligations will
generally be equal only to the net amount to be paid by a Fund based
on
the relative values of the positions held by each party to the
agreement.
Earmarking or otherwise segregating a large percentage of a Fund’s assets
could
impede the management of the Fund’s portfolio or a Fund’s ability to meet
redemption requests or other current obligations,
because a
Fund may
be unable to promptly dispose of those
assets.
Currencies
Risk
— A Fund may have significant exposure to foreign currencies for investment or
hedging purposes by making direct investments in non-U.S.
currencies or in securities denominated in non-U.S. currencies (including
emerging
market currencies), or by purchasing or selling foreign currency
forward contracts, non-U.S. currency futures contracts, options on non-U.S.
currencies and non-U.S. currency futures and swaps for cross-currency
investments. Foreign currencies will fluctuate, and may decline, in value
relative to the U.S. dollar and affect a Fund’s investments in foreign
(non-U.S.) currencies, securities that trade in, and receive revenues in, or in
derivatives that provide exposure to, foreign (non-U.S.) currencies.
For
example, if the U.S. dollar appreciates against foreign currencies, the value of
Fund holdings generally would depreciate and vice versa.
Cybersecurity
and
Operational Risk —
With the increased use of technologies such as the Internet and the dependence
on computer systems to perform
necessary business functions, the Funds, and their service providers, may
be prone to operational and information security risks resulting from
cyber-attacks.
In general, cyber incidents can result from deliberate attacks or unintentional
events. Cyber-attacks include, but are not limited to, stealing
or corrupting data maintained online or digitally (e.g., through
“hacking,”
computer
viruses or
other
malicious
software coding), the theft and holding
for ransom of proprietary or confidential information or data
(sometimes referred to as “ransomware” attacks),
denial of service attacks on websites,
“phishing”
attempts and other social engineering techniques aimed at personnel or systems,
and the unauthorized release of confidential information.
Cyber-attacks affecting the Funds or the Manager, a
sub-advisor,
the
Custodian (as defined below),
the transfer agent, intermediaries and other
third-party service providers may adversely impact the Funds. For instance,
cyber-attacks may interfere with the processing of shareholder transactions,
result in the loss or theft of shareholder data or funds, impact a Fund’s
ability to calculate NAV per share, cause the release of private shareholder
information or confidential business information, impede trading, subject the
Funds to regulatory fines or financial losses and/or cause reputational
damage. A cyber-attack may also result in shareholders or service providers
being unable to access electronic systems (“denial of services”),
loss or theft of proprietary information or corporate data, physical damage to a
computer or network system, or remediation costs associated
with system repairs. The Funds may also incur additional costs for cybersecurity
risk management purposes. Similar types of cybersecurity risks
are also present for issuers or securities in which the Funds may invest, which
could result in material adverse consequences for such issuers and may
cause a Fund’s investment in such companies to lose value. Adverse
consequences also could result from cybersecurity incidents affecting
counterparties
with which a Fund engages in transactions, governmental and other regulatory
authorities, exchanges and other financial market operators,
banks, brokers, dealers, insurance companies, other financial institutions and
other parties. A Fund’s service providers also may be negatively impacted
due to operational risks arising from non-cybersecurity
related factors
such as processing errors and human errors, inadequate or failed internal
or external processes, failures in systems and technology errors or
malfunctions, changes in personnel, and errors caused by Fund service
providers
or counterparties.
In
addition, other events or circumstances — whether foreseeable, unforeseeable, or
beyond our control, such as acts of war, other conflicts, terrorism,
natural
disaster, widespread disease, pandemic or other public health crises may result
in, among other things, quarantines and travel restrictions, workforce
displacement and loss or reduction in Personnel and other resources. In the
above circumstances, the Funds and the Service Providers’ operations
may be significantly impacted, or even temporarily halted. The Funds’ securities
market counterparties or vendors may face the same or similar
systems failure, cybersecurity breaches and other business disruptions
risks.
Any
of these results could have a substantial adverse impact on a Fund and its
shareholders. For example, if a cybersecurity incident results in a denial
of
service, Fund shareholders could lose access to their electronic accounts and be
unable to buy or sell Fund shares for an unknown period of time, and
service providers could be unable to access electronic systems to perform
critical duties for a Fund, such as trading, NAV calculation, shareholder
accounting
or fulfillment of Fund share purchases and redemptions. Cybersecurity incidents
could cause a Fund or a service provider to incur regulatory penalties,
reputational damage, additional compliance costs associated with corrective
measures, or financial loss of a significant magnitude and could result
in allegations that a Fund or Fund service provider violated privacy and
other laws. There are inherent limitations in risk management systems
that
seek to reduce the risks associated with cybersecurity and business continuity
plans in the event there is a cybersecurity breach, including the possibility
that certain risks may not have been adequately
identified or prepared for,
in large part because different or unknown threats may emerge in the
future. Furthermore, a Fund does not control the cybersecurity systems and plans
of the issuers of securities in which a Fund invests, third party service
providers, trading counterparties or any other service providers whose
operations may affect a
Fund or its shareholders.
The widespread use of work-from-home
arrangements, such as during the COVID-19 pandemic, may increase operational and
information security risks.
Debentures
— Debentures are unsecured, medium- to long-term debt securities protected only
by the general creditworthiness of the corporate or government
issuer, not by collateral, and documented by indentures. Governments often issue
debentures because they generally cannot guarantee debt
with assets due to the fact that government assets are public property.
Debenture holders are unsecured creditors. In the event of default or
bankruptcy
by the issuer, debenture holders will not have a claim against any specific
assets of the issuer and will therefore only be paid from the issuer’s
assets after the secured creditors have been paid. The value of a debenture can
fluctuate with changes in interest rates and the perceived ability of
the issuer to make interest or principal payments on time.
Derivatives
— Generally a derivative is a financial instrument the value of which is based
on, or “derived” from, a traditional security, asset, currency, or
market index (collectively referred to as “reference assets”). A Fund may use
derivatives for hedging and efficient portfolio management purposes.
Derivative
instruments may allow for better management of exposure to certain asset
classes, as well as more efficient access to asset classes. There are
many
different types of derivatives and many different ways to use them. Some forms
of derivatives, such as exchange-traded futures,
options on securities,
commodities, or indices, and
certain forward contracts are
traded on regulated exchanges. These types of derivatives are standardized
contracts
that can easily be bought and sold, and whose market values are determined and
published daily. Non-standardized derivatives, on the other hand,
tend to be more specialized or complex, and may be harder to value. Certain
derivative securities are described more accurately as index/structured
securities. Index/structured securities are derivative securities whose value or
performance is linked to other equity securities (such as depositary
receipts), currencies, interest rates, indices or other financial
indicators.
Derivatives
may involve significant risk. Many derivative instruments often require little
or no payment and therefore often create inherent economic leverage.
Some derivatives have the potential for unlimited loss, regardless of the size
of a Fund’s initial investment. Not all derivative transactions require
a counterparty to post collateral, which may expose a Fund to greater
losses in the event of a default by a counterparty.
Derivatives
may be illiquid and may be more volatile than other types of investments. A Fund
may buy and sell derivatives that are neither centrally cleared
nor traded on an exchange. Such derivatives may be subject to heightened
counterparty, liquidity and valuation risk.
The
regulation of the U.S. and non-U.S. derivatives markets has undergone
substantial change in recent years and such change may continue. In particular,
effective August 19, 2022 (the “Compliance Date”), Rule 18f-4 under the 1940 Act
(the “Derivatives Rule”) replaced the asset segregation regime
of Investment Company Act Release No. 10666 (“Release 10666”) with a new
framework for the use of derivatives by registered funds. As of the
Compliance Date, the SEC rescinded Release 10666 and withdrew no-action letters
and similar guidance addressing a Fund’s use of derivatives and began
requiring a Fund to satisfy the requirements of the Derivatives Rule. As a
result, a Fund is no longer required to engage in “segregation” or “coverage”
techniques with respect to derivatives transactions and will instead comply with
the applicable requirements of the Derivatives Rule.
The
Derivatives Rule mandates that a Fund
adopt and/or implement: (i) value-at-risk
limitations (“VaR”);
(ii) a written derivatives risk management program;
(iii) new Board
oversight responsibilities; and (iv) new reporting and recordkeeping
requirements. In
the event that a Fund’s derivative exposure
is 10% or less
of its net assets, excluding certain currency and interest rate hedging
transactions,
it can elect to be classified as a limited derivatives
user (“Limited Derivatives User”) under the Derivatives Rule, in which case a
Fund is not subject to the full requirements of the Derivatives Rule.
Limited Derivatives Users are excepted from VaR testing, implementing a
derivatives risk management program, and certain Board oversight and
reporting
requirements mandated by
the Derivatives Rule.
However, a Limited Derivatives User is still required to implement written
compliance policies and
procedures reasonably designed to manage its derivatives risks. The Derivatives
Rule also provides special treatment for reverse repurchase agreements,
similar financing transactions and unfunded commitment agreements. Specifically,
a Fund may elect whether to treat reverse repurchase agreements
and similar financing transactions as “derivatives transactions” subject to the
requirements
of the Derivatives Rule or
as senior securities equivalent
to bank borrowings for purposes of Section 18 of the 1940 Act. In addition, a
Fund may invest in a security on a when-issued or forward-settling
basis, or with a non-standard settlement cycle, and the transaction will be
deemed not to involve a senior security, provided that: (i) a Fund
intends to physically settle the transaction; and (ii) the transaction will
settle within 35 days of its trade date.
The
enactment of the Dodd-Frank Act and
similar global regulations resulted
in historic and comprehensive reform relating to derivatives, including the
manner
in which they are entered into, reported, recorded, executed, and settled or
cleared. Pursuant to these
regulations,
the SEC,
CFTC and foreign regulators
have promulgated a broad range of regulations and guidance
on the use of derivatives,
including use
by registered investment companies. These
include regulations with respect to security-based swaps (e.g., derivatives
based on a single security or narrow-based securities index) that are
regulated
by the SEC
in the U.S.,
and other swaps that are regulated by the CFTC and the markets in which these
instruments trade. In addition, regulations
adopted by the banking regulators require certain banks to include in a range of
financial contracts, including many derivatives contracts,
terms
delaying or restricting default, termination and other rights in the event that
the bank and/or its affiliates become subject to certain types of resolution
or insolvency proceedings. The regulations could limit a Fund’s ability to
exercise a range of cross-default rights if its counterparty, or an affiliate
of the counterparty, is subject to bankruptcy or similar proceeding. Such
regulations could further negatively impact a Fund’s use of derivatives.
Under
CFTC Regulation 4.5, a Fund is excluded from registration as a CPO if its
investments in
commodity interests (such as futures contracts, options on
futures contracts, non-deliverable forwards and swaps), other
than those used for bona fide hedging purposes (as defined by the CFTC),
are
limited,
such
that the aggregate initial margin and premiums required to establish the
positions (after taking into account unrealized profits and unrealized
losses
on any such positions and excluding the amount by which options are
“in-the-money” at the time of purchase) do not exceed 5% of a Fund’s
NAV.
Alternatively, the aggregate net notional value of the positions, determined at
the time the most recent position was established, may not exceed 100%
of a Fund’s NAV, after taking into account unrealized profits and unrealized
losses on any such positions.
Further, to qualify for the exclusion in Regulation
4.5, a Fund must satisfy a marketing test, which requires, among other things,
that a Fund not hold itself out as a vehicle for trading commodity
interests. A Fund’s ability to use these instruments also may be limited by
federal income tax considerations. See the section entitled “Tax Information.”
The
Manager is not registered as a CPO with respect to the Funds in reliance on the
delayed compliance date provided by No-Action Letter 12-38 of the
Division of Swap Dealer and Intermediary Oversight (“Division”) of the CFTC.
Pursuant to this letter and the conditions set forth herein, the Manager
is not required to register as a CPO, or rely on an exemption from registration,
until six months from the date the Division issues revised guidance
on the application of the calculation of the de minimis thresholds in the
context of the CPO exemption in CFTC Regulation 4.5.
The
Manager has
also filed a notice claiming the CFTC Regulation 4.5 exclusion from CPO
registration with respect to the Funds. The Manager is also exempt from
registration
as a commodity trading advisor under CFTC Regulation 4.14(a)(8) with respect to
the Funds.
Further
information about the specific types of derivative instruments in which a Fund
may invest, including the risks involved in their use, are contained
under the description of each of these instruments in this SAI. A Fund may
invest in various types of derivatives, including among others:
■ |
Forward
Contracts. A
Fund may enter into forward contracts. Forward contracts are a type of
derivative instrument that obligate the purchaser to take
delivery of, or cash settle a specific amount of, a commodity, security or
obligation underlying the contract at a specified time in the future for a
specified
price. Likewise, the seller incurs an obligation to deliver the specified
amount of the underlying asset against receipt of the specified price.
Generally,
forward contracts are traded through financial institutions acting as
market-makers, on certain securities exchanges, or over-the-counter,
and
the protections afforded to investors may vary depending on the trading
environment. This is distinguishable from futures contracts, which are
traded
on U.S. and foreign commodities exchanges. Forward
contracts are often negotiated on an individual basis and are not
standardized. The market for forward contracts is substantially
unregulated,
as there is no limit on daily price movements and speculative position
limits are not applicable. The principals who deal in certain forward
contract markets are not required to continue to make markets in the
underlying reference assets in which they trade and these markets can
experience
periods of illiquidity, sometimes of significant duration. There have been
periods during which certain participants in forward contract markets
have refused to quote prices for certain underlying references or have
quoted prices with an unusually wide spread between the price at
which
they were prepared to buy and that at which they were prepared to sell. At
or prior to maturity of a forward contract, a Fund may enter into
an
offsetting contract and may incur a loss to the extent there has been
adverse movement in forward contract prices. The liquidity of the markets
for
forward contracts depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent
participants make
or take delivery, liquidity in the market for forwards could be reduced. A
relatively small price movement in a forward contract may result in
substantial
losses to a Fund, exceeding the amount of the margin paid. Forward
contracts can increase a Fund’s risk exposure to underlying reference
assets
and their attendant risks. A
Fund bears the risk of loss of the amount expected to be received under a
forward contract in the event of the default or bankruptcy of a
counterparty.
If such a default occurs, a Fund may have contractual remedies pursuant to
the forward contract, but such remedies may be subject to bankruptcy
and insolvency laws which could affect a Fund’s rights as a
creditor. |
■ |
Forward
Foreign Currency Contracts. A
Fund may enter into forward foreign currency contracts (“forward currency
contracts”), which are a type of
derivative instrument, for a variety of reasons. A forward currency
contract involves an obligation to purchase or sell a specified 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.
Because these forward currency contracts normally are settled through an
exchange of currencies, they are traded in the interbank market
directly
between currency traders (usually large commercial banks) and their
customers. |
|
Forward
currency contracts may serve as long hedges. For example, a Fund may
purchase a forward currency contract to lock in the U.S. dollar price
of
a security denominated in a foreign currency that it intends to acquire.
Forward currency contract transactions also may serve as short hedges. For
example,
a Fund may sell a forward currency contract to lock in the U.S. dollar
equivalent of the proceeds from the anticipated sale of a security or
from
a dividend or interest payment on a security denominated in a foreign
currency. |
|
A Fund
may enter into forward currency contracts to sell a foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of
its
respective portfolio securities denominated in such foreign currency. In
addition, a Fund may use forward currency contracts when a sub-advisor
wishes
to “lock in” the U.S. dollar price of a security when a Fund is purchasing
or selling a security denominated in a foreign currency or anticipates
receiving
a dividend or interest payment denominated in a foreign
currency. |
|
A Fund
may enter into forward currency contracts for the purchase or sale of a
specified currency at a specified future date either with respect to
specific
transactions or with respect to portfolio positions in order to minimize
the risk to a Fund from adverse changes in the relationship between
the
U.S. dollar and foreign currencies. |
|
A Fund
may use forward currency contracts to seek to hedge against, or profit
from, changes in the value of a particular currency by using forward
currency
contracts on another foreign currency or a basket of currencies, the value
of which a sub-advisor believes will have a positive correlation to
the
values of the currency being hedged. When hedging, use of a different
foreign currency magnifies the risk that movements in the price of the
forward
contract will not correlate or will correlate unfavorably with the foreign
currency being hedged. |
|
In
addition, a Fund may use forward currency contracts to shift exposure to
foreign currency fluctuations from one country to another. For example,
if
a Fund owned securities denominated in a foreign currency that a
sub-advisor believed would decline relative to another currency, it might
enter into
a forward currency contract to sell an appropriate amount of the first
foreign currency, with payment to be made in the second currency.
Transactions
that involve two foreign currencies are sometimes referred to as “cross
hedging.” Use of a different foreign currency magnifies a Fund’s
exposure
to foreign currency exchange rate
fluctuations. |
|
A
Fund also may enter into forward currency contracts for non-hedging
purposes if a foreign currency is anticipated to appreciate or depreciate
in value,
but securities denominated in that currency do not present attractive
investment opportunities and are not held in a Fund’s investment
portfolio. |
|
The
cost to a Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period
and the
market conditions then prevailing. Because forward currency contracts
usually are entered into on a principal basis, no fees or commissions are
involved.
When a Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at
the
maturity of the contract. Failure by the counterparty to do so would
result in the loss of any expected benefit of the
transaction. |
|
Sellers
or purchasers of forward currency contracts can enter into offsetting
closing transactions, similar to closing transactions on futures, by
purchasing
or selling, respectively, an instrument identical to the instrument sold
or bought, respectively. Secondary markets generally do not exist
for
forward currency contracts, however, with the result that closing
transactions generally can be made for forward currency contracts only by
negotiating
directly with the counterparty. Thus, there can be no assurance that a
Fund will in fact be able to close out a forward currency contract
at
a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, a Fund might be unable to close out a
forward currency
contract at any time prior to maturity. In either event, a Fund would
continue to be subject to market risk with respect to the position, and
would
continue to be required to maintain a position in the securities or
currencies that are the subject of the hedge or to maintain cash or
securities. |
|
The
precise matching of forward currency contract amounts and the value of
securities whose U.S. dollar value is being hedged by those contracts
involved
generally will not be possible because the value of such securities,
measured in the foreign currency, will change after the forward currency
contract
has been established. Thus, a Fund might need to purchase or sell foreign
currencies in the spot (cash) market to the extent such foreign
currencies
are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful
execution
of a short-term hedging strategy is highly
uncertain. |
|
A Fund
bears the risk of loss of the amount expected to be received under a
forward currency contract in the event of the default or bankruptcy of a
counterparty.
If such a default occurs, a Fund may have contractual remedies pursuant to
the forward currency contract, but such remedies may be subject
to bankruptcy and insolvency laws which could affect a Fund’s rights as a
creditor. |
|
At
the maturity of a forward contract, a Fund may sell the portfolio security
and make delivery of the foreign currency, or it may retain the security
and
either extend the maturity of the forward contract (by “rolling” that
contract forward) or may initiate a new forward contract. If a Fund
retains the
portfolio security and engages in an offsetting transaction, a Fund will
incur a gain or a loss (as described below) to the extent that there has
been
movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to
sell
the foreign currency. |
|
Should
forward prices decline during the period between a Fund’s entering into a
forward contract for the sale of a foreign currency and the date it
enters
into an offsetting contract for the purchase of the foreign currency, a
Fund will realize a gain to the extent the price of the currency it has
agreed
to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, a Fund will suffer a loss to the extent
the price
of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. |
|
Forward
currency contracts in which a Fund may engage include foreign exchange
forwards. The consummation of a foreign exchange forward requires
the actual exchange of the principal amounts of the two currencies in the
contract (i.e., settlement on a physical basis). Because foreign
exchange
forwards are physically settled through an exchange of currencies, they
are traded in the interbank market directly between currency traders
(usually large commercial banks) and their customers. A foreign exchange
forward generally has no deposit requirement, and no commissions
are charged at any stage for trades; foreign exchange dealers realize a
profit based on the difference (the spread) between the prices at
which
they are buying and the prices at which they are selling various
currencies. When a Fund enters into a foreign exchange forward, it
relies on the
counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would
result
in the loss of any expected benefit of the
transaction. |
|
A
Fund may be required to obtain the currency that it must deliver under the
foreign exchange forward through the sale of portfolio securities
denominated
in such currency or through conversion of other assets of a Fund into such
currency. When a Fund engages in foreign currency transactions
for hedging purposes, it will not enter into foreign exchange forwards to
sell currency or maintain a net exposure to such contracts if their
consummation would obligate a Fund to deliver an amount of foreign
currency materially in excess of the value of its portfolio securities or
other
assets denominated in that currency. |
■ |
Futures
Contracts. A
Fund may enter into futures contracts. Futures contracts are a type of
derivative instrument that obligate the purchaser to take
delivery of, or cash settle a specific amount of, a commodity, security or
other obligation underlying the contract at a specified time in the
future
for a specified price. Likewise, the seller incurs an obligation to
deliver the specified amount of the underlying obligation against receipt
of the specified
price. Futures are traded on both U.S. and foreign commodities exchanges.
The purchase of futures can serve as a long hedge, and the sale
of
futures can serve as a short hedge. No
price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit “initial
margin” consisting
of cash, U.S. Government securities, suitable money market instruments, or
liquid, high-grade debt securities in an amount set by the exchange
on which the contract is traded and varying based on the volatility of the
underlying asset. Margin must also be deposited when writing a
call
or put option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin
on |
|
futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to a Fund
at
the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high
volatility, a
Fund may be required by a futures exchange to increase the level of its
initial margin payment, and initial margin requirements might be increased
generally
in the future by regulatory action. Subsequent “variation margin” payments
(sometimes referred to as “maintenance margin” payments) are
made to and from the futures broker daily as the value of the futures
position varies, a process known as “marking-to-market.” Variation margin
does
not involve borrowing, but rather represents a daily settlement of a
Fund’s obligations to or from a futures broker. When a Fund purchases or
sells
a futures contract, it is subject to daily, or even intraday, variation
margin calls that could be substantial in the event of adverse price
movements.
If a Fund has insufficient cash to meet daily or intraday variation margin
requirements, it might need to sell securities at a time when such
sales are disadvantageous. Purchasers
and sellers of futures contracts can enter into offsetting closing
transactions, by selling or purchasing, respectively, an instrument
identical to
the instrument purchased or sold. Positions in futures contracts may be
closed only on a futures exchange or board of trade that trades that
contract.
A Fund intends to enter into futures contracts only on exchanges or boards
of trade where there appears to be a liquid secondary market. However,
there can be no assurance that such a market will exist for a particular
contract at a particular time. In such event, it may not be possible to
close
a futures contract. Although
many futures contracts by their terms call for the actual delivery or
acquisition of the underlying asset, in most cases the contractual
obligation
is fulfilled before the date of the contract without having to make or
take delivery of the securities or currency. The offsetting of a
contractual
obligation is accomplished by buying (or selling, as appropriate) on a
commodities exchange an identical futures contract calling for
delivery
in the same month. Such a transaction, which is effected through a member
of an exchange, cancels the obligation to make or take delivery
of
the securities or currency. Since all transactions in the futures market
are made, offset or fulfilled through a clearinghouse associated with the
exchange
on which the contracts are traded, a Fund will incur brokerage fees when
it purchases or sells futures contracts. If an offsetting purchase
price
is less than the original sale price, a Fund realizes a capital gain, or
if it is more, a Fund realizes a capital loss. Conversely, if an
offsetting sell price
is more than the original purchase price, a Fund realizes a capital gain,
or if it is less, a Fund realizes a capital loss.
The Funds has no current intent
to accept physical delivery in connection with the settlement of futures
contracts. Under
certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract can vary from the previous
day’s settlement price; once that limit is reached, no trades may be made
that day at a price beyond the limit. Daily price limits do not limit
potential
losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation
of unfavorable
positions. If a Fund were unable to liquidate a futures contract due to
the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A Fund would continue to be
subject to market risk with respect to the position. In addition, a Fund
would
continue to be required to make daily variation margin payments and might
be required to maintain the position being hedged by the futures
contract
or option thereon or to maintain cash or securities in a segregated
account. The
ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation
margin
deposit requirements, investors may close futures contracts through
offsetting transactions that could distort the normal relationship
between
the cash and futures markets. Second, the liquidity of the futures market
depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced,
thus
producing distortion. Third, from the point of view of speculators, the
margin deposit requirements in the futures market are less onerous than
margin
requirements in the securities market. Therefore, increased participation
by speculators in the futures market may cause temporary price
distortions.
Due to the possibility of distortion, a correct forecast of securities
price or currency exchange rate trends by a sub-advisor may still not
result
in a successful transaction. Futures
contracts also entail other risks. Although the use of such contracts may
benefit a Fund, if investment judgment about the general direction
of,
for example, an index is incorrect, a Fund’s overall performance would be
worse than if it had not entered into any such contract. There are
differences
between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given transaction
not
to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand
for
futures, including technical influences in futures trading, and
differences between the financial instruments being hedged and the
instruments underlying
the standard contracts available for trading in such respects as interest
rate levels, maturities, and creditworthiness of issuers. A decision
as
to whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some
degree
because of market behavior or unexpected interest rate
trends. |
■ |
Rights.
Rights are options to purchase an issuer’s securities at a stated price
during a stated term, usually at a price below the initial offering price
of the
securities and before the securities are offered to the general public.
Rights are similar to warrants but typically have a shorter duration.
Rights are
usually freely transferable, but may not be as liquid as exchange-traded
options. In addition, the terms of a right may limit a Fund’s ability to
exercise
the right at such time, or in such quantities, as a Fund would otherwise
wish. Rights usually have no voting rights, pay no dividends and
have
no rights with respect to the assets of the corporation issuing them. A
right ceases to have value if it is not exercised prior to its expiration
date. As
a result, rights may be considered more speculative than certain other
types of investments. |
■ |
Swap
Agreements.
A swap is a transaction in which a Fund and a counterparty agree to pay or
receive payments at specified dates based upon or calculated
by reference to changes in specified prices or rates (e.g., interest rates
in the case of interest rate swaps) or the performance of specified
securities
or indices based on a specified amount (the “notional” amount). Nearly any
type of derivative, including forward contracts, can be structured
as a swap. See “Derivatives” for a further discussion of derivatives
risks. Swap agreements can be structured to provide exposure to a
variety
of different types of investments or market factors. For example, in an
interest rate swap, fixed-rate payments may be exchanged for floating
rate
payments; in a currency swap, U.S. dollar-denominated payments may be
exchanged for payments denominated in a foreign currency; and in a
total
return swap, payments tied to the investment return on a particular asset,
group of assets or index may be exchanged for payments that are
effectively
equivalent to interest payments or for payments tied to the return on
another asset, group of assets, or index. Swaps may have a leverage
component,
and adverse changes in the value or level of the underlying asset,
reference rate or index can result in gains or losses that are
substantially
greater than the amount invested in the swap itself. Some swaps currently
are, and more in the future will be, centrally cleared. Swaps
|
|
that
are centrally-cleared are exposed to the creditworthiness of the clearing
organizations (and, consequently, that of their members - generally,
banks
and broker-dealers) involved in the transaction. For example, an investor
could lose margin payments it has deposited with the clearing organization
as well as the net amount of gains not yet paid by the clearing
organization if it breaches its agreement with the investor or becomes
insolvent
or goes into bankruptcy. In the event of bankruptcy of the clearing
organization, the investor may be able to recover only a portion of the
net
amount of gains on its transactions and of the margin owed to it,
potentially resulting in losses to the investor. Swaps that are not
centrally cleared
involve the risk that a loss may be sustained as a result of the
insolvency or bankruptcy of the counterparty or the failure of the
counterparty to
make required payments or otherwise comply with the terms of the
agreement. If a counterparty’s creditworthiness declines, the value of the
swap
might decline, potentially resulting in losses to a Fund. Changing
conditions in a particular market area, whether or not directly related to
the referenced
assets that underlie the swap agreement, may have an adverse impact on the
creditworthiness of a counterparty. To mitigate this risk, a Fund
will only enter into swap agreements with counterparties considered by a
sub-advisor to present minimum risk of default, and a Fund normally
obtains
collateral to secure its exposure. Swaps involve the risk that, if the
swap declines in value, additional margin would be required to maintain
the
margin level. The seller may require a Fund to deposit additional sums to
cover this, and this may be at short notice. If additional margin is not
provided
in time, the seller may liquidate the positions at a loss, which may cause
a Fund to owe money to the seller. The centrally cleared and OTC
swap
agreements into which a Fund enters normally provide for the obligations
of a Fund and its counterparty in the event of a default or other
early
termination to be determined on a net basis. Similarly, periodic payments
on a swap transaction that are due by each party on the same day
normally
are netted. The use of swap agreements requires special skills, knowledge
and investment techniques that differ from those required for normal
portfolio management. Swaps may be considered illiquid investments,
and a Fund may be unable to sell a swap agreement to a third party
at a
favorable price; see “Illiquid and Restricted Securities” for a
description of liquidity risk. |
■ |
Currency
Swaps.
A currency swap involves the exchange of payments denominated in one
currency for payments denominated in another. Payments
are based on a notional principal amount, the value of which is fixed in
exchange rate terms at the swap’s inception. Currency swap agreements
may be entered into on a net basis or may involve the delivery of the
entire principal value of one designated currency in exchange for
the
entire principal value of another designated currency. In such cases, the
entire principal value of a currency swap is subject to the risk that the
counterparty
will default on its contractual delivery obligations. Currency swaps are
subject to currency risk. |
■ |
Warrants.
Warrants are options to purchase an issuer’s securities at a stated price
during a stated term, usually at a price below the initial offering
price
of the securities and before the securities are offered to the general
public. If the market price of the underlying common stock does not
exceed
the warrant’s exercise price during the life of the warrant, the warrant
will expire worthless. As a result, warrants may be considered more
speculative
than certain other types of investments. Warrants usually have no voting
rights, pay no dividends and have no rights with respect to the
assets
of the corporation issuing them. The percentage increase or decrease in
the value of a warrant may be greater than the percentage increase
or
decrease in the value of the underlying common stock. Warrants may be
purchased with values that vary depending on the change in value of
one
or more specified indices (“index warrants”). Index warrants are generally
issued by banks or other financial institutions and give the holder the
right,
at any time during the term of the warrant, to receive upon exercise of
the warrant a cash payment from the issuer based on the value of the
underlying
index at the time of the exercise. Warrants
may also be linked to the performance of oil and/or the GDP of specific
emerging markets.
Warrants
are usually freely transferable, but may not be as liquid as
exchange-traded options, and the market for warrants may be very limited
and it may
be difficult to sell them promptly at an acceptable
price. |
Equity
Investments — A
Fund may invest in the following equity securities:
■ |
Common
Stock.
Common stock generally takes the form of shares in a corporation which
represent an ownership interest. It ranks below preferred stock
and debt securities in claims for dividends and for assets of the company
in a liquidation or bankruptcy. The value of a company’s common
stock
may fall as a result of factors directly relating to that company, such as
decisions made by its management or decreased demand for the company’s
products or services. A stock’s value may also decline because of factors
affecting not just the company, but also companies in the same
industry
or sector. The price of a company’s stock may also be affected by changes
in financial markets that are relatively unrelated to the company,
such
as changes in interest rates, currency exchange rates or industry
regulation. Companies that elect to pay dividends on their common stock
generally
only do so after they invest in their own business and make required
payments to bondholders and on other debt and preferred stock.
Therefore,
the value of a company’s common stock will usually be more volatile than
its bonds, other debt and preferred stock. Common stock may be
exchange-traded or traded over-the-counter. OTC stock may be less liquid
than exchange-traded stock. |
■ |
Depositary
Receipts. A
Fund may invest in depositary receipts, which represent ownership
interests in securities of foreign companies (an “underlying
issuer”) that have been deposited with a bank or trust and that trade on
an exchange or OTC. Depositary receipts may not be denominated
in the same currency as the securities into which they may be converted,
and they are subject to the risk of fluctuation in the currency
exchange
rate. Investing in depositary receipts entails substantially the same
risks as direct investment in foreign securities. There is generally less
publicly
available information about foreign companies and there may be less
governmental regulation and supervision of foreign stock exchanges,
brokers,
and listed companies. In addition, such companies may use different
accounting and financial standards (and certain currencies may become
unavailable
for transfer from a foreign currency), resulting in a Fund’s possible
inability to convert immediately into U.S. currency proceeds realized
upon
the sale of portfolio securities of the affected foreign companies. In
addition, the issuers of unsponsored depositary receipts are not obligated
to
disclose material information about the underlying securities to investors
in the United States. Ownership of unsponsored depositary receipts may
not
entitle a Fund to the same benefits and rights as ownership of a sponsored
depositary receipt or the underlying security. Please see “Foreign
Securities”
below for a description of the risks associated with investments in
foreign securities. A Fund may invest in the following type of
depositary
receipts: |
■ |
ADRs.
ADRs are depositary receipts for foreign issuers in registered form,
typically issued by a U.S. financial institution, traded in U.S.
securities markets. |
■ |
EDRs.
EDRs, which are sometimes called Continental Depositary Receipts, are
issued in Europe in bearer form and are traded in European securities
markets. |
■ |
GDRs.
GDRs are in bearer form and traded in both the U.S. and European
securities markets. |
■ |
NVDRs.
NVDRs represent financial interests in an issuer but the holder is not
entitled to any voting rights. |
■ |
Income
Deposit Securities.
A
Fund may purchase IDSs. Each IDS represents two separate securities,
shares of common stock and subordinated notes
issued by the same company, that are combined into one unit that trades
like a stock on an exchange. Holders of IDSs receive dividends on the
common
shares and interest at a fixed rate on the subordinated notes to produce a
blended yield. An IDS is typically listed on a stock exchange, but
the
underlying securities typically are not listed on the exchange until a
period of time after the listing of the IDS or upon the occurrence of
certain events
(e.g., a change of control of the issuer of the IDS). When the underlying
securities are listed, the holders of IDSs generally have the right to
separate
the components of the IDSs and trade them
separately. |
|
There
may be a thinner and less active market for IDSs than that available for
other securities. The value of an IDS will be affected by factors
generally
affecting common stock and subordinated debt securities, including the
issuer’s actual or perceived ability to pay interest and principal on
the
notes and pay dividends on the stock. |
|
The
federal income tax treatment of IDSs is not entirely clear and there is no
authority that directly addresses the tax treatment of securities with
terms
substantially similar to IDSs. Among other things, although it is expected
that the subordinated notes portion of an IDS will be treated as debt,
if
it is characterized as equity rather than debt, then interest paid on the
notes could be treated as dividends (to the extent paid out of the
issuer’s earnings
and profits). |
■ |
Income
Trusts. A
Fund may invest in shares of income trusts, including Canadian royalty
trusts. An income trust is an investment trust which holds income-producing
assets and generally distributes the income generated by such assets on to
its security holders. Income trusts also may include royalty
trusts, a particular type of income trust whose securities are listed on a
stock exchange and which controls an underlying company whose business
relates to, without limitation, the acquisition, exploitation, production
and sale of oil and natural gas. The main attraction of an income
trust
is its ability to generate constant cash flows. Income trusts have the
potential to deliver higher yields than bonds. During periods of low
interest rates,
income trusts may achieve higher yields compared with cash investments.
During periods of increasing rates, the opposite may be true. Income
trusts
may experience losses during periods of both low and high interest
rates. |
|
Income
trusts generally are structured to avoid income taxes at the entity level.
In a traditional corporate tax structure, net income is taxed at the
corporate
level and again when distributed as dividends to its shareholders. Under
current law, an income trust, if properly structured, should not be
subject
to federal income tax. This flow-through structure means that the
distributions to income trust investors are generally higher than
dividends from
an equivalent corporate entity. |
|
Despite
the potential for attractive regular payments, income trusts are equity
investments, not fixed-income securities, and they share many of the
risks
inherent in stock ownership, including operating risk based on the income
trusts’ underlying assets and their respective businesses. Such risks
may
include lack of, or limited, operating histories. In addition, an income
trust may lack diversification and potential growth may be sacrificed
because
revenue is passed on to security holders, rather than reinvested in the
business. Because income trusts may pay out more than their net
income,
the unitholder equity (capital) may decline over time. Income trusts often
grow through acquisition of additional assets, funded through the
issuance
of additional equity or, where the trust is able, additional debt. Income
trusts do not guarantee minimum distributions or even return of
capital;
therefore, if the business of a trust starts to lose money, the trust can
reduce or even eliminate distributions. The tax structure of income
trusts
described above, which would allow income to flow through to investors and
be taxed only at the investor level, could be challenged under
existing
law, or the tax laws could change. Royalty trusts and income trusts
frequently are found in Canada, and an investment in a Canadian trust
will
be subject to certain additional risks of investing in foreign
securities. |
■ |
Initial
Public Offerings. A
Fund can invest in IPOs. By definition, securities issued in IPOs have not
traded publicly until the time of their offerings. Special
risks associated with IPOs may include, among others, the fact that there
may only be a limited number of shares available for trading. The
market
for those securities may be unseasoned. The issuer may have a limited
operating history. These factors may contribute to price volatility. The
limited
number of shares available for trading in some IPOs may also make it more
difficult for a Fund to buy or sell significant amounts of shares
without
an unfavorable impact on prevailing prices. In addition, some companies
initially offering their shares publicly are involved in relatively new
industries
or lines of business, which may not be widely understood by investors.
Some of the companies involved in new industries may be regarded
as
developmental state companies, without revenues or operating income, or
the near-term prospects of them. Many IPOs are by small- or micro-cap
companies
that are undercapitalized. IPOs may adversely impact a Fund’s performance.
However, the impact of IPOs on a Fund’s performance will likely
decrease as a Fund’s asset size
increases. |
■ |
Master
Limited Partnerships. A
Fund may invest in publicly traded partnerships such as MLPs. MLPs issue
units that are registered with the SEC and
are freely tradable on a securities exchange or in the OTC market. An MLP
may have one or more general partners, who conduct the business,
and
one or more limited partners, who contribute capital. The general partner
or partners are jointly and severally responsible for the liabilities of
the MLP.
An MLP also may be an entity similar to a limited partnership, such as an
LLC, which has one or more managers or managing members and non-managing
members (who are like limited partners). A Fund will invest in an MLP as a
limited partner, and normally would not be liable for the debts
of an MLP beyond the amount that a Fund has invested therein. However, as
a limited partner, a Fund would not be shielded to the same extent
that a stockholder of a corporation would be. In certain instances,
creditors of an MLP would have the right to seek a return of capital that
had
been distributed to a limited partner. This right of an MLP’s creditors
would continue even after a Fund had sold its investment in the
partnership.
Holders of MLP units have more limited rights to vote on matters affecting
the partnership than owners of common stock. MLPs typically
invest in real estate and oil and gas equipment leasing assets, but they
also finance entertainment, research and development, and other
projects. |
ESG
Considerations
— Environmental, social, and/or governance (“ESG”) considerations, either
quantitative or qualitative, may be utilized as a component
of a Fund’s investment process to implement its investment strategies.
Since
ESG considerations are not the only component that may be evaluated
by a sub-advisor, the issuers in which a Fund invests may not be considered ESG
issuers or have good ESG ratings.
To the extent that a Fund utilizes
such considerations as a component of a Fund’s investment process, a Fund’s
performance may be affected depending on whether such considerations
are in or out of favor and relative to similar funds that do not include such
considerations in the investment process. There is no
guarantee
that the utilization of ESG considerations will be additive to a Fund’s
performance. ESG considerations may vary across types of investments
and
issuers, and not every such consideration may be identified, evaluated, or
evaluated in the same manner. ESG norms also differ by country and region,
and an issuer’s ESG practices or a sub-advisor’s assessment process of such
considerations may change over time. There are significant differences
in interpretations of what it means for a company to have good ESG
characteristics, and a Fund may underperform other funds that use different
considerations and/or a different methodology in evaluating such considerations.
Information used by a Fund to evaluate such considerations, including
the use of third-party research, if any,
may not be readily available, complete or accurate, and may vary across
third-party research providers and
issuers, which could negatively impact a Fund’s ability to accurately assess an
issuer. As investors can differ in their views regarding the meaning of
ESG
considerations, a Fund may invest in companies that do not reflect the beliefs
and values of any particular investor. The regulatory landscape with
respect
to ESG investing in the United States is still developing, and future rules and
regulations may require a Fund to modify or alter its investment process
with respect to the use of such considerations.
Expense
Risk
— Fund expenses are subject to a variety of factors, including fluctuations in a
Fund’s net assets. Accordingly, actual expenses may be greater
or less than those indicated. For example, to the extent that a Fund’s net
assets decrease due to market declines or redemptions, a Fund’s expenses
will increase as a percentage of Fund net assets. During periods of high market
volatility, these increases in a Fund’s expense ratio could be significant.
Fixed-Income
Investments
— A Fund may hold debt instruments, including government and corporate debt
instruments, and other fixed-income securities,
including derivative instruments that have fixed-income securities as reference
assets.
Typically, the values of fixed-income securities change inversely
with prevailing interest rates. Therefore, a fundamental risk of fixed-income
securities is interest rate risk, which is the risk that their value will
generally
decline as prevailing interest rates rise, which may cause a Fund’s NAV to
likewise decrease, and vice versa. How specific fixed-income securities
may react to changes in interest rates will depend on the specific
characteristics of each security. For example, while securities with longer
maturities
tend to produce higher yields, they also tend to be more sensitive to changes in
prevailing interest rates and are therefore more volatile than shorter-term
securities and are subject to greater market fluctuations as a result of changes
in interest rates. However, calculations of maturity and duration
may be based on estimates and may not reliably predict a security’s price
sensitivity to changes in interest rates. In addition, different interest
rate
measures (such as short- and long-term interest rates and U.S. and non-U.S.
interest rates), or interest rates on different types of securities or
securities
of different issuers, may not necessarily change in the same amount or in the
same direction. Investments in fixed-income securities with very low
or negative interest rates may diminish a Fund’s yield and performance.
Conversely, if rising interest rates cause a Fund to lose value, a Fund could
face
increased shareholder redemptions, which may lead to increased portfolio
turnover and transaction costs. An increase in shareholder redemptions
could
also force a Fund to liquidate investments at disadvantageous times or prices,
therefore adversely affecting a Fund as well as the value of your investment.
For fixed-income securities with variable or floating rates, the interest rates
reset when the specified index or reference rate changes. Fixed-income
securities are also subject to credit risk, which is the risk that the credit
strength of an issuer of a fixed-income security will weaken and/or that
the issuer will be unable or unwilling to make timely principal and interest
payments and that the security may go into default. In addition, there is
prepayment
risk, which is the risk that during periods of falling interest rates, certain
fixed-income securities with higher interest rates, such as mortgage-
and asset-backed securities, may be prepaid by their issuers thereby reducing
the amount of interest payments. This is similar to call risk,
which
is the risk that the issuer of a debt security may repay the security early.
This may result in a Fund not enjoying the increase in the security’s
market
price that usually accompanies a decline in rates, and also having to reinvest
its proceeds in lower yielding securities. Fixed-income securities may
also be subject to valuation risk and liquidity risk. Valuation risk is the risk
that one or more of the fixed-income securities in which a Fund invests
are
priced differently than the value realized upon such security’s sale. In times
of market instability, valuation may be more difficult. Liquidity risk is the
risk
that fixed-income securities may be difficult or impossible to sell at the time
that a Fund would like or at the price a sub-advisor believes the security
is currently worth. To the extent a Fund invests in fixed-income securities in a
particular industry or economic sector, its share values may fluctuate
in response to events affecting that industry or sector.
Securities
underlying mortgage and asset backed securities, which may include
subprime mortgages, also may be subject to a higher degree of credit
risk,
valuation risk, and liquidity risk.
To
the extent that a Fund invests in derivatives tied to fixed income securities,
such Fund may be more substantially
exposed to these risks than a portfolio that does not invest in such
derivatives.
Fixed-income
securities are also subject to market risk. The market for certain fixed-income
securities may become illiquid under adverse market or economic
conditions independent of any specific adverse changes in the conditions of a
particular issuer. Recent and potential future changes in government
monetary policy may also affect the level of interest rates. A Fund may be
subject to heightened interest rate risk in times of monetary policy
change and uncertainty, such as when the Federal Reserve ends a quantitative
easing program and/or raises interest rates. The end of quantitative
easing and/or rising interest rates may expose fixed-income markets to increased
volatility and may reduce the liquidity of certain investments.
These developments could cause a Fund’s NAV to fluctuate or make it more
difficult for a Fund to accurately value its securities. The amount
of assets deemed illiquid remaining within a Fund may also increase, making it
more difficult to meet shareholder redemptions and further adversely
affecting the value of a Fund.
In
addition, specific types of fixed-income securities in which a Fund may invest
are subject to the risks described elsewhere in this SAI. See
“High-Yield Bonds”
disclosure below for the risks associated with low-quality, high-risk corporate
bonds, a type of fixed-income security.
■ |
Corporate
Debt and Other Fixed-Income Securities.
Typically, the values of fixed income securities change inversely with
prevailing interest rates. Therefore,
a fundamental risk of fixed income securities is interest rate risk, which
is the risk that their value generally will decline as prevailing
interest
rates rise, which may cause a Fund’s NAV to likewise decrease, and vice
versa. How specific fixed income securities may react to changes in
interest
rates will depend on the specific characteristics of each security. For
example, while securities with longer maturities tend to produce higher
yields,
they also tend to be more sensitive to changes in prevailing interest
rates. They are therefore more volatile than shorter-term securities and
are subject
to greater market fluctuations as a result of changes in interest rates.
Fixed income securities are also subject to credit risk, which is the risk
that
the credit strength of an issuer of a fixed income security will weaken
and/or that the issuer will be unable to make timely principal and
interest payments,
and that the security may go into
default. |
■ |
Master
Demand Notes.
Master demand notes are direct arrangements, between a lender and a
corporate borrower, that permit the investment of fluctuating
amounts of money at varying rates of interest. They permit daily changes
in the amounts borrowed. The lender has the right to increase or
decrease the amount it lends under the note at any time, up to the full
amount provided by the note agreement. The borrower may prepay up to
the
full amount of the note without penalty. These notes may or may not be
backed by bank letters of credit. These
notes are direct lending arrangements between the lender and borrower, and
there is no secondary market for them. The principal plus accrued
interest is redeemable at any time, however. This right to redeem the
notes depends on the ability of the borrower to make the specified
payment
on demand. The sub-advisors will consider the earning power, cash flow and
other liquidity ratios of an issuer, and its ability to pay principal
and interest on demand, including a situation in which all holders of such
notes make demand simultaneously. Investments in master demand
notes may be subject to limited
liquidity. |
Foreign
Securities
— A Fund may invest in U.S. dollar-denominated and non-U.S.
dollar-denominated equity and debt securities of foreign issuers and
foreign
branches of U.S. banks, including negotiable CDs, bankers’ acceptances, and
commercial paper. Foreign issuers are issuers organized and doing business
principally outside the United States and include corporations, banks, non-U.S.
governments, and quasi-governmental organizations. While investments
in foreign securities are intended to reduce risk by providing further
diversification, such investments involve sovereign and other risks, in
addition
to the credit and market risks normally associated with domestic securities.
These additional risks may include: the possibility of adverse political
and economic developments (including political or social instability,
nationalization, expropriation, or confiscatory taxation); the impact of
economic,
political, social, diplomatic or other conditions or events (including, for
example, military confrontations and actions, war, other conflicts, terrorism,
and disease/virus outbreaks and epidemics); the potentially adverse effects of
unavailability of public information regarding issuers, less or less
reliable information about the securities and business operations of foreign
issuers, less governmental supervision and regulation of financial markets,
reduced liquidity of certain financial markets, and the lack of uniform
accounting, auditing, and financial reporting standards or the application
of standards that are different or less stringent than those applied in the
United States; different laws and customs governing securities purchases,
tracking and custody; the difficulty of predicting international trade patterns
and the possibility of exchange controls or limitations on the removal
of funds or assets; the impact of economic, political, social, diplomatic or
other conditions or events (including, for example, military confrontations
and actions, war, other conflicts, terrorism, and disease/virus outbreaks and
epidemics); and possibly more limited legal remedies and access
to the courts available to enforce a Fund’s rights as an investor. The prices of
such securities may be more volatile than those of domestic securities.
Equity securities may trade at price/earnings multiples higher than comparable
U.S. securities, and such levels may not be sustainable. The economies
of many of the countries in which a Fund may invest are not as developed as the
U.S. economy, and individual foreign economies can differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource self-sufficiency,
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable
to diplomatic developments, the imposition of economic sanctions against a
particular country or countries, changes in international trading patterns,
trade barriers, and other protectionist or retaliatory
measures.
Foreign
stock markets are generally not as developed or efficient as, and may be more
volatile than, those in the United States. While growing in volume,
they usually have substantially less trading volume than U.S. markets. As a
result, foreign securities may trade with less frequency and in less
volume
than domestic securities and therefore may exhibit greater or lower price
volatility. A Fund may be exposed to risks in the process of clearing
and
settling trades and the holding of securities by foreign banks, agents and
depositories. Governments or trade groups may compel local agents to
hold
securities in designated depositories that are not subject to independent
evaluation. Additional costs associated with an investment in foreign
securities
may include higher custodial fees than apply to domestic custody arrangements
and transaction costs of foreign currency conversions. Investments
in emerging markets may be subject to greater custody risks than investments in
more developed markets. Foreign markets also have different
clearance and settlement procedures. In certain markets, there have been times
when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion
of the assets of a Fund is not invested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause a Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems
could result in losses to a Fund due to subsequent declines in value of the
securities or, if a Fund has entered into a contract to sell the securities,
could result in possible liability to the purchaser. In addition, certain
foreign markets may institute share blocking, which is a practice under
which
an issuer’s securities are blocked from trading at the custodian or
sub-custodian level for a specified number of days before and, in certain
instances,
after a shareholder meeting where a vote of shareholders takes place. The
blocking period can last up to several weeks. Share blocking may prevent
a Fund from buying or selling securities during this period, because during the
time shares are blocked, trades in such securities will not settle. It
may be difficult or impossible to lift blocking restrictions, with the
particular requirements varying widely by country. As a consequence of these
restrictions,
a sub-advisor, on behalf of a Fund, may elect not to vote proxies in
markets that require share blocking. Interest rates prevailing in other
countries
may affect the prices of foreign securities and exchange rates for foreign
currencies. Local factors, including the strength of the local economy,
the demand for borrowing, the government’s fiscal and monetary policies, and the
international balance of payments, often affect interest rates
in other countries.
Economic
sanctions and other similar governmental actions could, among other things,
effectively restrict or eliminate a Fund’s ability to purchase or sell
foreign securities, and thus may prevent the Fund from making investments or
make the Fund’s investments in such securities less liquid or more difficult
to value. In addition, as a result of economic sanctions, a Fund may be forced
to sell or otherwise dispose of investments at inopportune times or
prices, which could result in losses to the Fund and increased transaction
costs. These conditions may be in place for a substantial period of time and
enacted
with limited advance notice to a Fund. The risks posed by sanctions against a
particular foreign country, its nationals or industries or businesses
within
the country may be heightened to the extent a Fund invests significantly in the
affected country or region or in issuers from the affected country that
depend on global markets.
Investing
in foreign currency denominated securities involves not only the special risks
associated with investing in non-U.S. issuers, as described above, but
also the additional risks of adverse changes in foreign exchange rates and
investment or exchange control regulations, which could prevent cash
from
being brought back to the United States. Additionally, dividends and interest
payable on foreign securities (and gains realized on disposition thereof)
may be subject to foreign taxes, including taxes withheld from those payments.
Some governments may impose a tax on purchases by foreign
investors
of certain securities that trade in their country. Countries may amend or revise
their existing tax laws, regulations and/or procedures in the future,
possibly with retroactive effect. Changes in or uncertainties regarding the
laws, regulations or procedures of a country could reduce the after-tax
profits of a Fund, directly or indirectly, including by reducing the after-tax
profits of companies located in such countries in which a Fund invests,
or result in unexpected tax liabilities for a Fund. Commissions on foreign
securities exchanges are often at fixed rates and are generally higher
than
those negotiated commissions on U.S. exchanges, although a sub-advisor endeavors
to achieve the most favorable net results on portfolio transactions.
A
Fund may also invest in foreign “market access” investments, such as
participatory notes, low-exercise price options or warrants, equity-linked
notes, or
equity swaps. These investments may provide economic exposure to an issuer
without directly holding its securities. For example, market access investments
may be used where regulatory or exchange restrictions make it difficult or
undesirable for a Fund to invest directly in an issuer’s common stock.
Use of market access investments may involve risks associated with derivative
investments, which are discussed in “Derivatives.” Market access investments
can be either exchange-traded or over-the-counter. Certain market access
investments can be subject to the credit risk of both the underlying
issuer and a counterparty. Holders of certain market access investments might
not have voting, dividend, or other rights associated with shareholders
of the referenced securities. Holders of market access investments might not
have any right to make a claim against an issuer or counterparty
in the event of their bankruptcy or other restructuring. It may be more
difficult or time consuming to dispose of certain market access investments
than the referenced security.
A
Fund may be subject to the risk that its share price may be exposed to arbitrage
attempts by investors seeking to capitalize on differences in the values
of foreign securities trading on foreign exchanges that may close before the
time a Fund’s net asset value is determined. If such arbitrage attempts
are successful, a Fund’s net asset value might be diluted.
The
use of fair value pricing in certain circumstances may help deter such arbitrage
activities. The effect of such fair value pricing is that foreign securities
may not be priced on the basis of quotations from the primary foreign securities
market in which they are traded, but rather may be fair valued.
As such, fair value pricing is based on subjective judgment and it is possible
that fair value may differ materially from the value realized on a sale
of a foreign security. It is also possible that use of fair value pricing will
limit an investment adviser’s ability to implement a Fund’s investment
strategy
(e.g., reducing the volatility of a Fund’s share price) or achieve its
investment objective. The Funds’ market timing and frequent trading policies
and
procedures also are intended to help deter arbitrage activities.
■ |
Emerging
Market Securities. A
Fund may invest in emerging market securities. A Fund may consider a
country to be an emerging market country based
on a number of factors including, but not limited to, if the country is
classified as an emerging or developing economy by any supranational
organization
such as the World Bank, International Finance Corporation or the United
Nations, or related entities, or if the country is considered an
emerging
market country for purposes of constructing emerging markets indices.
Investments in emerging market country securities involve special
risks.
The economies, markets and political structures of a number of the
emerging market countries in which a Fund can invest do not compare
favorably
with the United States and other mature economies in terms of wealth and
stability. Therefore, investments in these countries may be riskier,
and will be subject to erratic and abrupt price movements. These risks are
discussed below. Economies:
The economies of emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of
gross
domestic product, rate of inflation, currency depreciation, reliable
access to capital, capital reinvestment, resource self-sufficiency,
balance of payments
and trade difficulties. Some economies are less well developed and less
diverse (for example, Latin America, Eastern Europe and certain
Asian
countries), and may be heavily dependent upon international trade, as well
as the economic conditions in the countries with which they trade.
Such
economies accordingly have been, and may continue to be, adversely
affected by trade barriers, exchange controls, managed adjustments in
relative
currency values and other protectionist or retaliatory measures imposed or
negotiated by the countries with which they trade. Similarly, many
of
these countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations,
large amounts of national and external debt, severe recession, and extreme
poverty and unemployment. The economies of emerging market
countries may be based predominately on only a few industries or may be
dependent on revenues from participating commodities or on international
aid or developmental assistance. Emerging market economies may develop
unevenly or may never fully develop. Investments in countries
that have recently begun moving away from central planning and state-owned
industries toward free markets, such as the Eastern European,
Russian or Chinese economies, should be regarded as
speculative. Governments:
Emerging markets may have uncertain national policies and social,
political and economic instability. While government involvement
in
the private sector varies in degree among emerging market countries, such
involvement may in some cases include government ownership of companies
in certain sectors, wage and price controls or imposition of trade
barriers and other protectionist measures. In the past, governments of
such
nations have expropriated substantial amounts of private property, and
most claims of the property owners have never been fully settled. There
is
no assurance that such expropriations will not reoccur. In addition, there
is no guarantee that some future economic or political crisis will not
lead to
price controls, forced mergers of companies, confiscatory taxation or
creation of government monopolies to the possible detriment of a Fund’s
investments.
In such event, it is possible that a Fund could lose the entire value of
its investments in the affected markets. Emerging
market countries may have national policies that limit a Fund’s investment
opportunities such as restrictions on investment in issuers or
industries
deemed sensitive to national interests. Repatriation of investment income,
capital and the proceeds of sales by foreign investors may require
governmental registration and/or approval in some emerging market
countries. In addition, if a Fund invests in a market where restrictions
are
considered acceptable, a country could impose new or additional
repatriation restrictions after investment that are unacceptable. This
might require,
among other things, applying to the appropriate authorities for a waiver
of the restrictions or engaging in transactions in other markets
designed
to offset the risks of decline in that country. Further, some attractive
securities may not be available, or may require a premium for purchase,
due to foreign shareholders already holding the maximum amount legally
permissible. In addition to withholding taxes on investment income,
some countries with emerging capital markets may impose differential
capital gain taxes on foreign investors. An
issuer or governmental authority that controls the repayment of an
emerging market country’s debt may not be able or willing to repay the
principal
and/or interest when due in accordance with the terms of such debt. A
debtor’s willingness or ability to repay principal and interest due in a
timely
manner may be affected by, among other factors, its cash flow situation,
and, in the case of a government debtor, 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
and the political constraints to which a government debtor may be subject.
Government debtors may default on their debt and may also be dependent
on expected disbursements from foreign governments, multilateral agencies
and others abroad to reduce principal and interest arrearages
on their debt. Holders of government debt may be requested to participate
in the rescheduling of such debt and to extend further loans to
government debtors. There may be limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the
courts
of the defaulting party itself, and the ability of the holder of foreign
government fixed-income securities to obtain recourse may be subject to
the
political climate in the relevant country. In addition, no assurance can
be given that the holders of commercial bank debt will not contest
payments
to the holders of other foreign government debt obligations in the event
of default under their commercial bank loan agreements. Capital
Markets:
The capital markets in emerging market countries may be underdeveloped.
They may have low or non-existent trading volume, resulting
in a lack of liquidity and increased volatility in prices for such
securities, as compared to securities from more developed capital markets.
Emerging
market securities may be substantially less liquid and more volatile than
those of mature markets, and securities may be held by a limited
number
of investors. This may adversely affect the timing and pricing of a Fund’s
acquisition or disposal of securities. There may be less publicly
available
information about emerging markets than would be available in more
developed capital markets, and such issuers may not be subject to
accounting,
auditing and financial reporting standards and requirements comparable to
those to which U.S. companies are subject. In certain countries
with emerging capital markets, reporting standards vary widely. As a
result, traditional investment measurements used in the U.S., may not
be
applicable. Investing in certain countries with emerging capital markets
may entail purchasing securities issued by or on behalf of entities that
are insolvent,
bankrupt, in default or otherwise engaged in an attempt to reorganize or
reschedule their obligations, and in entities that have little or no
proven
credit rating or credit history. In any such case, the issuer’s poor or
deteriorating financial condition may increase the likelihood that the
investing
Fund will experience losses or diminution in available gains due to
bankruptcy, insolvency or fraud. There may also be custodial restrictions
or
other non-U.S. or U.S. governmental laws or restrictions applicable to
investments in emerging market countries. Practices
in relation to settlement of securities transactions in emerging markets
involve higher risks than those in developed markets, in part because
a Fund may use brokers and counterparties that are less well capitalized,
and custody and registration of assets in some countries may be
unreliable.
Supervisory authorities also may be unable to apply standards comparable
to those in developed markets. Thus, there may be risks that settlement
may be delayed and that cash or securities belonging to a Fund may be in
jeopardy because of failures of or defects in the systems. In particular,
market practice may require that payment be made before receipt of the
security being purchased or that delivery of a security be made
before
payment is received. In such cases, default by a broker or bank (the
“counterparty”) through whom the transaction is effected might
cause a Fund
to suffer a loss. There can be no certainty that a Fund will be
successful in eliminating counterparty risk, particularly as
counterparties operating in
emerging market countries frequently lack the substance or financial
resources of those in developed countries. There may also be a danger
that, because
of uncertainties in the operation of settlement systems in individual
markets, competing claims may arise with respect to securities held by
or
to be transferred to a Fund. Regulatory
authorities in some emerging markets currently do not provide the Public
Company Accounting Oversight Board with the ability to inspect
public accounting firms as required by U.S. law, including sufficient
access to inspect audit work papers and practices, or otherwise do not
cooperate
with U.S. regulators, which potentially could expose investors to
significant risks. Legal
Systems:
Investments in emerging market countries may be affected by the lack, or
relatively early development, of legal structures governing private
and foreign investments and private property. Such capital markets are
emerging in a dynamic political and economic environment brought
about
by events over recent years that have reshaped political boundaries and
traditional ideologies. Many emerging market countries have little
experience
with the corporate form of business organization and may not have
well-developed corporation and business laws or concepts of fiduciary
duty in the business context. The organizational structures of certain
issuers in emerging markets may limit investor rights and
recourse. A Fund
may encounter substantial difficulties in obtaining and enforcing
judgments against individuals and companies located in certain emerging
market
countries, either individually or in combination with other shareholders.
It may be difficult or impossible to obtain or enforce legislation or
remedies
against governments, their agencies and sponsored entities. Additionally,
in certain emerging market countries, fraud, corruption and attempts
at market manipulation may be more prevalent than in developed market
countries. Shareholder claims that are common in the U.S. and are
generally viewed as determining misconduct, including class action
securities law and fraud claims, generally are difficult or impossible to
pursue as
a matter of law or practicality in many emerging markets. The
laws in certain countries with emerging capital markets may be based upon
or be highly influenced by religious codes or rules. The interpretation
of how these laws apply to certain investments may change over time, which
could have a negative impact on those investments and a
Fund. Russia
launched a large-scale invasion of Ukraine on February 24, 2022. The
extent and duration of the military action, resulting sanctions and
resulting
future market disruptions, including declines in its stock markets and the
value of the ruble against the U.S. dollar, are impossible to predict,
but
could be significant. Any such disruptions caused by Russian military
action or other actions (including cyberattacks and espionage) or
resulting actual
and threatened responses to such activity, including purchasing and
financing restrictions, boycotts or changes in consumer or purchaser
preferences,
sanctions, tariffs or cyberattacks on the Russian government, Russian
companies or Russian individuals, including politicians, may impact
Russia’s
economy and Russian issuers of securities in which a Fund invests. Actual
and threatened responses to such activity, including purchasing
restrictions,
sanctions, tariffs or cyberattacks on the Russian government or Russian
companies, may impact Russia’s economy and Russian issuers of securities
in which a Fund invests. Actual and threatened responses to such military
action may also impact the markets for certain Russian commodities,
such as oil and natural gas, as well as other sectors of the Russian
economy, and may likely have collateral impacts on such sectors
globally,
and may negatively affect global supply chains, inflation and global
growth. These and any related events could significantly impact a Fund’s
performance
and the value of an investment in a Fund, even if a Fund does not have
direct exposure to Russian issuers or issuers in other countries
affected
by the invasion. Governments
in the United States and many other countries (collectively, the
“Sanctioning Bodies”) have imposed economic sanctions, which can
consist
of prohibiting certain securities trades, certain private transactions in
the energy sector, asset freezes and prohibition of all business, against
certain
Russian individuals, including politicians, and Russian corporate and
banking entities. The Sanctioning Bodies, or others, could also institute
broader
sanctions on Russia, including banning Russia from global payments systems
that facilitate cross-border payments. These sanctions, or even
the
threat of further sanctions, may result in the decline of the value and
liquidity of Russian securities, a weakening of the ruble or other adverse
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consequences
to the Russian economy. These sanctions could also result in the immediate
freeze of Russian securities and/or funds invested in prohibited
assets, impairing the ability of a Fund to buy, sell, receive or deliver
those securities and/or assets. Sanctions could also result in Russia
taking
counter measures or retaliatory actions which may further impair the value
and liquidity of Russian securities. |
■ |
European
Securities.
A Fund’s performance may be affected by political, social and economic
conditions in Europe, such as growth of economic output
(the gross national product of the countries in the region), the rate of
inflation, the rate at which capital is reinvested into European
economies,
the success of governmental actions to reduce budget deficits, the
resource self-sufficiency of European countries, interest rates in
European
countries, monetary exchange rates between European countries, and
conflict between European countries. Most developed countries in
Western
Europe are members of the European Union (“EU”), and many are also members
of the European Economic and Monetary Union (“EMU” or
“Eurozone”). The EMU is comprised of EU members that have adopted the Euro
currency. As part of EMU membership, member states relinquish control
of their own monetary policies to the European Central Bank. The EMU
requires Eurozone countries to comply with restrictions on interest
rates,
deficits, debt levels, and inflation rates; fiscal and monetary controls;
and other factors. Although the EMU has adopted a common currency
and
central bank, there is no fiscal union; therefore, money does not
automatically flow from countries with surpluses to those with deficits.
These restrictions
and characteristics may limit the ability of EMU member countries to
implement monetary policy to address regional economic conditions
and
significantly impact every European country and their economic partners,
including those countries that are not members of the EMU. In addition,
those EU member states that are not currently in the Eurozone (except
Denmark) are required to seek to comply with convergence criteria
to
permit entry to the Eurozone. The economies and markets of European
countries are often closely connected and interdependent, and events in
one
country in Europe can have an adverse impact on other European countries.
Changes in imports or exports, changes in governmental or European
regulations on trade, changes in the exchange rate of the Euro, the threat
of default or actual default by one or more European countries
on
its sovereign debt, and/or an economic recession in one or more European
countries may have a significant adverse effect on the economies of
other
European countries and their trading partners. The
European financial markets have experienced and may continue to experience
volatility and adverse trends due to concerns relating to economic
downturns;
national unemployment; ageing populations; rising government debt levels
and the possible default on government debt in several European
countries; public health crises; political unrest; economic sanctions;
inflation; energy crises; the future of the Euro as a common currency;
and
war and military conflict, such as the Russian invasion of Ukraine. These
events have affected the exchange rate of the Euro and may continue
to
significantly affect European countries. Responses to financial problems
by European governments, central banks, and others, including austerity
measures
and other reforms, may not produce the desired results, may result in
social unrest and may limit future growth and economic recovery or
may
have unintended consequences. In order to prevent further economic
deterioration, certain countries, without prior warning, can institute
“capital
controls.” Countries may use these controls to restrict volatile movements
of capital entering and exiting their country. Such controls may
negatively
affect a Fund’s investments. In addition, one or more countries may
abandon the Euro and/or withdraw from the EU. The impact of these
actions,
especially if they occur in a disorderly fashion, could be significant and
far-reaching. Many
European nations are susceptible to economic risks associated with high
levels of debt. Non-governmental issuers, and even certain governments,
have defaulted on, or been forced to restructure, their debts, and other
issuers have faced difficulties obtaining credit or refinancing
existing
obligations. A default or debt restructuring by any European country could
adversely impact holders of that country’s debt and sellers of
credit
default swaps linked to that country’s creditworthiness, which may be
located in other countries. Such a default or debt restructuring could
affect
exposures to other European countries and their companies as well. Further
defaults on, or restructurings of, the debt of governments or other
entities could have additional adverse effects on economies, financial
markets and asset valuations around the world. In
addition, issuers have faced difficulties obtaining credit or refinancing
existing obligations; financial institutions have in some cases required
government
or central bank support, have needed to raise capital and/or have been
impaired in their ability to extend credit; and financial markets in
Europe
and elsewhere have experienced extreme volatility and declines in asset
values and liquidity. Furthermore, certain European countries have
had
to accept assistance from supranational agencies such as the International
Monetary Fund, the European Stability Mechanism or others. The
European
Central Bank has also intervened to purchase Eurozone debt in an attempt
to stabilize markets and reduce borrowing costs. There can be no
assurance that any creditors or supranational agencies will continue to
intervene or provide further assistance, and markets may react adversely
to any
expected reduction in the financial support provided by these
creditors. Certain
European countries have experienced negative interest rates on certain
fixed-income instruments. A negative interest rate is an unconventional
central bank monetary policy tool where nominal target interest rates are
set with a negative value (i.e., below zero percent) intended
to help create self-sustaining growth in the local economy. Negative
interest rates may result in heightened market volatility and may
detract
from a Fund’s performance to the extent a Fund is exposed to such interest
rates. Certain
European countries have also developed increasingly strained relationships
with the U.S., and if these relationships were to worsen, they
could
adversely affect European issuers that rely on the U.S. for trade. In
addition, the national politics of European countries have been
unpredictable
and subject to influence by disruptive political groups and ideologies.
Secessionist movements, as well as government or other responses
to such movements, may create instability and uncertainty in a country or
region. European governments may be subject to change and such
countries may experience social and political unrest. Unanticipated or
sudden political or social developments may result in sudden and
significant
investment losses. The occurrence of terrorist incidents throughout Europe
also could impact financial markets, as could military conflicts.
The
impact of these or other events is not clear but could be significant and
far-reaching and materially impact the value and liquidity of
a Fund’s investments.
Russia’s war with Ukraine has negatively impacted European economic
activity. The Russia/Ukraine war and Russia’s response to sanctions
imposed by the U.S., EU, UK and others have and could continue to severely
impact the performance of the economies of European and other
countries, including adverse effects to global financial and energy
markets, global supply chains and global growth, and
inflation. Certain
countries have applied to become new member countries of the EU, and these
candidate countries’ accessions may become more controversial
to the existing EU members. Some member states may repudiate certain
candidate countries joining the EU due to concerns about the possible
economic, immigration and cultural implications. Also, Russia may be
opposed to the expansion of the EU to members of the former Eastern
Bloc (i.e. ex-Soviet Union-controlled countries in Europe) and may, at
times, take actions that could negatively impact European economic
activity. The
United Kingdom withdrew from the European Union on January 31, 2020 and
entered into a transition period, which ended on December 31,
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2020.
The longer term economic, legal, and political framework between the
United Kingdom and the EU is still developing and may lead to ongoing
political and economic uncertainly and periods of increased volatility in
the United Kingdom, Europe, and the global market. Investments in
companies
with significant operations and/or assets in the United Kingdom could be
adversely impacted by the new legal, political, and regulatory
environment,
whether by increased costs or impediments to the implementation of
business plans. The uncertainty resulting from any further exits
from
the EU, or the possibility of such exits, would also be likely to cause
market disruption in the EU and more broadly across the global economy,
as
well as introduce further legal, political, and regulatory uncertainty in
Europe. |
■ |
Pacific
Basin Securities.
Many Asian countries may be subject to a greater degree of social,
political and economic instability than is the case in the U.S.
and Western European countries. Such instability may result from, among
other things, (i) authoritarian governments or military involvement in
political
and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with
demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v)
ethnic,
religious and racial disaffection. In addition, the Asia-Pacific
geographic region has historically been prone to natural disasters. The
occurrence of
a natural disaster in the region, including the subsequent recovery, could
negatively impact the economy of any country in the region. The
existence
of overburdened infrastructure and obsolete financial systems also
presents risks in certain Asian countries, as do environmental
problems. The
economies of most of the Asian countries are heavily dependent on
international trade and are accordingly affected by protective trade
barriers and
the economic conditions of their trading partners, principally, the U.S.,
Japan, China and the EU. The enactment by the U.S. or other principal
trading
partners of protectionist trade legislation, reduction of foreign
investment in the local economies and general declines in the
international securities
markets could have a significant adverse effect upon the securities
markets of the Asian countries. The economies of certain Asian
countries
may depend to a significant degree upon only a few industries and/or
exports of primary commodities and, therefore, are vulnerable to
changes
in commodity prices that, in turn, may be affected by a variety of
factors. In addition, certain developing Asian countries, such as the
Philippines
and India, are especially large debtors to commercial banks and foreign
governments. Many of the Pacific Basin economies may be intertwined,
so an economic downturn in one country may result in, or be accompanied
by, an economic downturn in other countries in the region. Furthermore,
many of the Pacific Basin economies are characterized by high inflation,
underdeveloped financial services sectors, heavy reliance on international
trade, frequent currency fluctuations, devaluations, or restrictions,
political and social instability, and less efficient
markets. The
securities markets in Asia are substantially smaller, less liquid and more
volatile than the major securities markets in the U.S., and some of the
stock
exchanges in the region are in the early stages of their development, as
compared to the stock exchanges in the U.S. Equity securities of many
companies
in the region may be less liquid and more volatile than equity securities
of U.S. companies of comparable size. Additionally, many companies
traded on stock exchanges in the region are smaller and less seasoned than
companies whose securities are traded on stock exchanges in the
U.S. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the
number
of shares available for investment by a Fund. In some countries, there is
no established secondary market for securities. Therefore, liquidity
of
securities may be generally low and transaction costs generally high.
Similarly, volume and liquidity in the bond markets in Asia are less than
in the U.S.
and, at times, price volatility can be greater than in the U.S. A limited
number of issuers in Asian securities markets may represent a disproportionately
large percentage of market capitalization and trading value. The limited
liquidity of securities markets in Asia may also affect a Fund’s
ability to acquire or dispose of securities at the price and time it
wishes to do so. In addition, the Asian securities markets are susceptible
to being
influenced by large investors trading significant blocks of
securities. |
|
The
legal systems in certain developing market Pacific Basin countries also
may have an adverse impact on a Fund. For example, while the potential
liability
of a shareholder in a U.S. corporation with respect to acts of the
corporation is generally limited to the amount of the shareholder’s
investment,
the notion of limited liability is less clear in certain Pacific Basin
countries. Similarly, the rights of investors in Pacific Basin companies
may be
more limited than those of shareholders of U.S. corporations. It may be
difficult or impossible to obtain and/or enforce a judgment in a Pacific
Basin
country. |
|
Many
stock markets are undergoing a period of growth and change which may
result in trading volatility and difficulties in the settlement and
recording
of transactions, and in interpreting and applying the relevant law and
regulations. With respect to investments in the currencies of Asian
countries,
changes in the value of those currencies against the U.S. dollar will
result in corresponding changes in the U.S. dollar value of a Fund’s
assets
denominated in those currencies. Certain developing economies in the
Asia-Pacific region have experienced currency fluctuations, devaluations,
and restrictions; unstable employment rates; rapid fluctuation in, among
other things, inflation and reliance on exports; and less efficient
markets. Currency fluctuations or devaluations in any one country can have
a significant effect on the entire Asia Pacific region. Holding
securities
in currencies that are devalued (or in companies whose revenues are
substantially in currencies that are devalued) will likely decrease the
value
of a Fund’s investments. Some developing Asian countries prohibit or
impose substantial restrictions on investments in their capital markets,
particularly
their equity markets, by foreign entities such as a Fund. For example,
certain countries may require governmental approval prior to investments
by foreign persons or limit the amount of investment by foreign persons in
a particular company or limit the investment by foreign persons
to only a specific class of securities of a company which may have less
advantageous terms (including price and shareholder rights) than
securities
of the company available for purchase by nationals of the relevant
country. There can be no assurance that a Fund will be able to obtain
required
governmental approvals in a timely manner. In addition, changes to
restrictions on foreign ownership of securities subsequent to a Fund’s
purchase
of such securities may have an adverse effect on the value of such shares.
Certain countries may restrict investment opportunities in issuers
or
industries deemed important to national
interests. |
Growth
Companies
— Growth companies are those that are expected to have the potential for
above-average or rapid growth. Growth companies are
expected to increase their earnings at a certain rate. When these expectations
are not met or earnings decrease, the prices of these securities may
decline,
sometimes sharply, even if earnings showed an absolute increase. A Fund’s
investments in growth companies may be more sensitive to company
earnings and more volatile than the market in general primarily because their
stock prices are based heavily on future expectations. If an assessment
of the prospects for a company’s growth is incorrect, then the price of the
company’s stock may fall or not approach the value placed on it. Growth
company securities may lack the dividend yield that can cushion prices in market
downturns. Growth companies may have limited operating histories
and greater business risks, and their potential for profitability may be
dependent on regulatory approval of their products or regulatory developments
affecting certain sectors, which could have an adverse impact upon growth
companies’ future growth and profitability. Different
investment
styles tend to shift in and out of favor, depending on market conditions and
investor sentiment. A Fund’s growth style could cause it to underperform
funds that use a value or non-growth approach to investing or have a broader
investment style.
Illiquid
and Restricted Securities
— Generally, an illiquid asset is an asset that a Fund reasonably expects cannot
be sold or disposed of in current market
conditions in seven calendar days or less without the sale or disposition
significantly changing the market value of the investment. Historically,
illiquid
securities have included securities that have not been registered under the
Securities Act, securities that are otherwise not readily marketable,
and
repurchase agreements having a remaining maturity of longer than seven calendar
days.
Securities
that have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly
from
the issuer or in the secondary market. Such securities include those sold in
private placement offerings made in reliance on the “private placement”
exemption from registration afforded by Section 4(a)(2) of the Securities Act,
and resold to qualified institutional buyers pursuant to Rule 144A
under the Securities Act (“Section 4(a)(2) securities”). Such securities are
restricted as to disposition under the federal securities laws, and generally
are sold to institutional investors, such as a Fund, that agree they are
purchasing the securities for investment and not with an intention to
distribute
to the public. These securities may be sold only in a privately negotiated
transaction or pursuant to an exemption from registration.
A
large institutional market exists 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. Section
4(a)(2) securities normally are resold to other institutional investors
through or with the assistance of the issuer or dealers that make a market in
the Section 4(a)(2) securities, thus providing liquidity. 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. Rule 144A under the Securities Act is designed to
facilitate efficient trading among institutional investors by permitting
the sale of certain unregistered securities to qualified institutional buyers.
To the extent privately placed securities held by a Fund qualify under
Rule 144A and an institutional market develops for those securities, a Fund
likely will be able to dispose of the securities without registering
them
under the Securities Act. To the extent that institutional buyers are
uninterested in purchasing restricted securities, a Fund’s investment in such
securities
could have the effect of reducing a Fund’s liquidity. A determination could be
made that certain securities qualified for trading under Rule 144A
are liquid. In addition to Rule 144A, Regulation S under the Securities Act
permits the sale abroad of securities that are not registered for sale in
the
United States and includes a provision for U.S. investors, such as a Fund, to
purchase such unregistered securities if certain conditions are
met.
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 redemptions within seven calendar days.
However,
the fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative
of their liquidity. In addition, a Fund may get only limited information about
an issuer of such a security, so it may be less able to predict a loss.
A Fund also might 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. The illiquidity of the
market, as well as the lack of publicly available information regarding
these
securities, also may make it difficult to determine a fair value for certain
securities for purposes of computing a Fund’s NAV.
Inflation-Indexed
Securities
— Inflation-indexed securities, also known as “inflation-protected
securities,” are fixed-income
instruments structured such
that their interest payments and principal amounts are adjusted to keep up with
inflation. Two structures are common. The U.S. Treasury and some
other issuers use a structure that accrues inflation into the principal value of
the bond. Other issuers pay out the index-based accruals as part of its
coupon. The U.S. Treasury is obligated to repay at least the greater of the
original principal value or accrued principal value at maturity for inflation-indexed
securities issued directly by the U.S. Government, which are referred to as
“U.S. Treasury Inflation Protected Securities,” or “TIPS,” and
are backed by the full faith and credit of the U.S. Government. However,
inflation-indexed securities of other issuers may or may not have the
same
principal guarantee and may repay an amount less than the original principal
value at maturity. If inflation is lower than expected during the period
a Fund holds the security, a Fund may earn less on it than on a conventional
bond. Inflation-indexed securities are expected to react primarily to
changes
in the “real” interest rate (i.e., the nominal, or stated, rate less the rate of
inflation), while a typical bond reacts to changes in the nominal interest
rate. Accordingly, inflation-indexed securities have characteristics of
fixed-rate U.S. Treasury securities having a shorter duration. Changes in
market
interest rates from causes other than inflation will likely affect the market
prices of inflation-indexed securities in the same manner as conventional
bonds. Any increase in the principal amount of an inflation-indexed debt
security will be considered ordinary income, even though a Fund will
not receive the principal until maturity. Thus, a Fund could be required, at
times, to liquidate other investments in order to satisfy its distribution
requirements.
There
can be no assurance that the inflation index used will accurately measure the
real rate of inflation in the prices of goods and services. A Fund’s
investments
in inflation-indexed securities may lose value in the event that the actual rate
of inflation is different than the rate of the inflation index. In addition,
inflation-indexed securities are subject to risks related to the
discontinuation, substitution or fundamental alteration of the Consumer Price
Index
for All Urban Consumers (the index used for U.S. TIPS) or other relevant pricing
indices. Such alteration, which could be effected by legislation or Executive
Order, could be materially adverse to the interests of an investor in the
securities or substituted with an alternative index. In periods of deflation
when the inflation rate is declining, the principal value of an
inflation-indexed security will be adjusted downward. This will result in a
decrease
in the interest payments thereon, but holders at maturity receive no less than
par value. However, if a Fund purchases inflation-indexed securities
in the secondary market whose principal values have been adjusted upward due to
inflation since issuance, a Fund may experience a loss if there
is a subsequent period of deflation.
Interfund
Lending
— Pursuant to an order issued by the SEC, the Funds may participate in a credit
facility whereby each Fund, under certain conditions,
is permitted to lend money directly to and borrow directly from other funds
under the Manager’s management for temporary purposes. The credit
facility is administered by a credit facility team consisting of professionals
from the Manager’s asset management, compliance, and accounting departments,
who report on credit facility activities to the Board. The credit facility can
provide a borrowing fund with savings at times when the cash position
of a Fund is insufficient to meet temporary cash requirements. This situation
could arise when shareholder redemptions exceed anticipated volumes
and a Fund has insufficient cash on hand to satisfy such redemptions, or when
sales of securities do not settle as expected, resulting in a cash shortfall
for a Fund. When a Fund liquidates portfolio securities to meet redemption
requests, it often does not receive payment in settlement for up to
two
days (or longer for certain foreign transactions). However, redemption requests
normally are satisfied the next business day. The credit facility provides
a source of immediate, short-term liquidity pending settlement of the sale of
portfolio securities. Although the credit facility may reduce a Fund’s
need to borrow from banks, a Fund remains free to establish and utilize lines of
credit or other borrowing arrangements with banks.
Investment
Grade Securities
— Investment grade securities that a Fund may purchase, either as part of its
principal investment strategy or to implement
its temporary defensive policy, include securities issued or guaranteed by the
U.S. Government, its agencies and instrumentalities, as well as securities
rated in one of the four highest rating categories by at least two rating
organizations rating that security (such as S&P Global, Fitch, or
Moody’s)
or rated in one of the four highest rating categories by one rating organization
if it is the only organization rating that security. A Fund, at the discretion
of the Manager or a sub-advisor, may retain a security that has been downgraded
below the initial investment criteria. Please see “Appendix C:
Ratings Definitions” for an explanation of rating categories.
Issuer
Risk
— The value of an investment may decline for a number of reasons which directly
relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer’s goods or services, as well as the
historical and prospective earnings of the issuer and the value of
its assets.
Large-Capitalization
Companies Risk
— The securities of large market capitalization companies may underperform other
segments of the market, in
some cases for extended periods of time. Such companies may be less responsive
to competitive challenges and opportunities, such as changes in technology
and consumer tastes, and, at times, such companies may be out of favor with
investors. Large market capitalization companies generally are
expected to be less volatile than companies with smaller market capitalizations.
However, large market capitalization companies may be unable to attain
the high growth rates of successful smaller companies, especially during periods
of economic expansion, and may instead focus their competitive efforts
on maintaining or expanding their market share.
Loan
Interests, Participations and Assignments
— Loan interests are a form of direct debt instrument in which a Fund may
invest by taking an assignment
of all or a portion of an interest in a loan previously held by another
institution or by acquiring a participation in an interest in a loan that
continues
to be held by another institution. A Fund may invest in secured and unsecured
loans. Loans are subject to the same risks as Fixed-Income Investments
discussed above and carry additional risks described in this section. Loan
interests are different from traditional debt securities in that debt
securities
generally are part of a large issue of securities to the public, whereas loan
interests may not be a security and may represent a specific commercial
loan to a borrower.
Loan
Interests. A Fund’s ability to receive payments in connection with loans depends
on the financial condition of the borrower. The sub-advisor may not
rely solely on another lending institution’s credit analysis of the borrower,
but may perform its own investment analysis of the borrower. The sub-advisor’s
analysis may include consideration of the borrower’s financial strength,
managerial experience, debt coverage, additional borrowing requirements
or debt maturity schedules, changing financial conditions, and responsiveness to
changes in business conditions and interest rates. In addition,
loan interests may not be rated by independent rating agencies and therefore,
investments in a particular loan participation may depend almost
exclusively on the credit analysis of the borrower performed by the sub-advisor.
Loan interests of borrowers whose creditworthiness is poor involves
substantially greater risks and may be highly speculative.
Loans
are typically administered by a bank, insurance company, finance company or
other financial institution (the “agent”) for a lending syndicate of
financial
institutions. In a typical loan, the agent administers the terms of the loan
agreement and is responsible for the collection of principal and interest
and fee payments from the borrower and the apportionment of these payments to
all lenders that are parties to the loan agreement. In addition,
an institution (which may be the agent) may hold collateral on behalf of the
lenders. Typically, under loan agreements, the agent is given broad
authority in monitoring the borrower’s performance and is obligated to use the
same care it would use in the management of its own property. In
asserting rights against a borrower, a Fund normally will be dependent on the
willingness of the lead bank to assert these rights, or upon a vote of
all
the lenders to authorize the action. If an agent becomes insolvent, or has a
receiver, conservator, or similar official appointed for it by the appropriate
regulatory authority, or becomes a debtor in a bankruptcy proceeding, the
agent’s appointment may be terminated and a successor agent would
be appointed. If an appropriate regulator or court determines that assets held
by the agent for the benefit of purchasers of loans are subject to the
claims of the agent’s general or secured creditors, a Fund might incur
certain costs and delays in realizing payment on a loan or suffer a loss of
principal
and/or interest. A Fund may be subject to similar risks when it buys a
participation interest or an assignment from an intermediary.
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, loans that are part of highly
leveraged transactions involve a significant risk that the borrower may
default or go into bankruptcy or become insolvent. Borrowers that are in
bankruptcy or restructuring may never pay off their debts or may pay
only
a small fraction of the amount owed. In connection with the restructuring of a
loan or other direct debt instrument outside of bankruptcy court in a
negotiated work-out or in the context of bankruptcy proceedings, equity
securities or junior debt securities may be received in exchange for all or a
portion
of an interest in the loan.
A
borrower must comply with various restrictive covenants in a loan agreement such
as restrictions on dividend payments and limits on total debt. The loan
agreement may also contain a covenant requiring the borrower to prepay the loan
with any free cash flow. A breach of a covenant is normally an event
of default, which provides the agent or the lenders the right to call the
outstanding loan.
Loans
that are fully secured offer a Fund more protection than an unsecured loan
in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the collateral from a secured loan in which
a Fund invests can be promptly liquidated, or that its liquidation value
will
be equal to the value of the debt. In most loan agreements, there is no formal
requirement to pledge additional collateral if the value of the initial
collateral
declines. As a result, a loan may not always be fully collateralized and can
decline significantly in value. If a borrower becomes insolvent, access
to collateral may be limited by bankruptcy and other laws. If a secured loan is
foreclosed, a Fund will likely be required to bear the costs and
liabilities
associated with owning and disposing of the collateral. There is also a
possibility that a Fund will become the owner of its pro rata share of
the
collateral, which may carry additional risks and liabilities. Some loans are
unsecured. If the borrower defaults on an unsecured loan, a Fund will be
a
general creditor and will not have rights to any specific assets of the
borrower.
Participation
Interests. The participation by a Fund in a lender’s portion of a loan
typically will result in a Fund having a contractual relationship only
with
such lender, not with the business entity borrowing the funds. As a result,
a Fund may have the right to receive payments of principal, interest and
any
fees to which it is entitled only from the lender selling the participation and
only upon receipt by such lender of payments from the borrower. As a
result,
a Fund will be exposed to the credit risk of both the borrower and the
institution selling the participation.
Assignments.
The purchaser of an assignment typically succeeds to all the rights and
obligations under the loan agreement with the same rights and obligations
as the assigning lender. Assignments may, however, be arranged through private
negotiations between potential assignees and potential assignors,
and the rights and obligations acquired by the purchaser of an assignment may
differ from, and be more limited than, those held by the assigning
lender. In addition, a Fund may not be able to unilaterally enforce all
rights and remedies under the loan and with regard to any associated
collateral.
Resale
Restrictions. Loans may be subject to legal or contractual restrictions on
resale. Loans normally are not registered with the SEC or any state securities
commission and are not currently listed on any securities exchange or automatic
quotation system, and there may not be an active trading market
for some loans. As a result, the amount of public information available about a
specific loan historically has been less extensive than if the loan were
registered or exchange-traded. They may also not be considered “securities,” and
purchasers, such as a Fund, therefore may not be entitled to rely
on the strong anti-fraud protections of the federal securities laws. In the
absence of definitive regulatory guidance, a Fund relies on the
sub-advisor’s
research in an attempt to avoid situations where fraud and misrepresentation
could adversely affect a Fund. In addition, a Fund may be
unable
to sell such investments at an opportune time or may have to resell them at less
than fair market value. The lack of a liquid secondary market may
have an adverse impact on a Fund’s ability to dispose of particular
assignments or participations when necessary to meet redemptions of
a Fund’s shares,
to meet a Fund’s liquidity needs or when necessary in response to a
specific economic event, such as deterioration in the creditworthiness of
the
borrower. In addition, transactions in loan investments may take a significant
amount of time to settle (i.e., more than seven days and up to several
weeks
or longer). Accordingly, the proceeds from the sale of a loan investment may not
be available to make additional investments or to meet redemption
obligations until potentially a substantial period after the sale of the loan.
The extended trade settlement periods could force a Fund to liquidate
other securities to meet redemptions and may present a risk that a Fund
may incur losses in order to timely honor redemptions. To the extent
that
any such investments are determined to be illiquid, they will be subject to
a Fund‘s restrictions on investments in illiquid
securities.
In
certain circumstances, the Manager, the sub-advisor or their affiliates
(including on behalf of clients other than a Fund) or a 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, a Fund
could
be unable (potentially for a substantial period of time) 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 to avoid or to not receive non-public
information about a borrower for loan investments being considered for
acquisition by the Fund or held by the Fund, the Fund may be disadvantaged
relative to other investors that do receive such information, and the Fund may
not be able to take advantage of other investment opportunities
that it may otherwise have.
Prepayment
Risk. The borrower in a loan arrangement may, either at its own election or
pursuant to the terms of the loan documentation, prepay amounts
of the loan from time to time. Due to prepayment, the actual maturity of loans
is typically shorter than their stated final maturity calculated solely
on the basis of the stated life and payment schedule. The degree to which
borrowers prepay loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, market interest rates,
the borrower’s financial condition and competitive conditions among
lenders. Such prepayments may require a Fund to replace an investment with
a lower yielding security which may have an adverse effect on a Fund’s
share price. Prepayments cannot be predicted with accuracy. Floating rate loans
can be less sensitive to prepayment risk, but a Fund’s NAV may
still fluctuate in response to interest rate changes because variable interest
rates may reset only periodically and may not rise or decline as much as
interest
rates in general.
Lender
Liability. A number of judicial decisions in the United States have upheld the
right of borrowers to sue lenders or bondholders on the basis of various
evolving legal theories (commonly referred to as “lender liability”). Generally,
lender liability is founded upon the premise that an institutional lender
or bondholder has violated a duty (whether implied or contractual) of good
faith, commercial reasonableness and fair dealing owed to the borrower
or issuer or has assumed a degree of control over the borrower or issuer
resulting in the creation of a fiduciary duty owed to the borrower or
issuer
or its other creditors or stockholders. Because of the nature of its
investments, a Fund may be subject to allegations of lender liability. In
addition, under
common law principles that in some cases form the basis for lender liability
claims, if a lender or bondholder: (i) intentionally takes an action that
results
in the undercapitalization of a borrower to the detriment of other creditors of
such borrower, (ii) engages in other inequitable conduct to the detriment
of such other creditors, (iii) engages in fraud with respect to, or makes
misrepresentations to, such other creditors or (iv) uses its influence as
a
stockholder to dominate or control a borrower to the detriment of other
creditors of such borrower, a court may elect to subordinate the claim of the
offending
lender or bondholder to the claims of the disadvantaged creditor or creditors, a
remedy called “equitable subordination.” A Fund does not intend
to engage in conduct that would form the basis for a successful cause of action
based upon the equitable subordination doctrine; however, because
of the nature of the debt obligations, a Fund may be subject to claims
from creditors of an obligor that debt obligations of such obligor which
are
held by a Fund should be equitably subordinated. Because affiliates of, or
persons related to, the Manager and/or the sub-advisor may hold equity
or
other interests in obligors of a Fund, a Fund could be exposed to
claims for equitable subordination or lender liability or both based on such
equity or
other holdings.
Micro-Capitalization
Companies Risk —
Micro-capitalization companies are subject to substantially greater risks of
loss and price fluctuations, sometimes
rapidly and unpredictably, because their earnings and revenues tend to be less
predictable. In addition, some companies may experience significant
losses. Since micro-capitalization companies may not have an operating history,
product lines, or financial resources, their share prices also tend
to be more volatile and their markets less liquid than companies with larger
market capitalizations, and they can be sensitive to changes in overall
economic
conditions, interest rates, borrowing costs and earnings. The shares of
micro-capitalization companies tend to trade less frequently than those
of larger, more established companies, which can adversely affect the pricing of
these securities and the future ability to sell these securities. Micro-capitalization
companies face greater risk of business failure, which could increase the
volatility of a Fund’s portfolio.
Mid-Capitalization
Companies Risk
— Investing in the securities of mid-capitalization companies involves greater
risk and the possibility of greater price
volatility than investing in more established companies with larger
capitalization. Since mid-capitalization companies may have limited operating
history,
product lines and financial resources, the securities of these companies may
lack sufficient market liquidity and can be sensitive to expected changes
in interest rates, borrowing costs and earnings.
Model
and Data Risk
— The sub-advisor relies heavily on proprietary mathematical quantitative models
(each, a “Model”) and data developed both by
the sub-advisor and those supplied by third parties (collectively, “Data”)
rather than granting trade-by-trade discretion to the sub-advisor’s investment
professionals. In combination, Models and Data are used to construct investment
decisions, to value potential
investments
for trading purposes,
to
provide risk management insights and to assist in hedging
a Fund’s positions and investments. Models and Data are known to have errors,
omissions,
imperfections and malfunctions (collectively, “System Events”).
The
sub-advisor seeks to reduce the incidence and impact of System Events, to the
extent feasible, through a combination of internal testing, simulation,
real-time monitoring, use of independent safeguards in the overall portfolio
management process and often in the software code itself. Despite
such testing, monitoring and independent safeguards, System Events will result
in, among other things, the execution of unanticipated trades, the
failure to execute anticipated trades, delays in the execution of anticipated
trades, the failure to properly allocate trades, the failure to properly
gather
and organize available data, the failure to take certain hedging or risk
reducing actions and/or the taking of actions which increase certain risk(s)
-
all of which may have materially adverse effects on a Fund. System Events
in third-party provided Data are generally entirely outside of the control of
the
sub-advisor. The research and modeling processes engaged in by the sub-advisor
on behalf of a Fund are extremely complex and involve the use of
financial,
economic, econometric and statistical theories, research and modeling; the
results of this investment approach must then be translated into computer
code. Although the sub-advisor seeks to hire individuals skilled in each of
these functions and to provide appropriate levels of oversight and employ
other mitigating measures and processes, the complexity of the individual tasks,
the difficulty of integrating such tasks, and the limited ability to
perform “real world” testing of the end product, even with simulations and
similar methodologies, raise the chances that Model code may contain
one
or more coding errors, thus potentially resulting in a System Event and further,
one or more of such coding errors could adversely affect investment performance.
The
investment strategies of the sub-advisor are highly reliant on the gathering,
cleaning, culling and performing of analysis of large amounts of Data.
Accordingly,
Models rely heavily on appropriate Data inputs. However, it is impossible and
impracticable to factor all relevant, available Data into forecasts,
investment decisions and other parameters of the Models. The sub-advisor will
use its discretion to determine what Data to gather with respect
to each investment strategy and what subset of that Data the Models take into
account to produce forecasts which may have an impact on ultimate
investment decisions. In addition, due to the automated nature of Data
gathering, the volume and depth of Data available, the complexity and
often manual nature of Data cleaning, and the fact that the substantial majority
of Data comes from third-party sources, it is inevitable that not all
desired
and/or relevant Data will be available to, or processed by, the sub-advisor at
all times. Irrespective of the merit, value and/or strength of a particular
Model, it will not perform as designed if incorrect Data is fed into it which
may lead to a System Event potentially subjecting a Fund to a loss.
Further,
even if Data is input correctly, “model prices” anticipated by the Data through
the Models may differ substantially from market prices, especially
for financial instruments with complex characteristics, such as derivatives, in
which a Fund may invest. Where incorrect or incomplete Data is
available,
the sub-advisor may, and often will, continue to generate forecasts and make
investment decisions based on the Data available to it. Additionally,
the sub-advisor may determine that certain available Data, while potentially
useful in generating forecasts and/or making investment decisions,
is not cost effective to gather due to, among other factors, the technology
costs or third-party vendor costs and, in such cases, the sub-advisor
will not utilize such Data. The sub-advisor has full discretion to select the
Data it utilizes. The sub-advisor may elect to use or may refrain from
using any specific Data or type of Data in generating forecasts or making
trading decisions with respect to the Models. The Data utilized in generating
forecasts or making trading decisions underlying the Models may not be (i) the
most accurate data available or (ii) free of errors. The Data set
used in connection with the Models is limited. The foregoing risks associated
with gathering, cleaning, culling and analysis of large amounts of Data
are an inherent part of investing with a quantitative, process-driven,
systematic adviser such as the sub-advisor.
When
Models and Data prove to be incorrect, misleading or incomplete, any decisions
made in reliance thereon expose a Fund to potential losses and
such
losses may be compounded over time. For example, by relying on Models and Data,
the sub-advisor may be induced to buy certain investments at prices
that are too high, to sell certain other investments at prices that are too low,
or to miss favorable opportunities altogether. Similarly, any hedging
based
on faulty Models and Data may prove to be unsuccessful and when determining the
NAV of a Fund, any valuations of a Fund’s investments that
are
based on valuation Models may prove to be incorrect. In addition, Models may
incorrectly forecast future behavior, leading to potential losses on a
cash
flow and/or a mark-to-market basis. Furthermore, in unforeseen or certain
low-probability scenarios (often involving a market event or disruption
of
some kind), Models may produce unexpected results which may or may not be System
Events. Errors in Models and Data are often extremely difficult
to detect, and, in the case of Models, the difficulty of detecting System Events
may be exacerbated by the lack of design documents or specifications.
Regardless of how difficult their detection appears in retrospect, some System
Events may go undetected for long periods of time and some
may never be detected. When a System Event is detected, a review and analysis of
the circumstances that may have caused a reported System Event
will be completed and is overseen by an escalation committee made up of
appropriate senior personnel. Following this review, the sub-advisor in
its
sole discretion may choose not to address or fix such System Event, and the
third party software will lead to System Events known to the sub-advisor
that
it chooses, in its sole discretion, not to address or fix. The degradation or
impact caused by these System Events can compound over time. When a System
Event is detected, the sub-advisor generally will not, as part of the review of
circumstances leading to the System Event, perform a materiality analysis
on the potential impact of a System Event. The sub-advisor believes that the
testing and monitoring performed on Models and the controls adopted
to ensure processes are undertaken with care will enable the sub-advisor to
identify and address those System Events that a prudent person managing
a quantitative, systematic and computerized investment program would identify
and address by correcting the underlying issue(s) giving rise to
the System Events, but there is no guarantee of the success of such processes.
Fund shareholders should assume that System Events and their ensuing
risks and impact are an inherent part of investing with a process-driven,
systematic sub-advisor such as the sub-advisor.
Mortgage-Backed
Securities
— Mortgage-backed securities may be more volatile or less liquid than more
traditional debt securities. Mortgage-backed
securities include both collateralized mortgage obligations and mortgage
pass-through certificates.
■ |
Collateralized
Mortgage Obligations (“CMOs”). A
CMO is a debt obligation of a legal entity that is collateralized by
mortgages or mortgage-related
assets. These
securities may be issued by U.S. Government agencies, instrumentalities or
sponsored enterprises such as Fannie Mae or
Freddie Mac or by trusts formed by private originators of, or investors
in, mortgage loans, including savings and loan associations, mortgage
bankers,
commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. CMOs
divide the cash flow generated
from the underlying mortgages or mortgage pass-through securities into
different groups referred to as “tranches,” which are typically
retired
sequentially over time in order of priority. Interest
and prepaid principal is paid, in most cases, on a monthly basis. CMOs may
be collateralized
by whole mortgage loans or private mortgage bonds, but they
are
more typically collateralized by portfolios of mortgage pass-through
securities
guaranteed by GNMA; FHLMC and FNMA (each a government-sponsored enterprise
and
may be owned
entirely by private shareholders); and
their income streams. The
issuers of CMOs are structured as trusts or corporations established for
the purpose of issuing such CMOs and often have no assets other than
those
underlying the securities and any credit support provided. Although
payment of the principal of, and interest on, the underlying collateral
securing
privately issued CMOs may be guaranteed by the U.S. Government or
government-sponsored enterprises, these CMOs represent obligations
solely of the private issuer and are not insured or guaranteed by the U.S.
Government, any government-sponsored enterprise, or any other
person or entity. Prepayments could cause early retirement of CMOs.
Payment of interest or principal on certain tranches of CMOs may be
subject
to contingencies, and certain tranches may bear some or all of the risk of
default on the underlying mortgages. CMO tranches are generally
retired
in sequence as the underlying mortgage loans in the mortgage pool are
repaid. If enough mortgages are repaid ahead of schedule, the CMO
tranches
with the earliest maturities generally will be retired prior to their
stated maturity date. Thus, the early retirement of particular tranches of
a CMO
would have a similar effect as the prepayment of mortgages underlying
other MBS. Conversely, slower than anticipated prepayments can
extend
the effective maturities of CMOs, subjecting them to a greater risk of
decline in market value in response to rising interest rates than
traditional
debt securities, and therefore, potentially increasing the volatility of a
Fund’s investments in CMOs. An increase or decrease in prepayment
rates
(resulting from a decrease or increase in mortgage interest rates) will
affect the yield, average life, and price of CMOs. Under certain CMO
structures,
certain tranches have priority over others with respect to the receipt of
repayments on the mortgages. Therefore, depending on the type of
CMOs in which a Fund invests, the investment may be subject to a greater
or lesser risk of prepayment than other types of mortgage-related
securities.
The prices of certain CMOs, depending on their structure and the rate of
prepayments, can be volatile. Some CMOs may also not be as liquid
as other securities. |
■ |
Commercial
Mortgage-Backed Securities (“CMBSs”).
CMBS include securities that reflect an interest in, and are secured by,
mortgage loans on commercial
real estate property. CMBS are generally multi-class or pass-through
securities backed by a mortgage loan or a pool of mortgage loans
secured
by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties
and
cooperative apartments. The commercial mortgage loans that underlie CMBS
are generally not amortizing or not fully amortizing. That is, at
their
maturity date, repayment of the remaining principal balance or “balloon”
is due and is repaid through the attainment of an additional loan or
sale
of the property. Many of the risks of investing in CMBS reflect the risk
of investing in the real estate securing the underlying mortgage loans.
These
risks reflect the effects of local and other economic conditions on real
estate markets, the ability of tenants to make loan payments, and the
ability
of a property to attract and retain tenants. CMBS may be less liquid and
exhibit greater price volatility than other types of mortgage- or
asset-backed
securities. |
■ |
Mortgage
Dollar Rolls. A
Fund may enter into mortgage dollar rolls in which a Fund sells
mortgage-backed securities for delivery in the current month
and simultaneously contracts with the same counterparty to repurchase
fungible securities (e.g., same type, coupon, and maturity) on a
specified
future date at a pre-determined price. During the roll period, a Fund
would lose the right to receive principal (including prepayments of
principal)
and interest paid on the securities sold. However, a Fund would benefit to
the extent of any difference between the price received for the
securities
sold and the lower forward price for the future purchase (often referred
to as the “drop”) or fee income plus the return
earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. If
such benefits do
not exceed
the income, capital appreciation
and gain due
to mortgage prepayments that would have been realized on the securities
sold as part of the mortgage dollar roll, the Fund
would incur a loss. A
Fund only enters into covered dollar rolls, which means that a
Fund will earmark cash or liquid securities to secure its obligation for
the forward commitment
to buy mortgage-backed securities plus any accrued interest,
marked-to-market daily. Mortgage dollar roll transactions may be
considered
a borrowing under certain circumstances. Since
a Fund may reinvest the cash proceeds from the sale, the transactions may
involve leverage. Each
mortgage dollar roll transaction is accounted for as a sale or purchase of
a portfolio security and a subsequent purchase or sale of a substantially
similar security in the forward market. Mortgage dollar roll transactions
may result in higher transaction costs, increase interest rate risk
or
result in an increased portfolio turnover rate. Mortgage dollar rolls
involve the risk that the market value of the securities subject to a
Fund’s forward
purchase commitment may decline below, or the market value of the
securities subject to a Fund’s forward sale commitment may increase
above,
the exercise price of the forward commitment. Additionally, because dollar
roll transactions do not require the purchase and sale of identical
securities,
the characteristics of the security delivered to a
Fund may be less
favorable than the security delivered to the dealer. The successful use of
dollar
rolls may depend upon a sub-advisor’s ability to correctly predict
interest rates and prepayments, depending on the underlying security.
There is
no assurance that dollar rolls can be successfully employed. In addition,
in the event the buyer of the securities under a
mortgage dollar roll
files for
bankruptcy or becomes insolvent, a Fund’s use of the proceeds of the sale
portion of the transaction may be restricted pending a determination
by
the other party, or its trustee or receiver, whether to enforce the Fund’s
obligation to purchase the similar securities in the forward
transaction. |
■ |
Mortgage
Pass-Through Securities. Mortgage
pass-through securities are securities representing interests in “pools”
of mortgages in which payments
of both interest and principal on the securities are generally made
monthly, in effect “passing through” monthly payments made by the
individual
borrowers on the residential mortgage loans that underlie the securities
(net of fees paid to the issuer or guarantor of the securities). There
are
generally three types of mortgage pass-through securities: (1) those
issued by the U.S. government or one of its agencies or instrumentalities,
such
as GNMA, FNMA, and FHLMC; (2) those issued by private issuers that
represent an interest in or are collateralized by pass-through securities
issued
or guaranteed by the U.S. government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent
an interest
in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but that usually have some
|
|
form
of private credit enhancement. The
rate of pre-payments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of
shortening
or extending the effective duration of the security relative to what was
anticipated at the time of purchase. To the extent that unanticipated
rates of pre-payment on underlying mortgages increase the effective
duration of a mortgage-related security, the volatility of such
security
can be expected to increase. Government
and Government-Related Mortgage Pass-Through Securities. Payment of
principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed
by the full faith and credit of the U.S. Government, as in the
case
of securities guaranteed by GNMA, or guaranteed by government-sponsored
enterprises, as in the case of securities guaranteed by FNMA or
FHLMC,
which are supported only by the discretionary authority of the U.S.
Government to purchase the agency’s obligations. There
are a number of important differences among the agencies of the U.S.
government and government-sponsored enterprises that issue mortgage-related
securities and among the securities that they issue. Such agencies and
securities include: |
■ |
GNMA
Mortgage Pass-Through Certificates (“Ginnie Maes”)
— GNMA is a wholly owned U.S. Government corporation within the U.S.
Department
of Housing and Urban Development. Ginnie Maes represent an undivided
interest in a pool of mortgages that are insured by the Federal
Housing Administration or the Farmers Home Administration or guaranteed by
the Veterans Administration. Ginnie Maes entitle the holder
to receive all payments (including prepayments) of principal and interest
owed by the individual mortgagors, net of fees paid to GNMA and
to
the issuer that assembles the mortgage pool and passes through the monthly
mortgage payments to the certificate holders (typically, a mortgage
banking firm), regardless of whether the individual mortgagor actually
makes the payment. Because payments are made to certificate holders
regardless of whether payments are actually received on the underlying
mortgages, Ginnie Maes are of the “modified pass-through” mortgage
certificate type. GNMA guarantees the timely payment of principal and
interest on Ginnie Maes. GNMA’s guarantee is backed by the full
faith
and credit of the United States, and GNMA has unlimited authority to
borrow funds from the U.S. Treasury to make payments under the
guarantee.
The market for Ginnie Maes is highly liquid because of the government
guarantee, the size of the market, and the active participation
in
the secondary market of security dealers and a variety of
investors. |
■ |
FHLMC
Mortgage Participation Certificates (“Freddie Macs”)
— FHLMC is a government-sponsored enterprise owned by stockholders; it is
similar
to Fannie Mae. FHLMC issues participation certificates that represent
interests in mortgages from its national portfolio. Freddie Macs are
not
guaranteed by the United States and do not constitute a debt or obligation
of the United States. Freddie Macs represent interests in groups of
specified
first lien residential conventional mortgages underwritten and owned by
FHLMC. Freddie Macs entitle the holder to timely payment of interest,
which is guaranteed by FHLMC. FHLMC guarantees either ultimate collection
or timely payment of all principal payments on the underlying
mortgage loans. In cases where FHLMC has not guaranteed timely
payment of principal, FHLMC may remit the amount due because of
its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it
becomes
payable. |
■ |
FNMA
Guaranteed Mortgage Pass-Through Certificates (“Fannie
Maes”)
— FNMA is a government-sponsored enterprise owned by stockholders;
it is similar to Freddie Mac. It is subject to general regulation by the
Federal Housing Finance Authority (“FHFA”). Fannie Maes entitle
the
holder to timely payment of interest, which is guaranteed by FNMA. FNMA
guarantees either ultimate collection or timely payment of all
principal
payments on the underlying mortgage loans. In cases where FNMA has not
guaranteed timely payment of principal, FNMA may remit the amount
due because of its guarantee of ultimate payment of principal at any time
after default on an underlying mortgage, but in no event later
than
one year after it becomes payable. Fannie Maes represent an undivided
interest in a pool of conventional mortgage loans secured by first
mortgages
or deeds of trust, on one family or two to four family, residential
properties. FNMA is obligated to distribute scheduled monthly installments
of principal and interest on the mortgages in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated
mortgages. |
|
The U.S.
Treasury has historically had the authority to purchase obligations of
Fannie Mae and Freddie Mac. However, in 2008, due to capitalization
concerns,
Congress provided the Treasury with additional authority to lend Fannie
Mae and Freddie Mac emergency funds and to purchase their stock.
In September 2008, the Treasury and the FHFA announced that FNMA and FHLMC
had been placed in conservatorship. Since that time, FNMA and
FHLMC have received significant capital support through Treasury preferred
stock purchases, as well as Treasury and Federal Reserve purchases
of
their mortgage - backed securities. The FHFA and the U.S. Treasury
(through its agreement to purchase FNMA and FHLMC preferred stock) have
imposed
strict limits on the size of their mortgage portfolios. While the
mortgage-backed securities purchase programs ended in 2010, the Treasury
continued
its support for the entities’ capital as necessary to prevent a negative
net worth. When a credit rating agency downgraded long-term U.S.
Government
debt in August 2011, the agency also downgraded FNMA and FHLMC’s bond
ratings, from AAA to AA+, based on their direct reliance on
the U.S. Government (although that rating did not directly relate to their
mortgage-backed securities). In August 2012, the Treasury amended its
preferred
stock purchase agreements to provide that FNMA’s and FHLMC’s portfolios
will be wound down at an annual rate of 15 percent (up from the
previously agreed annual rate of 10 percent), requiring them to reach the
$250 billion target by December 31, 2018. FNMA and FHLMC were below
the $250 billion cap for year-end 2018. On
December 21, 2017, a letter agreement between the Treasury and Fannie Mae
and Freddie Mac changed the terms of the senior preferred stock
certificates
issued to the Treasury to permit the GSEs each to retain a $3 billion
capital reserve, quarterly. Under the 2017 letter, each GSE paid a
dividend
to Treasury equal to the amount that its net worth exceeded $3 billion at
the end of each quarter. On September 30, 2019, the Treasury and
the FHFA, acting as conservator to Fannie Mae and Freddie Mac, announced
amendments to the respective senior preferred stock certificates
that
will permit the GSEs to retain earnings beyond the $3 billion capital
reserves previously allowed through the 2017 letter agreements. Fannie
Mae
and Freddie Mac are now permitted to maintain capital reserves of $25
billion and $20 billion, respectively. In late 2020, the FHFA issued a new
capital
rule requiring Fannie Mae and Freddie Mac to hold $283 billion in
unadjusted total capital as of June 30, 2020, based on their assets at the
time.
In January 2021, the FHFA and the U.S. Treasury agreed to amend the
preferred stock purchase agreements for the shares in Fannie Mae and
Freddie
Mac that the federal government continues to hold. The amendments permit
Fannie Mae and Freddie Mac to retain all earnings until they have
reached the requirements set by the 2020 capital rule. The
problems faced by FNMA and FHLMC, resulting from their being placed into
federal conservatorship and receiving significant U.S. Government
|
|
support,
sparked serious debate among federal policymakers regarding the continued
role of the U.S. Government in providing liquidity for mortgage
loans. In December 2011, Congress enacted the Temporary Payroll Tax Cut
Continuation Act of 2011 which, among other provisions, requires
that FNMA and FHLMC increase their single-family guaranty fees by at least
10 basis points and remit this increase to the Treasury with respect
to all loans acquired by FNMA or FHLMC on or after April 1, 2012 and
before January 1, 2022. There have been discussions among policymakers,
however, as to whether FNMA and FHLMC should be nationalized, privatized,
restructured or eliminated altogether. FNMA and FHLMC
also are the subject of several continuing legal actions and
investigations over certain accounting, disclosure or corporate governance
matters,
which (along with any resulting financial restatements) may continue to
have an adverse effect on the guaranteeing entities. Under
the direction of the FHFA, FNMA and FHLMC jointly developed a common
securitization platform for the issuance of a uniform mortgage-backed
security (“UMBS”) (the “Single Security Initiative”) that aligns the
characteristics of FNMA and FHLMC certificates. In June 2019, under
the Single Security Initiative, FNMA and FHLMC started issuing UMBS in
place of their prior offerings of TBA-eligible securities. The Single
Security
Initiative seeks to support the overall liquidity of the TBA market by
aligning the characteristics of FNMA and FHLMC certificates. The effects
that
the Single Security Initiative may have on the market for TBA and other
mortgage-backed securities are uncertain. |
■ |
Mortgage
Pass-Through Securities Issued by Private Organizations
— The pools underlying privately-issued mortgage pass-through securities
consist of mortgage loans secured by mortgages or deeds of trust creating
a first lien on commercial, residential, residential multi-family
and
mixed residential/commercial properties. Pools created by non-governmental
issuers generally offer a higher rate of interest than government
and
government-related pools because there are no direct or indirect
government guarantees of payments in such pools. The timely payment of
interest
and principal on mortgage loans in these pools may be supported by various
other forms of insurance or guarantees, including individual loan,
pool and hazard insurance, subordination and letters of credit. Such
insurance and guarantees may be issued by private insurers, banks and
mortgage poolers.
There is no assurance that private guarantors or insurers, if any, will
meet their obligations. Timely payment of interest and principal
of these pools also may be partially supported by various enhancements
such as over-collateralization and senior/subordination structures
and
by various forms of insurance or guarantees, including individual loan,
title, pool and hazard insurance. The insurance and guarantees are
issued
by government entities, private insurers or the mortgage poolers. These
mortgage pass-through securities do not have the same credit standing
as U.S. government guaranteed securities and generally offer a higher
yield than similar securities issued by a government entity. Some
mortgage
pass-through securities issued by private organizations may not be readily
marketable, may be more difficult to value accurately and may
be more volatile than similar securities issued by a government
entity. Many
transactions in the fixed-rate mortgage pass-through securities occur
through the use of TBA transactions. TBA transactions are generally
conducted
in accordance with widely-accepted guidelines that establish commonly
observed terms and conditions for execution, settlement and delivery.
In a TBA transaction, the buyer and seller decided on general trade
parameters, such as agency, settlement date, par amount and price.
The
actual pools delivered generally are determined two days prior to
settlement date. Default by or bankruptcy of a counterparty to a TBA
transaction
would expose a Fund to possible loss because of adverse market
action, expenses or delays in connection with the purchase or sale of
the
pools of mortgage pass-through securities specified in the TBA
transaction. |
■ |
Stripped
Mortgage-Backed Securities (“SMBSs”).
SMBS are derivative multi-class mortgage securities. SMBS are created when
a U.S. government
agency or a financial institution separates the interest and principal
components of a MBS and sells them as individual securities. SMBS
may
be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including
savings
and loan associations, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing. SMBS are usually
structured
with two classes that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. A common type
of
SMBS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive
most of
the interest and the remainder of the principal. In the most extreme case,
one class will receive all of the interest (the interest-only or “IO”
class), while
the other class will receive the entire principal (the principal-only or
“PO” class). A Fund may invest in both the IO class and the PO class. The
prices
of stripped MBS may be particularly affected by changes in interest rates
and the rate of principal payments (including prepayments) on the
related
underlying mortgage assets. As interest rates fall, prepayment rates tend
to increase, which tends to reduce prices of IOs and increase prices
of
POs. Rising interest rates can have the opposite effect. The yield to
maturity on an IO class is extremely sensitive to the rate of principal
payments (including
pre-payments) on the related underlying mortgage assets, and a rapid rate
of principal payments in excess of that considered in pricing the
securities may have a material adverse effect on a Fund’s yield to
maturity from these securities. If the underlying mortgage assets
experience greater
than anticipated pre-payments of principal, a Fund may fail to recoup some
or all of its initial investment in these securities even if the
security
is in one of the highest rating categories. In addition, there are certain
types of IOs that represent the interest portion of a particular class as
opposed
to the interest portion of the entire pool. The sensitivity of this type
of IO to interest rate fluctuations may be increased because of the
characteristics
of the principal portion to which they relate. The secondary market for
stripped MBS may be more volatile and less liquid than that for
other
MBS, potentially limiting a Fund’s ability to buy or sell those securities
at any particular time. |
Municipal
Securities
— A Fund may invest in municipal securities the interest on which is excludable
from gross income for federal income tax purposes
(“tax-exempt”), as well as municipal securities the interest on which is
taxable. Municipal bonds are issued for a wide variety of reasons, including
to construct public facilities, to obtain funds for operating expenses, to
refund outstanding municipal obligations, and to loan funds to various
public institutions and facilities. Municipal securities are subject to credit
risk where a municipal issuer of a security might not make interest or
principal
payments on a security as they become due. An issuer’s actual or perceived
credit quality can be affected by, among other things, the financial
condition of the issuer, the issuer’s future borrowing plans and sources of
revenue, the economic feasibility of a project or general borrowing purpose,
and political or economic developments in the region where the instrument is
issued. Local and national market forces, such as declines in real
estate prices or general business activity, shifting demographics or political
gridlock may result in decreasing tax bases, growing entitlement budgets,
and increasing construction and/or maintenance costs and could reduce the
ability of certain issuers of municipal securities to repay their obligations.
Municipal
securities also are subject to interest rate risk. As with other fixed income
securities, an increase in interest rates generally will reduce the value
of a Fund’s investments in municipal obligations, whereas a decline in interest
rates generally will increase that value.
Some
municipal securities, including those in the high yield market, may include
transfer restrictions (e.g., may only be transferred to qualified institutional
buyers and purchasers meeting other qualification requirements set by the
issuer). As such, it may be difficult to sell municipal securities at
a
time when it may otherwise be desirable to do so or a Fund may be able to sell
them only at prices that are less than what a Fund regards as their fair
market
value.
To
the extent that municipalities face severe financial hardship, certain state and
local governments may have difficulty paying principal or interest when
due on their outstanding debt and may experience credit ratings downgrades on
their debt. In addition, municipal securities backed by revenues from
a project or specified assets may be adversely impacted by a municipality’s
failure to collect the revenue. The possibility of their defaulting on
obligations,
and/or declaring bankruptcy where allowable, creates risks to the value of
municipal securities held by a Fund. Difficulties in the municipal securities
markets could result in increased illiquidity, volatility and credit risk, and a
decrease in the number of municipal securities investment opportunities.
A
Fund may purchase municipal securities that are fully or partially backed by
entities providing credit support such as letters of credit, guarantees, or
insurance.
The credit quality of the entities that provide such credit support will affect
the market values of those securities. The insurance feature of a municipal
security guarantees the full and timely payment of interest and principal
through the life of an insured obligation. The insurance feature does
not,
however, guarantee the market value of the insured obligation or the net asset
value of a Fund’s shares represented by such an insured obligation. A
sub-advisor generally looks to the credit quality of the issuer of a municipal
security to determine whether the security meets a 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. Certain significant
providers of insurance for municipal securities can incur and, in the past
have
incurred, significant losses as a result of exposure to certain categories of
investments, such as sub-prime mortgages and other lower credit quality
investments that have experienced defaults or otherwise suffered extreme credit
deterioration. Such losses can adversely impact the capital adequacy
of these insurers and may call into question the insurers’ ability to fulfill
their obligations under such insurance if they are called to do so, which
could negatively affect a Fund. There are a limited number of providers of
insurance for municipal securities and a Fund may have multiple investments
covered by one insurer. Accordingly, this may make the value of those
investments dependent on the claims-paying ability of that one insurer
and could result in share price volatility for a Fund’s shares.
In
addition, the amount of publicly available information for municipal issuers is
generally less than for corporate issuers. Unlike other types of investments,
municipal obligations have traditionally not been subject to the registration
requirements of the federal securities laws, although there have
been proposals to provide for such registration. This lack of SEC regulation has
adversely affected the quantity and quality of information available
to
the bond markets about issuers and their financial condition. The SEC has
responded to the need for such information with Rule 15c2-12 under the
Securities
Exchange Act of 1934, as amended (the “Rule”). The Rule requires that
underwriters must reasonably determine that an issuer of municipal securities
undertakes in a written agreement for the benefit of the holders of such
securities to file with a nationally recognized municipal securities
information
repository certain information regarding the financial condition of the issuer
and material events relating to such securities.
Additionally,
the Internal Revenue Service (“Service”) occasionally challenges the tax-exempt
status of the interest on particular municipal securities. If the
Service determined that interest earned on a municipal security a Fund
held was taxable and the issuer thereof failed to overcome that determination,
that interest would be taxable to a Fund, possibly retroactive to the time a
Fund purchased the security.
The
municipal securities in which a Fund may invest may include:
■ |
Commercial
Paper.
Commercial paper, the interest on which is exempt from federal income tax,
is issued by municipalities to help finance short-term
capital or operating needs in anticipation of future tax or other
revenue. |
■ |
General
Obligation
Bonds.
General obligation bonds are secured by the pledge of the issuer’s full
faith, credit, and usually, taxing power
and are payable
from and backed only by the issuer’s general unrestricted revenues and not
from any particular fund or source. The characteristics and method
of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer, and payment may be dependent
upon
appropriation by the issuer’s legislative body. The
taxing power may be an unlimited ad valorem tax or a limited tax, usually
on real estate and personal
property. Most states do not tax real estate, but leave that power to
local units of government. |
■ |
Revenue
Obligations.
Revenue obligations,
such as industrial development bonds,
are backed by the revenue cash flow of a project or facility. The
interest
on such obligations is payable only from the revenues derived from a
particular project, facility, specific excise tax or other revenue source.
Revenue
obligations are not a debt or liability of the local or state government
and do not obligate that government to levy or pledge any form of
taxation
or to make any appropriation for payment. |
Other
Investment Company Securities and Exchange-Traded Products
— Investments in the securities of other investment companies may involve
duplication of advisory fees and certain other expenses. By investing in another
investment company, a Fund becomes a shareholder of that investment
company. As a result, Fund shareholders indirectly will bear a Fund’s
proportionate share of the fees and expenses paid by shareholders of
the
other investment company, in addition to the fees and expenses Fund shareholders
directly bear in connection with a Fund’s own operations. Any
such
fees and expenses are reflected in
the Fees and Expenses Table for a Fund in its Prospectus.
To the extent a Fund invests
in investment company securities
advised by the Manager, shareholders
could pay fees charged by the Manager to such investment company. A
Fund’s investment in securities of
other investment companies, except for money market funds, is generally limited
to (i) 3% of the total voting stock of any one investment company, (ii)
5% of a Fund’s total assets with respect to any one investment company and (iii)
10% of a Fund’s total assets in all investment companies in the aggregate.
However, currently a Fund may exceed these limits when investing in shares of an
ETF or other investment company subject to a statutory exemption
or to the terms and conditions of an exemptive order from the SEC obtained by
the ETF or other investment company that permits an investing
fund, such as a Fund, to invest in the ETF or other investment company in excess
of the limits described above. Rule 12d1-4 under the Investment
Company Act and revisions to other rules permitting funds to invest in other
investment companies, which are intended to streamline and enhance
the regulatory framework applicable to fund of funds arrangements, took effect
on January 19, 2022. While Rule 12d1-4 permits more types
of
fund of fund arrangements without an exemptive order, and supersedes many prior
exemptive orders, it imposes new conditions, including limits on control
and voting of acquired funds’ shares, evaluations and findings by investment
advisers, fund investment agreements, and limits on most three-tier
fund structures.
A
Fund at times may invest in shares of other investment companies and
exchange-traded products, which, in addition to the general risks of
investments
in other investment companies described above, include the following
risks:
■ |
BDCs.
BDCs are a specialized form of closed-end fund that invest generally in
small developing companies and financially troubled businesses. The
Investment
Company Act imposes certain restraints upon the operation of a BDC. For
example, BDCs are required to invest at least 70% of their total
assets primarily in securities of private companies or thinly traded U.S.
public companies, cash, cash equivalents, U.S. government securities and
high
quality debt investments that mature in one year or less. As a result,
BDCs generally invest in private companies and thinly traded securities of
public
companies, including debt instruments. Generally, little public
information exists for private and thinly traded companies and there is a
risk that
investors may not be able to make fully informed investment decisions.
Many debt investments in which a BDC may invest will not be rated by a
credit
rating agency and will be below investment grade quality. Risks faced by
BDCs include competition for limited BDC investment opportunities;
the
liquidity of a BDC’s private investments; uncertainty as to the value of a
BDC’s private investments; risks associated with access to capital and
leverage;
and reliance on the management of a BDC. A Fund’s investments in BDCs are
similar and include portfolio company risk, leverage risk, market
and valuation risk, price volatility risk and liquidity risk.
Historically, shares of BDCs have frequently traded at a discount to their
net asset value,
which discounts have, on occasion, been substantial and lasted for
sustained periods of time. |
■ |
ETFs. A
Fund may purchase shares of ETFs. ETFs trade like a common stock and
passive ETFs usually represent a fixed portfolio of securities designed
to
track the performance and dividend yield of a particular domestic or
foreign market index. Typically, a Fund would purchase passive ETF
shares to obtain
exposure to all or a portion of the stock or bond market. As a shareholder
of an ETF, a Fund would be subject to its ratable share of the ETF’s
expenses,
including its advisory and administration expenses. An investment in an
ETF generally presents the same primary risks as an investment in a
conventional
mutual fund (i.e., one that is not exchange traded) that has the same
investment objective, strategies, and policies. The price of an ETF
can
fluctuate within a wide range, and a Fund could lose money investing
in an ETF if the prices of the securities owned by the ETF decline in
value. In
addition, ETFs are subject to the following risks that do not apply to
conventional mutual funds: (1) the market price of the ETF’s shares may
trade at
a discount or premium to their NAV per share; (2) an active trading market
for an ETF’s shares may not develop or be maintained; or (3) trading of
an
ETF’s shares may be halted if the listing exchange’s officials deem such
action appropriate, the shares are de-listed from the exchange, or the
activation
of market-wide “circuit breakers” (which are tied to large decreases in
stock prices) halts stock trading
generally. |
■ |
Money
Market Funds. A
Fund can invest free cash balances in registered open-end investment
companies regulated as money market funds under the
Investment Company Act, to provide liquidity or for defensive
purposes. A Fund would invest in money market funds rather
than purchasing individual
short-term investments. Although a money market fund is designed to be a
relatively low risk investment, it is not free of risk. Despite the
short
maturities and high credit quality of a money market fund’s investments,
increases in interest rates and deteriorations in the credit quality of
the
instruments the money market fund has purchased may reduce the money
market fund’s yield and can cause the price of a money market security
to decrease. In addition, a money market fund is subject to the risk that
the value of an investment may be eroded over time by inflation. If
the
liquidity of a money market fund’s portfolio deteriorates below certain
levels, the money market fund may suspend redemptions (i.e., impose a
redemption
gate) and thereby prevent a Fund from selling its investment in the money
market fund, or impose a fee of up to 2% on amounts redeemed
from the money market fund. |
Pay-in-Kind
Securities —
Pay-in-kind securities are debt securities that may pay interest through the
issuance of additional securities or in cash. Because
these securities may not pay current cash income, their price can be volatile
when interest rates fluctuate. Federal income tax law requires a holder
of pay-in-kind securities to include in gross income each taxable year the
portion of the non-cash income on those securities (i.e., the additional
securities
issued as interest thereon) accrued during that year.
In
order to continue to qualify for treatment as a “regulated investment company”
under the Internal Revenue Code and avoid federal excise tax, a
Fund
may be required to distribute a portion of such non-cash income and may be
required to dispose of other portfolio securities in order to generate
cash
to meet these distribution requirements, including during periods of adverse
market prices for those portfolio securities. See the section entitled
“Tax
Information.”
Preferred
Stock
— A preferred stock blends 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
its participation in the issuer’s growth may be limited. Preferred stock
generally has preference over common stock in the receipt of dividends and in
any residual assets after payment to creditors should the issuer be dissolved.
Because preferred stock is subordinate to bonds in the issuer’s capital
structure, the value of preferred stock will usually react more strongly
than
bonds and other debt to actual or perceived changes in the company’s financial
condition or prospects. Although the dividend is set at a fixed or variable
rate, in some circumstances it can be changed or omitted by the issuer.
Preferred stockholders may have certain rights if dividends are not paid
but
generally have no legal recourse against the issuer, and may suffer a loss of
value as a result. Preferred stocks are subject to the risks associated
with
other types of equity securities, as well as additional risks, such as credit
risk, interest rate risk, potentially greater volatility and risks related to
the deferral
of dividend payments, the non-cumulative payment of dividends (in which omitted
or deferred dividends are not subsequently paid), subordination,
liquidity, limited voting rights, and special redemption rights. The market
prices of preferred stock are generally more sensitive to changes
in the issuer’s creditworthiness than are the prices of debt securities.
Preferred stock also may be subject to optional or mandatory redemption
provisions.
Quantitative
Strategy Risk
— The success of a Fund’s investment strategy may depend in part on the
effectiveness of a sub-advisor’s quantitative tools
for screening securities. Securities selected using quantitative analysis can
react differently to issuer, political, market, and economic developments
than
the market as a whole or securities selected using only fundamental analysis,
which could adversely affect their value. A sub-advisor’s quantitative
tools
may use factors that may not be predictive of a security’s value, and any
changes over time in the factors that affect a security’s value may not be
reflected
in the quantitative model.
A sub-advisor’s
stock selection can be adversely affected if it relies on insufficient,
erroneous or outdated data or flawed
models or computer systems. Data for some companies, particularly non-U.S.
companies, may be less available and/or less current than data for other
companies.
Real
Estate Related Investments
— A Fund may gain exposure to the real estate sector by investing in real
estate-linked derivatives, REITs, and securities
of corporate
issuers
in real estate-related industries. Adverse economic, business or political
developments affecting real estate could have an
effect
on the value of a Fund’s investments. Investing in securities issued by real
estate and real estate-related companies may subject a Fund to risks
associated
with the direct ownership of real estate,
including the cyclical nature of real estate values, risks related to general
and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, demographic trends and variations in rental income,
changes in zoning laws, casualty or condemnation losses, environmental risks,
regulatory limitations on rents, changes in neighborhood values,
changes in the appeal of properties to tenants and extended vacancies of
properties, increases in interest rates, the financial condition of tenants,
buyers and sellers, the quality of maintenance, insurance, and management
services, and other real estate capital market influences.
Changes in
interest rates, debt leverage ratios, debt maturity schedules, and the
availability of credit to real estate companies may also affect the value of a
Fund’s
investment in real estate securities. Real estate securities are dependent upon
specialized management skills at the operating company level. Such
securities also have limited diversification and are, therefore, subject to
risks inherent in operating and financing a limited number of properties.
Real
estate securities are subject to heavy cash flow dependency and defaults by
borrowers. An
economic downturn could have an adverse effect on the
real estate markets and real estate companies. In addition, if a real estate
company’s properties do not generate sufficient income to meet operating
expenses, including debt service, ground lease payments, tenant improvements,
third party leasing commissions and other capital expenditures,
the income and ability of the real estate company to make payments of any
interest and principal on its debt securities will be adversely affected.
In addition, real property may be subject to the quality of credit extended and
defaults by borrowers and tenants. The financial results of major
local employers also may have an impact on the cash flow and value of certain
properties. In addition, certain real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions
is limited. A real estate company may also have joint venture investments in
certain of its properties and, consequently, its ability to control decisions
relating to such properties may be limited.
Separately
Traded Registered Interest and Principal Securities and Other Zero-Coupon
Obligations
— Separately traded registered interest and
principal securities or “STRIPS” and other zero-coupon obligations are
securities that do not make regular interest payments
prior to their maturity date
or another specified date in the future. Instead,
they are sold at a discount from their face value
and accrue interest over the life of the bond. While
interest payments are not made on such securities, holders of such securities
are deemed to have received income (“phantom income”) annually, notwithstanding
that cash may not be received currently. The effect of owning instruments that
do not make current interest payments is that a fixed yield
is earned not only on the original investment but also, in effect, on all
discount accretion during the life of the obligations.
Because they do not pay
coupon income, the prices of STRIPS and zero-coupon obligations can be very
volatile when interest rates change, their
values may fluctuate more than
the value of similar securities that pay interest periodically,
and they may be less liquid than similar securities that pay interest
periodically.
STRIPS are
zero-coupon bonds issued by the U.S. Treasury.
A
Fund accrues income with respect to these securities for federal income tax and
accounting purposes prior to the receipt of cash payments. Further, to
maintain its qualification for pass-through treatment under the federal tax
laws, a Fund is required to distribute income to its shareholders and,
consequently,
may have to dispose of other, more liquid portfolio securities under
disadvantageous circumstances in order to generate the cash to satisfy
these distributions. The required distributions may result in an increase in a
Fund’s exposure to zero coupon securities.
Small-Capitalization
Companies Risk
— Investing in the securities of small-capitalization companies involves greater
risk and the possibility of greater
price volatility, which at times can be rapid and unpredictable, than investing
in larger capitalization and more established companies, since smaller
companies may have limited operating history, product lines, and financial
resources. The securities of these companies may lack sufficient market
liquidity and they can be particularly sensitive to expected changes in overall
economic conditions, interest rates, borrowing costs and earnings.
Sovereign
and Quasi-Sovereign Government and Supranational Debt
— Sovereign debt securities may include: debt securities issued or guaranteed
by governments, governmental agencies or instrumentalities and political
subdivisions located in emerging market countries; debt securities
issued by government owned, controlled or sponsored entities located in emerging
market countries; interests in entities organized and operated
for the purpose of restructuring the investment characteristics of instruments
issued by any of the above issuers; participations in loans between
emerging market governments and financial institutions; and Brady Bonds, which
are debt securities issued under the framework of the Brady Plan
as a means for debtor nations to restructure their outstanding external
indebtedness.
Investments
in debt securities issued or guaranteed by foreign governments and their
political subdivisions or agencies involve special risks not present
in
corporate debt obligations. Sovereign debt is subject to risks in addition to
those relating to non-U.S. investments generally. The issuer of the debt or
the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance
with the terms of such debt, and a Fund may have limited legal recourse in
the event of a default. As a sovereign entity, the issuing government
may be immune from lawsuits in the event of its failure or refusal to pay the
obligations when due.
Sovereign
debt differs from debt obligations issued by private entities in that,
generally, remedies for defaults must be pursued in the courts of the
defaulting
party. Legal recourse is therefore somewhat diminished when the issuer is a
foreign government or its political subdivisions or agencies. Political
conditions, especially a sovereign entity’s willingness to meet the terms of its
debt obligations, are of considerable significance. Also, holders of
commercial
bank debt issued by the same sovereign entity may contest payments to the
holders of sovereign debt in the event of default under commercial
bank loan agreements.
A
sovereign debtor’s willingness or ability to repay principal and interest due in
a timely manner may be affected by, among other factors, its cash flow
situation,
insufficient foreign currency reserves, the availability of sufficient non-U.S.
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, the failure to implement economic reforms
required by the International Monetary Fund or other multilateral agencies and
the political constraints to which a sovereign debtor may be
subject.
Increased protectionism on the part of a country’s trading partners or political
changes in those countries could also adversely affect its exports. Such
events could diminish a country’s trade account surplus, if any, or the credit
standing of a particular local government or agency.
Sovereign
debtors’ ability to repay their obligations may also be dependent on
disbursements or assistance from foreign governments or multinational
agencies,
the country’s access to trade and other international credits, and the country’s
balance of trade. The receipt of assistance from other governments
or multinational agencies is not assured. Assistance may be dependent on a
country’s implementation of austerity measures and reforms, which
may be politically difficult to implement. These measures may limit or be
perceived to limit economic growth and recovery. In the past, some sovereign
debtors have rescheduled their debt payments, declared moratoria on payments or
restructured their debt to effectively eliminate portions of it,
and similar occurrences may happen in the future. There is no bankruptcy
proceeding by which sovereign debt on which governmental entities have
defaulted
may be collected in whole or in part.
The
occurrence of political, social or diplomatic changes in one or more of the
countries issuing sovereign debt could adversely affect a Fund’s
investments.
Political changes or a deterioration of a country’s domestic economy or balance
of trade may affect the willingness of countries to service their
sovereign debt. While the Manager and sub-advisors endeavor to manage
investments in a manner that will minimize the exposure to such risks,
there
can be no assurance that adverse political changes will not cause a Fund
to suffer a loss of interest or principal on any of its holdings.
Brady
Bonds. Brady Bonds may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated), and they are
actively traded in the over-the-counter secondary market. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or
floating rate discount bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
Brady
Bonds. Brady Bonds are not, however, considered to be U.S. Government
securities.
Interest payments on Brady Bonds are often collateralized by cash
or securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating
rate
bonds, initially is equal to at least one year’s rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals
thereafter. Certain Brady Bonds are entitled to “value recovery payments” in
certain circumstances, which in effect constitute supplemental interest
payments, but generally are not collateralized. Brady Bonds are often viewed as
having three or four valuation components: (i) collateralized repayment
of principal at final maturity; (ii) collateralized interest payments; (iii)
uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
“residual risk”). In the event of a default with respect to Collateralized
Brady Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral
for the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will
be held by the collateral agent to the scheduled maturity of the defaulted Brady
Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have been
due on the Brady Bonds in the normal course. Brady Bonds involve
various risk factors including residual risk and the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds. There can be no assurance that Brady Bonds in which a Fund
may invest will not be subject to restructuring arrangements
or to requests for new credit, which may cause a Fund to suffer a loss of
interest or principal on any of its holdings.
Supranational
entities may also issue debt securities. Supranational organizations are
entities designated or supported by a government or governmental
group to promote economic development. Included among these organizations are
the Asian Development Bank, the European Investment
Bank, the Inter-American Development Bank, the International Monetary Fund, the
United Nations, the World Bank and the European Bank for
Reconstruction and Development. Supranational organizations have no taxing
authority and are dependent on their members for payments of interest
and principal to the extent their assets are insufficient. Further, the lending
activities of such entities are limited to a percentage of their total
capital,
reserves and net income. Obligations of supranational entities are subject to
the risk that the governments on whose support the entity depends
for its financial backing or repayment may be unable or unwilling to provide
that support. Obligations of a supranational entity that are denominated
in foreign currencies will also be subject to the risks associated with
investments in foreign currencies, as described above in the section
“Currencies
Risk.”
Supranational
Risk —
Supranational organizations are entities designated or supported by a government
or governmental group to promote economic
development. Supranational organizations have no taxing authority and are
dependent on their members for initial and ongoing payments of
interest and principal to the extent their assets are insufficient. Further, the
lending activities of such entities are limited to a percentage of their total
capital,
reserves and net income. Obligations of supranational entities are subject to
the risk that the governments on whose support the entity depends
for its financial backing or repayment may be unable or unwilling to provide
that support. Obligations
of a supranational entity that are denominated
in foreign currencies will also be subject to the risks associated with
investments in foreign currencies, as described above in the section
“Currencies
Risk.”
Trust
Preferred Securities —
A Fund may invest in trust preferred securities. Trust preferred securities have
the characteristics of both subordinated debt
and preferred stock. Generally, trust preferred securities are issued by a trust
that is wholly owned by a financial institution or other corporate entity,
typically a bank holding company. The financial institution creates the trust
and owns the trust’s common securities. The trust uses the sale proceeds
of its common securities to purchase subordinated debt issued by the financial
institution. The financial institution uses the proceeds from the subordinated
debt sale to increase its capital while the trust receives periodic interest
payments from the financial institution for holding the subordinated
debt. The trust uses the funds received to make dividend payments to the holders
of the trust preferred securities. The primary advantage of
this structure is that the trust preferred securities are treated by the
financial institution as debt securities for tax purposes and as equity for the
calculation
of capital requirements.
Trust
preferred securities typically bear a market rate coupon comparable to interest
rates available on debt of a similarly rated issuer. Typical characteristics
include long-term maturities, early redemption by the issuer, periodic fixed or
variable interest payments, and maturities at face value. Holders
of trust preferred securities have limited voting rights to control the
activities of the trust and no voting rights with respect to the financial
institution.
The market value of trust preferred securities may be more volatile than those
of conventional debt securities. Trust preferred securities may be
thinly traded and a Fund may not be able to dispose of them at a favorable
price. Trust preferred securities may be issued in reliance on Rule 144A
under
the Securities Act and subject to restrictions on resale. There can be no
assurance as to the liquidity of trust preferred securities and the ability of
holders,
such as a Fund, to sell their holdings. Please refer to “Illiquid and Restricted
Securities” above for further discussion of regulatory considerations
and constraints related to such securities. As the trust typically has no
business operations other than to issue the trust preferred securities,
the condition of the financial institution could have an impact on a Fund. If
the financial institution defaults on interest payments to the trust,
the trust will not be able to make dividend payments to holders of its
securities, such as a Fund.
U.S.
Government Agency Securities
— U.S. Government agency securities are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities
or sponsored enterprises.
Some obligations issued by U.S. Government agencies and
instrumentalities,
such as those of the Government
National Mortgage Association (“GNMA”),
are supported by the full faith and credit of the U.S. Treasury;
others,
such as those of the Federal
Home Loan Bank (“FHLB”) or the Federal Farm Credit Bank (“FFCB”),
by the right of the issuer to borrow from the U.S. Treasury; others,
such as
those of the Federal National Mortgage Association (‘‘Fannie Mae’’), Federal
Home Loan Mortgage Corporation (‘‘Freddie Mac’’), by the
discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality; and others,
such as those of the Federal Farm Credit Bureau,
only by the credit of the agency or instrumentality. U.S. Government securities
bear fixed, floating or variable rates of interest. The market prices
of U.S. government
agency securities are not guaranteed by the U.S. Government. While the U.S.
Government currently provides financial support
to certain U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated
by law. U.S. Government securities include U.S. Treasury bills, notes and bonds,
obligations
of GNMA, FHLB, FFCB, Fannie Mae, Freddie Mac, the
Federal Farm Credit Bureau, other
U.S. Government agency obligations and repurchase agreements secured thereby.
U.S. Government agency securities
are subject to credit risk,
interest rate risk
and market risk.
U.S.
Treasury Obligations
— U.S. Treasury obligations may differ in their interest rates, maturities,
times of issuance and other characteristics, and include
bills (initial maturities of one year or less), notes (initial maturities
between two and ten years), and bonds (initial maturities over ten years)
issued
by the U.S. Treasury,
separately traded registered interest and principal component parts of such
obligations (known as “STRIPS”), which are traded
independently, and Treasury inflation-protected securities, whose principal
value is periodically adjusted according to the rate of inflation.
The prices
of these securities (like all debt securities) change between issuance and
maturity in response to fluctuating market interest rates and credit
ratings.
U.S. Treasury obligations are subject to credit risk and interest rate risk. The
total amount of debt the Treasury is authorized to incur is subject to
a statutory limit. Once the Treasury reaches the debt limit, Congress must
raise, extend or otherwise modify the limit to enable the Treasury to incur
additional
debt to pay the obligations of the U.S. government, including principal and
interest payments on certain U.S. Treasury obligations (such as Treasury
bills, notes and bonds). Failure to, or potential failure to, increase the
statutory debt limit could: increase the risk that the U.S. government
defaults
on payments on certain U.S. Treasury obligations; cause the credit rating of the
U.S. government to be downgraded or increase volatility in both
stock and bond markets; result in higher debt servicing payments by the U.S.
government; reduce prices of Treasury securities; and/or increase the
costs
of certain kinds of debt. Treasury
inflation-indexed securities are U.S. Government securities whose principal
value is periodically adjusted according
to the rate of inflation (by reference to the Consumer Price Index for All Urban
Consumers (“CPI-U”), which is calculated by the Bureau of Labor
Statistics a part of the Department of Labor). The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing,
food, transportation and energy. There can be no assurance that the CPI-U or any
non-U.S. inflation index will accurately measure the real rate
of inflation in the prices of goods and services. The three-month lag in
calculating the CPI-U for purposes of adjusting the principal value of U.S.
TIPS
may give rise to risks under certain circumstances. The interest rate on TIPS is
fixed at issuance, but over the life of the security this interest may be
paid
on an increasing or decreasing principal value that has been adjusted for
inflation (but not below par value). Although repayment of the original
principal
upon maturity is guaranteed, the market value of TIPS is not guaranteed and will
fluctuate. The values of TIPS generally fluctuate in response to
changes in 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 faster rate than nominal interest rates, real interest rates might decline,
leading to an increase in the value of TIPS. In contrast, if nominal
interest
rates were to increase at a faster rate than inflation, real interest rates
might rise, leading to a decrease in the value of TIPS. If inflation is lower
than
expected during the period a Fund holds TIPS, a Fund may earn less on the TIPS
than on a conventional bond. Because the coupon rate on TIPS is lower
than fixed-rate Treasury Department securities, the CPI-U would have to rise at
least to the amount of the difference between the coupon rate of the
fixed-rate Treasury Department issues and the coupon rate of the TIPS, assuming
all other factors are equal, in order for such securities to match the
performance of the fixed-rate Treasury Department securities. If interest rates
rise due to reasons other than inflation, (for example, due to changes
in
the currency exchange rates), investors in TIPS may not be protected to the
extent that the increase is not reflected in the bonds’ inflation measure.
In
periods of deflation when the inflation rate is declining, the principal value
of an inflation-indexed security will be adjusted downward. This will
result
in a decrease in the interest payments thereon, but holders at maturity receive
no less than par value. However, if a Fund purchases inflation-indexed
securities in the secondary market whose principal values have been adjusted
upward due to inflation since issuance, a Fund may experience
a loss if there is a subsequent period of deflation. Any increase in principal
value of TIPS caused by an increase in the CPI is taxable in the year
the increase occurs, even though the holder will not receive cash representing
the increase at that time. As a result, a Fund could be required at times
to liquidate other investments, including when it is not advantageous to do so,
in order to satisfy its distribution requirements as a “regulated investment
company.” See “Tax Information.” If a Fund invests in TIPS, it will be required
to treat as original issue discount (“OID”) any increase in the principal
amount of the securities that occurs during the course of its taxable year. If a
Fund purchases such securities that are issued in stripped form either
as stripped bonds or coupons, it will be treated as if it had purchased a newly
issued debt instrument having OID. Because a Fund is required to distribute
substantially all of its net investment income (including accrued OID), its
investment in either zero coupon bonds or TIPS may require it to distribute
to shareholders an amount greater than the total cash income it actually
receives. Accordingly, in order to make the required distributions, a
Fund
may be required to borrow or liquidate securities.
Valuation
Risk
— This is the risk that certain
securities may be valued
at a price different from the price at which they can be sold. This risk may be
especially
pronounced for investments, such as certain credit-linked notes and other
derivatives, which may be illiquid or which may become illiquid, and
for securities that trade in relatively thin markets and/or markets that
experience extreme volatility. The
valuation of a Fund’s
investments in an accurate
and timely manner may be impacted by technological issues and/or errors by third
party service providers, such as pricing services or accounting
agents. If market or other conditions make it difficult to value certain
investments, SEC rules and applicable accounting protocols may require
the
valuation of
these investments using more subjective methods, such as fair-value
methodologies. Using fair value methodologies to price investments
may result in a value that is different from an investment’s most recent closing
price and from the prices used by others for the same
investment.
No assurance can be given that such prices accurately reflect the price a Fund
would receive upon sale of a security. An investment’s valuation
may differ depending on the method used for determining value. Investors who
purchase or redeem Fund shares on days when a Fund is holding
fair-valued securities may receive fewer or more shares, or lower or higher
redemption proceeds, than they would have received if the
securities
had
not been
fair
valued or
a different valuation methodology
had been used.
The value of foreign securities, certain fixed-income
securities and currencies,
as applicable, may be materially affected by events after the close of the
markets on which they are traded, but before a Fund determines its
NAV.
Value
Companies Risk
— Value companies are subject to the risk that their intrinsic or full value may
never be realized by the market, that a stock judged
to be undervalued may be appropriately priced, or that their prices may go down.
While a Fund’s investments in value stocks may limit its downside
risk over time, a Fund may produce more modest gains than riskier stock funds as
a trade-off for this potentially lower risk. Different investment
styles tend to shift in and out of favor, depending on market conditions and
investor sentiment. A Fund’s investments in value stocks may underperform
growth or non-value stocks that have a broader investment style.
Variable
or Floating Rate Obligations
— Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations.
A variable rate obligation has a coupon rate which is adjusted at predesignated
periods in response to changes in the market rate of interest
on which the coupon is based. The adjustment intervals may be regular, and range
from daily up to annually, or may be event based, such as based
on a change in the prime rate. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless,
such obligations may fluctuate in value in response to interest rate changes if
there is a delay between changes in market interest rates and
the interest reset date for the obligation, or for other reasons.
A
Fund may invest in floaters and engage in credit spread trades. The interest
rate on a floater is a variable rate which is tied to another interest rate,
such
as a money-market index rate,
the Secured Overnight Financing Rate (“SOFR”), or a
U.S. Treasury bill rate. The interest rate on a floater resets periodically,
typically every one or three months. While, because of the interest rate reset
feature, floaters provide a Fund with a certain degree of protection
against rises in interest rates, a Fund will participate in any declines in
interest rates as well. A
credit spread trade is an investment position relating
to a difference in the prices or interest rates of two securities or currencies,
where the value of the investment position is determined by movements
in the difference between the prices or interest rates, as the case may be, of
the respective securities or currencies.
Certain floaters may carry
a demand feature that permits the holder to tender them back to the issuer of
the underlying instrument, or to a third party, at par value prior to
maturity.
When the demand feature of certain floaters represents an obligation of a
foreign entity, the demand feature will be subject to certain risks discussed
under “Foreign Securities.”
When-Issued
and Forward Commitment Transactions
— These transactions involve a commitment by a Fund to purchase or sell
securities with payment
and delivery to take place at a future date, typically one to two months after
the date of the transaction. The payment obligations and interest
rate are fixed at the time the buyer enters into the transaction. These
transactions enable a Fund to “lock-in” what the Manager or
a sub-advisor,
as applicable,
believes
to be an attractive price or yield on a particular security for a period of
time, regardless of future changes in interest rates.
For instance, in periods of rising interest rates and falling prices, a Fund
might sell securities it owns on a forward commitment basis to limit its
exposure
to falling prices. In periods of falling interest rates and rising prices, a
Fund might purchase a security on a when-issued or forward commitment
basis and sell a similar security to settle such purchase, thereby obtaining the
benefit of currently higher yields. Forward commitment transactions
are executed for existing obligations, whereas in a when-issued transaction, the
obligations have not yet been issued.
The
value of securities purchased on a when-issued or forward commitment basis and
any subsequent fluctuations in their value are reflected in the computation
of a Fund’s NAV starting on the date of the agreement to purchase the
securities. Because a Fund has not yet paid for the securities, this
produces
an effect similar to leverage. A Fund does not earn interest on securities it
has committed to purchase until the securities are paid for and delivered
on the settlement date. When a Fund makes a forward commitment to sell
securities it owns, the proceeds to be received upon settlement are
included in its assets. Fluctuations in the market value of the underlying
securities are not reflected in a Fund’s NAV as long as the commitment to
sell
remains in effect.
When
entering into a when-issued or forward commitment transaction, a Fund will
rely on the other party to consummate the transaction; if the other party
fails to do so, a Fund may be disadvantaged. If
the other party fails to complete the trade, a Fund may lose the opportunity to
obtain a favorable price.
For purchases on a when-issued basis, the price of the security is fixed at the
date of purchase, but delivery of and payment for the securities is not
set until after the securities are issued. The value of when-issued securities
is subject to market fluctuation during the interim period and no income
accrues
to a Fund until settlement takes place. Such transactions therefore involve a
risk of loss if the value of the security to be purchased declines prior
to the settlement date or if the value of the security to be sold increases
prior to the settlement date. A sale of a when-issued security also involves
the risk that the other party will be unable to settle the transaction.
When-issued, delayed-delivery and forward commitment transactions may
cause
a Fund to liquidate positions when it may not be advantageous to do so in order
to satisfy its purchase or sale obligations.
Pursuant
to Rule 18f-4 under the Investment Company Act,
when-issued,
delayed-delivery and forward commitment transactions will be deemed not
to
involve a senior security, provided that: a Fund intends to physically
settle
the transaction; and
the transaction will settle within 35 days of its trade date.
If such transactions are deemed senior securities,
a Fund will
maintain with its Custodian segregated (or earmarked) liquid securities in an
amount at
least equal to the when-issued or forward commitment transaction.
Earmarking or otherwise segregating a large percentage of a Fund’s assets could
impede
a sub-advisors’
ability to manage a Fund’s portfolio.
OTHER
INVESTMENT STRATEGIES AND RISKS
In
addition to the investment strategies and risks described in the Prospectus, the
American Beacon Large Cap Value Fund
and American Beacon Small Cap
Value Fund may:
Invest
up to 20% of its total assets in debt securities that are investment grade at
the time of purchase, including obligations of the U.S. Government, its
agencies and instrumentalities, corporate debt securities, mortgage-backed
securities, asset-backed securities, master-demand notes, Yankee and
Eurodollar
bank certificates of deposit, time deposits, bankers’ acceptances, commercial
paper and other notes, inflation-indexed securities, and other debt
securities. Investment grade securities include securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities, as well as
securities rated in one of the four highest rating categories by at least two
rating organizations rating that security, such as S&P Global, Fitch, Inc.
(“Fitch”)
or Moody’s Investors Service, Inc. (“Moody’s”), or rated in one of the four
highest rating categories by one rating organization if it is the only
rating
organization rating that security. Obligations rated in the fourth highest
rating category are limited to 25% of each of these Funds’ debt allocations.
These Funds, at the discretion of the Manager, or the applicable sub-advisor,
may retain a debt security that has been downgraded below the
initial investment criteria.
The
American Beacon International Equity Fund may invest up to 20% of its total
assets in non-U.S. debt securities that are rated at the time of purchase
in one of the three highest rating categories by any rating organizations or, if
unrated, are deemed to be of comparable quality by the applicable
sub-advisor and traded publicly on a world market.
Each
Fund may (except where otherwise indicated):
1 |
Engage
in dollar rolls or purchase or sell securities on a when-issued or forward
commitment basis. The purchase or sale of when-issued securities
enables
an investor to hedge against anticipated changes in interest rates and
prices by locking in an attractive price or yield. The price of
when-issued
securities is fixed at the time the commitment to purchase or sell is
made, but delivery and payment for the when-issued securities takes
place at a later date, normally one to two months after the date of
purchase. During the period between purchase and settlement, no
payment
is made by the purchaser to the issuer and no interest accrues to the
purchaser. Such transactions therefore involve a risk of loss if the
value
of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement
date.
A sale of a when-issued security also involves the risk that the other
party will be unable to settle the transaction. Dollar rolls are a type of
forward
commitment transaction. Purchases and sales of securities on a forward
commitment basis involve a commitment to purchase or sell securities
with payment and delivery to take place at some future date, normally one
to two months after the date of the transaction. As with when-issued
securities, these transactions involve certain risks, but they also enable
an investor to hedge against anticipated changes in interest rates
and prices. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations
have
not yet been issued. |
2 |
Invest
in other investment companies (including affiliated investment companies)
to the extent permitted by the Investment Company Act, or exemptive
relief granted by the SEC. |
3 |
Loan
securities to broker-dealers or other institutional investors. Securities
loans will not be made if, as a result, the aggregate amount of all
outstanding
securities loans by a Fund exceeds 33¹/3%
of its total assets (including the market value of collateral received).
For purposes of complying
with a Fund’s investment policies and restrictions, collateral received in
connection with securities loans is deemed an asset of a Fund to
the
extent required by law. |
4 |
Enter
into repurchase agreements. A repurchase agreement is an agreement under
which securities are acquired by a Fund from a securities dealer
or
bank subject to resale at an agreed upon price on a later date. The
acquiring Fund bears a risk of loss in the event that the other party to a
repurchase
agreement defaults on its obligations and a Fund is delayed or prevented
from exercising its rights to dispose of the collateral securities.
However,
the Manager or the sub-advisors, as applicable, attempt to minimize this
risk by entering into repurchase agreements only with financial
institutions
that are deemed to be of good financial
standing. |
5 |
Purchase
securities sold in private placement offerings made in reliance on the
“private placement” exemption from registration afforded by Section
4(a)(2)
of the Securities Act and resold to qualified institutional buyers under
Rule 144A under the Securities Act. A Fund will not invest more than
15%
of its net assets in Section 4(a)(2) securities and illiquid securities
unless the Manager or the sub-advisor, as applicable, determines that any
Section
4(a)(2) securities held by such Fund in excess of this level are
liquid. |
INVESTMENT
RESTRICTIONS
Fundamental
Policies.
Each Fund has the following fundamental investment policy that enables it to
invest in another investment company or series thereof
that has substantially similar investment objectives and policies:
Notwithstanding
any other limitation, a Fund may invest all of its investable assets in an
open-end management investment company with substantially the
same investment objectives, policies and limitations as a Fund. For this
purpose, “all of a Fund’s investable assets” means that the only investment
securities
that will be held by a Fund will be a Fund’s interest in the investment
company.
The
Funds have no current intention to convert to a master-feeder structure, as
permitted by the foregoing policy.
Fundamental
Investment Restrictions.
The following discusses the investment policies of each Fund.
The
following restrictions have been adopted by each Fund and may be changed with
respect to any such Fund only by the majority vote of that Fund’s outstanding
voting securities. “Majority of the outstanding voting securities” under
the Investment Company Act and as used herein means, with
respect
to each Fund, the lesser of (a) 67% of the shares of the Fund present at the
meeting if the holders of more than 50% of the shares are present and
represented at the shareholders’ meeting or (b) more than 50% of the shares of
the Fund.
No
Fund may (unless otherwise indicated):
1 |
Each
Fund, except American Beacon Garcia Hamilton Quality Bond Fund: Purchase
or sell real estate or real estate limited partnership interests,
provided,
however, that a Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate
or
interests therein when consistent with the other policies and limitations
described in the Prospectus. American
Beacon Garcia Hamilton Quality Bond Fund: Purchase or sell real estate or
real estate limited partnership interests, provided, however,
|
| that
the Fund may dispose of real estate acquired as a result of the ownership
of securities or other instruments and invest in securities secured by
real
estate or interests therein or issued by companies which invest in real
estate or interests therein when consistent with the other policies and
limitations
described in the Prospectus. |
2 |
Invest
in physical commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Fund from
purchasing
or selling foreign currency, options, futures contracts, options on
futures contracts, forward contracts, swaps, caps, floors, collars,
securities
on a forward-commitment or delayed-delivery basis, and other similar
financial instruments). |
3 |
Engage
in the business of underwriting securities issued by others, except to the
extent that, in connection with the disposition of securities, a Fund
may
be deemed an underwriter under federal securities
law. |
4 |
Each
Fund, except American Beacon Garcia Hamilton Quality Bond Fund: Lend any
security or make any other loan except (i) as otherwise permitted
under the Investment Company Act, (ii) pursuant to a rule,
order or interpretation issued by the SEC or its staff, (iii) through the
purchase of
a portion of an issue of debt securities in accordance with a Fund’s
investment objective, policies and limitations, or (iv) by engaging in
repurchase
agreements with respect to portfolio securities. American
Beacon Garcia Hamilton Quality Bond Fund: Lend any security or make any
other loan except (i) as otherwise permitted under the Investment
Company Act, (ii) pursuant to a rule, order or interpretation issued by
the SEC or its staff, (iii) through the purchase of a portion of an
issue
of debt securities in accordance with a Fund’s investment objective,
policies and limitations, or (iv) by engaging in repurchase
agreements. |
5 |
Issue
any senior security except as otherwise permitted (i) under
the Investment Company Act or (ii) pursuant to a rule, order
or interpretation issued
by the SEC or its staff. |
6 |
Borrow
money, except as otherwise permitted under the Investment
Company Act or pursuant to a rule, order or interpretation issued by
the SEC or
its staff, including (i) as a temporary measure, (ii) by entering into
reverse repurchase agreements, and (iii) by lending portfolio securities
as collateral.
For purposes of this investment limitation, the purchase or sale of
options, futures contracts, options on futures contracts, forward
contracts,
swaps, caps, floors, collars and other similar financial instruments shall
not constitute borrowing. |
7 |
Invest
more than 5% of its total assets (taken at market value) in securities of
any one issuer, other than obligations issued by the U.S. Government,
its
agencies and instrumentalities, or purchase more than 10% of the voting
securities of any one issuer, with respect to 75% of a Fund’s total
assets. |
8 |
Each
Fund, except American Beacon Garcia Hamilton Quality Bond Fund: Invest
more than 25% of its total assets in the securities of companies
primarily
engaged in any one industry provided that: (i) this limitation does not
apply to obligations issued or guaranteed by the U.S. Government,
its
agencies and instrumentalities; and (ii) municipalities and their agencies
and authorities are not deemed to be industries. For purposes of
this restriction,
the Fund will regard only tax-exempt securities issued by municipalities
and their agencies not to be an industry. |
|
American
Beacon Garcia Hamilton Quality Bond Fund: Invest more than 25% of its
assets in the securities of companies primarily engaged in any
particular
industry or group of industries provided that this limitation does not
apply to (i) obligations issued by or guaranteed by the U.S. Government,
its agencies or instrumentalities; and (ii) tax exempt securities issued
by municipalities and their agencies and
authorities. |
The
above percentage limits (except the limitation on
borrowings) are based upon asset values at the time of the applicable
transaction; accordingly, a subsequent
change in asset values will not affect a transaction that was in compliance with
the investment restrictions at the time such transaction was effected.
For purposes of each Fund’s policy relating to making loans set forth in
(4)
above, securities loans will not be made if, as a result, the aggregate
amount of all outstanding securities loans by a Fund exceeds 33¹/3%
of its total assets (including the market value of collateral
received).
For
purposes of each Fund’s policy relating to issuing senior securities set forth
above, “senior securities” are defined as Fund obligations that have a
priority
over the Funds’ shares with respect to the payment of dividends or the
distribution of Fund assets. The Investment Company Act prohibits the
Funds
from issuing any class of senior securities or selling any senior securities of
which it is the issuer, except that the Funds are permitted to borrow
from
a bank so long as, immediately after such borrowings, there is an asset coverage
of at least 300% for all borrowings of each Fund (not including
borrowings
for temporary purposes in an amount not exceeding 5% of the value of the Fund’s
total assets). In the event that such asset coverage falls below
this percentage, each Fund is required to reduce the amount of its borrowings
within three days (not including Sundays and holidays) so that the asset
coverage is restored to at least 300%. Consistent with guidance issued by the
SEC and its staff, the requisite asset coverage may vary among different
types of instruments. The policy above will be interpreted not to prevent
collateral arrangements with respect to swaps, options, forward or futures
contracts or other derivatives, or the posting of initial or variation
margin.
For
purposes of each Fund’s industry concentration policy set forth above, the
Manager may analyze the characteristics of a particular issuer and instrument
and may assign an industry classification consistent with those characteristics.
The Manager may, but need not, consider industry classifications
provided by third parties, and the classifications applied to Fund investments
will be informed by applicable law. A large economic or market
sector shall not be construed as a single industry or group of industries. The
Manager currently considers securities issued by a foreign government
(but not the U.S. Government or its agencies or instrumentalities) to be an
“industry” subject to the 25% limitation. Thus, not more than 25%
of a Fund’s total assets will be invested in securities issued by any one
foreign government or supranational organization. A Fund might invest in
certain
securities issued by companies in a particular industry whose obligations are
guaranteed by a foreign government. The Manager could consider such
a company to be within the particular industry and, therefore, a Fund will
invest in the securities of such a company only if it can do so under its
industry
concentration policy.
Non-Fundamental
Investment Restrictions.
The following non-fundamental investment restrictions apply to each Fund (except
where noted otherwise)
and may be changed with respect to each Fund by a vote of a majority of the
Board. Each Fund may not (except where noted otherwise):
1 |
Invest
more than 15% of its net assets in illiquid securities, including time
deposits and repurchase agreements that mature in more than seven
days;
or |
2 |
Each
Fund, except American Beacon Garcia Hamilton Quality Bond Fund: Purchase
securities on margin or effect short sales, except that a Fund
may
obtain such short term credits as may be necessary for the clearance of
purchases or sales of securities.
|
| American
Beacon Garcia Hamilton Quality Bond Fund: Purchase securities on margin,
except that (1) the Fund may obtain such short term credits as
necessary
for the clearance of transactions, and (2) the Fund may make margin
payments in connection with foreign currency, futures contracts,
options,
forward contracts, swaps, caps, floors, collars, securities purchased or
sold on a forward-commitment or delayed-delivery basis or other
financial
instruments. |
All
percentage limitations on investments will apply at the time of the making of an
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the
extent designated as such in the Prospectus with respect to each Fund, the other
investment policies described in this SAI are not fundamental and may
be changed by approval of the Trustees.
TEMPORARY
OR DEFENSIVE INVESTMENTS
In
times of unstable or adverse market, economic, political or other conditions,
where the Manager or a sub-advisor believes it is appropriate and in a
Fund’s
best interest, a Fund can invest up to 100% in cash and other types of
securities for defensive or temporary purposes. It can also hold cash or
purchase
these types of securities for liquidity purposes to meet cash needs due to
redemptions of Fund shares, or to hold while waiting to invest cash received
from purchases of Fund shares or the sale of other portfolio
securities.
These
temporary investments can include: (i) obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; (ii) commercial paper
rated in the highest short-term category by a rating organization; (iii)
domestic, Yankee and Eurodollar certificates of deposit or bankers’ acceptances
of banks rated in the highest short-term category by a rating organization; (iv)
any of the foregoing securities that mature in one year or less
(generally known as “cash equivalents”); (v) other short-term corporate debt
obligations; (vi) repurchase agreements; (vii) futures; or (viii) shares of
money
market funds, including funds advised by the Manager or a
sub-advisor.
PORTFOLIO
TURNOVER
Portfolio
turnover is a measure of trading activity in a portfolio of securities, usually
calculated over a period of one year. The rate is calculated by dividing
the lesser amount of purchases or sales of securities by the average amount of
securities held over the period. A portfolio turnover rate of 100%
would indicate that a Fund sold and replaced the entire value of its securities
holdings during the period. High portfolio turnover can increase a Fund’s
transaction costs and generate additional capital gains or losses.
Portfolio
turnover may vary significantly from year to year due to a variety of factors,
including fluctuating volume of shareholder purchase and redemption
orders, market conditions, investment strategy changes, and/or changes in a
sub-advisor’s investment outlook.
DISCLOSURE
OF PORTFOLIO HOLDINGS
Each
Fund publicly discloses portfolio holdings information as follows:
1 |
a
complete list of holdings for each Fund on an annual and semi-annual basis
in the reports to shareholders within sixty days of the end of each
fiscal
semi-annual period and in publicly available filings of Form N-CSR with
the SEC within ten days thereafter (available on the SEC’s website at
www.sec.gov); |
2 |
a
complete list of holdings for each Fund as of the end of each fiscal
quarter in publicly available filings of Form N-PORT with the SEC within
sixty days
of the end of the fiscal quarter (available on the SEC’s website at
www.sec.gov); |
3 |
a
complete list of holdings for each Fund as of the end of each month on the
Funds’ website (www.americanbeaconfunds.com) approximately twenty
days after the end of the month; and |
4 |
ten
largest holdings for each Fund as of the end of each calendar quarter on
the Funds’ website (www.americanbeaconfunds.com) and in sales materials
approximately fifteen days after the end of the calendar
quarter. |
Public
disclosure of a Fund’s holdings on the website and in sales materials may be
delayed when an investment manager informs the Fund that such disclosure
could be harmful to the Fund. In addition, individual holdings may be omitted
from website and sales material disclosure, when such omission
is deemed to be in a Fund’s best interest. Disclosure of a Fund’s ten
largest holdings may exclude U.S. Treasury securities and cash equivalent
assets,
although such holdings will be included in each Fund’s complete list of
holdings.
Disclosure
of Nonpublic Holdings.
Occasionally, certain interested parties - including individual investors,
institutional investors, intermediaries that distribute
shares of the Funds, third-party service providers, rating and ranking
organizations, and others - may request portfolio holdings information
that
has not yet been publicly disclosed by the Funds. The Funds’ policy is to
control the disclosure of nonpublic portfolio holdings information in an
attempt
to prevent parties from utilizing such information to engage in trading activity
harmful to Fund shareholders. To this end, the Board has adopted
the Holdings Policy. The purpose of the Holdings Policy is to define those
interested parties who are authorized to receive nonpublic portfolio
holdings
information on a selective basis and to set forth conditions upon which such
information may be provided. In general, nonpublic portfolio holdings
may be disclosed on a selective basis only when it is determined that (i) there
is a legitimate business purpose for the information; (ii) recipients
are subject to a duty of confidentiality, including a duty not to trade on the
nonpublic information; and (iii) disclosure is in the best interests
of
Fund shareholders. The Holdings Policy does not restrict a Fund from disclosing
that a particular security is not a holding of the Fund. The Holdings
Policy
is summarized below.
A
variety of third party service providers require access to Fund holdings to
provide services to the Funds or to assist the Manager and a sub-advisor in
managing
the Funds (“service providers”). The service providers have a duty to keep the
Funds’ nonpublic information confidential either through written
contractual arrangements with the Funds (or another Fund service provider) or by
the nature of their role with respect to the Funds (or the service
provider). The Funds have determined that disclosure of nonpublic holdings
information to service providers fulfills a legitimate business purpose
and
is in the best interest of shareholders. In addition, the Funds have determined
that disclosure of nonpublic holdings information to members of the Board
fulfills a legitimate business purpose, is in the best interest of Fund
shareholders, and each Trustee is subject to a duty of
confidentiality.
The
Funds have ongoing arrangements to provide nonpublic holdings information
to the following service providers:
|
| |
Service
Provider |
Service |
Holdings
Access |
Manager |
Investment
management and administrator |
Complete
list on intraday basis with no lag |
Sub-Advisor |
Investment
management |
Holdings
under sub-advisor’s management on
intraday basis with no lag |
State
Street Bank and Trust Co. (“State
Street”) and its designated foreign
sub-custodians |
Securities
lending agent for Funds that participate in securities lending,
Funds’ custodian and foreign custody manager, and foreign
sub-custodians |
Complete
list on intraday basis with no lag |
PricewaterhouseCoopers
LLP |
Funds’
independent registered public accounting firm |
Complete
list on annual basis with no lag |
Abel
Noser Corp. |
Trade
execution analysis for a sub-advisor |
Complete
list on daily basis with no lag |
ACA
Performance Services |
GIPS
verification firm for a sub-advisor |
Complete
list on a monthly basis with lag |
Advent/Tamale |
Research
management system for a sub-advisor |
Complete
list on a daily basis with lag |
Ashland
Partners |
Performance
verification for a sub-advisor |
Complete
list on periodic basis with lag |
BBH
Infomediary |
SWIFT
messaging service provider for a sub-advisor |
Complete
list on daily basis with no lag |
BizAnalytica,
LLC |
Consulting
Service |
Complete
list on daily basis with no lag |
Bloomberg,
L.P. |
Performance
and portfolio analytics reporting |
Complete
list on daily basis with no lag |
BondEdge |
Financial
analytic database |
Partial
list on a daily basis with lag |
Broadridge/ProxyEdge |
Proxy
voting research provider for a sub-advisor |
Complete
list on a daily basis with lag |
Brown
Brothers Harriman |
Corporate
Action Management for a sub-advisor |
Complete
List on a daily basis with no lag |
Charles
River Systems |
Trade
order management for sub-advisors |
Complete
list on daily basis with no lag |
Chicago
Clearing |
Class
Actions |
Complete
list on a quarterly basis with no lag |
Commcise |
Transaction
cost analysis, trade execution analysis for a sub-advisor |
Partial
list on daily basis with no lag |
DTCC |
Trade
settlement services for a sub-advisor |
Partial
list on daily basis with no lag |
Eagle
Investment Systems Corp. |
Portfolio
accounting system for a sub-advisor |
Complete
list on a daily basis with no lag |
Electra |
Reconciliation
System for sub-advisors |
Complete
list on daily basis with no lag |
Eze
Castle |
Trade
order management for sub-advisors |
Complete
list on a daily basis with no lag |
FactSet
Research Systems, Inc. |
Performance
and portfolio analytics reporting for the Manager and sub-advisors |
Complete
list on daily basis with no lag |
FIS |
Portfolio
Accounting for a sub-advisor |
Complete
list on daily basis with no lag |
Fiserv |
Portfolio
Accounting |
Complete
list on daily basis with no lag |
FXTransparency |
Trade
Execution Assessment |
Complete
list on weekly basis with no lag |
Glass
Lewis & Co |
Proxy
voting services for sub-advisor |
Partial
list on a periodic basis with lag |
IEX
Data Analytics LLC (IEX Astral) |
Analytical
and reporting tool for a sub-advisor |
Partial
list on daily basis with no lag |
Institutional
Shareholder Services (“ISS”) |
Proxy
voting research provider to sub-advisors, and share recall services
provider to the Manager |
Complete
list on daily basis with no lag |
Investment
Technology Group, Inc. |
Fair
valuation of portfolio securities for Funds with significant foreign
securities holdings; transaction cost analysis for
sub-advisor |
Complete
list on daily basis with no lag and more
frequently when the Manager seeks advice
with respect to certain holdings |
KPMG
International |
Service
provider to State Street |
Complete
list on annual basis with lag |
LexisNexis |
OFAC
compliance service for a sub-advisor |
Complete
list on a weekly basis with lag |
MSCI
Barra, Inc. |
Analytics
platform to support portfolio risk management for a sub-advisor |
Complete
list on daily basis with no lag |
Northern
Trust |
Back
Office Operation for a sub-advisor |
Complete
list on a daily basis with no lag |
Omgeo
LLC |
Automated
trade matching service for sub-advisors |
Partial
list on a daily basis with no lag |
Parametric
Portfolio Associates LLC |
Provides
certain administrative services related to the equitization of
cash balances for certain Funds |
Partial
list on a daily basis with no lag |
Portia |
Portfolio
Accounting for a sub-advisor |
Complete
list on a daily basis with no lag |
Russell |
Ratings
Agency |
Complete
list on a daily basis with lag |
|
| |
Service
Provider |
Service |
Holdings
Access |
SS&C
Advent |
Portfolio
Accounting for a sub-advisor |
Complete
list on a daily basis with lag |
SS&C
Eze |
Trading
and Order Management for a sub-advisor |
Complete
list on a daily basis with no lag |
SS&C
Vision FI |
Client
and investor reporting system for a sub-advisor |
Complete
list on a daily basis with no lag |
Street
Account |
Investment
research for a sub-advisor |
Partial
list on a periodic basis with lag |
Trading
Technologies International, Inc. |
Trade
execution analysis for a sub-advisor |
Complete
list on daily basis with no lag |
Varden
Technologies, Inc. |
Client
and investor reporting system |
Complete
list on a daily basis with no lag |
Virtu
ITG LLC |
Transaction
cost analysis Trade execution analysis for a sub-advisor |
Partial
list on a daily basis with lag |
Certain
third parties are provided with nonpublic holdings information (either complete
or partial lists) by the Manager or another service provider on an
ad hoc basis
in the ordinary course of business.
These third parties include broker-dealers, prospective sub-advisors, borrowers
of the Funds’ portfolio
securities, pricing services, legal counsel, and issuers (or their agents).
Broker-dealers utilized by the Funds in the process of purchasing and
selling
portfolio securities or providing market quotations receive limited holdings
information on a current basis with no lag. The Manager provides current
holdings to investment managers being considered for appointment as a
sub-advisor to the Funds. If the Funds participate in securities lending
activities,
potential borrowers of the Funds’ securities receive information pertaining to
the Funds’ securities available for loan. Such information is provided
on a current basis with no lag. The Funds utilize various pricing services to
supply market quotations and evaluated prices to State Street. State
Street and the Manager may disclose current nonpublic holdings to those pricing
services. The
Manager or a sub-advisor
may provide holdings information
to legal counsel when seeking advice regarding those holdings. From time to
time, an issuer (or its agent) may contact the Funds requesting
confirmation of ownership of the issuer’s securities. Such holdings information
is provided to the issuer (or its agent) as of the date requested.
The Funds do not have written contractual arrangements with these third parties
regarding the confidentiality of the holdings information. However,
the Funds would not continue to utilize a third party that the Manager
determined to have misused nonpublic holdings information.
The
Funds have ongoing arrangements to provide periodic holdings information to
certain organizations that publish ratings and/or rankings for the Funds
or that redistribute the Funds’ holdings to financial intermediaries to
facilitate their analysis of the Funds. The Funds have determined that
disclosure
of holdings information to such organizations fulfills a legitimate business
purpose and is in the best interest of shareholders, as it provides existing
and potential shareholders with an independent basis for evaluating the Funds in
comparison to other mutual funds. As of the date of this SAI, all
such organizations receive holdings information after it has been made public on
the Funds’ website.
No
compensation or other consideration may be paid to the Funds, the Funds’ service
providers, or any other party in connection with the disclosure of portfolio
holdings information.
Under
the Holdings Policy, disclosure of nonpublic portfolio holdings information to
parties other than those discussed above must meet all of the following
conditions:
1 |
Recipients
of portfolio holdings information must agree in writing to keep the
information confidential until it has been posted to the Funds’
website
and not to trade based on the information; |
2 |
Holdings
may only be disclosed as of a month-end date; |
3 |
No
compensation may be paid to the Funds, the Manager or any other party in
connection with the disclosure of information about portfolio securities;
and |
4 |
A
member of the Manager’s Compliance staff must approve requests for
nonpublic holdings information. |
In
determining whether to approve a request for portfolio holdings disclosure by
the Manager, Compliance staff generally considers the type of requestor
and its relationship to the Funds, the stated reason for the request, any
historical pattern of requests from that same individual or entity, the
style
and strategy of the Fund for which holdings have been requested (e.g., passive
versus active management), whether a Fund is managed by one or
multiple
investment managers, and any other factors it deems relevant. Any potential
conflicts between shareholders and affiliated persons of the Funds
that arise as a result of a request for portfolio holdings information shall be
decided by the Manager in the best interests of shareholders.
However,
if a conflict exists between the interests of shareholders and the Manager, the
Manager may present the details of the request to the Board for
a determination to either approve or deny the request. On a quarterly basis, the
Manager will prepare a report for the Board outlining any instances of
disclosures of nonpublic holdings during the period that did not comply with the
Holdings Policy.
The
Compliance staff generally determines whether a historical pattern of requests
by the same individual or entity constitutes an “ongoing arrangement”
and should be disclosed in the Funds’ SAI.
The
Manager and sub-advisors to the Funds may manage substantially similar
portfolios for clients other than the Funds. Those other clients may
receive
and publicly disclose their portfolio holdings information prior to public
disclosure by the Funds. The Holdings Policy is not intended to limit the
Manager
or the sub-advisors from making such disclosures to their
clients.
LENDING
OF PORTFOLIO SECURITIES
A Fund
may lend securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions.
In connection with such loans, a Fund remains the beneficial owner of the loaned
securities and continues to be entitled to payments in amounts
approximately equal to the interest, dividends or other distributions payable on
the loaned securities. A Fund also has the right to terminate a loan
at any time. A Fund
does not have the right to vote on securities while they are on loan. However,
it is a
Fund’s
policy to attempt to terminate
loans
in time to vote those proxies that a Fund determines are material to its
interests. Loans of portfolio securities may not exceed 33¹/3%
of the value of
a Fund’s total assets (including the value of all assets received as collateral
for the loan). A
Fund
will receive collateral consisting of cash in the form of
cash or cash equivalents, securities of the U.S. Government and its agencies and
instrumentalities, approved bank letters of credit, or other forms of
collateral
that are permitted by the SEC for registered investment companies, which will be
maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. If the collateral consists
of cash, a Fund will reinvest the cash and may pay the borrower a pre-negotiated
fee or “rebate” for the use of that cash collateral. Under the terms of the
securities loan agreement between the Funds and State Street,
their securities lending agent, State Street indemnifies a
Fund
for certain losses resulting from a borrower default. However, should the
borrower
of the securities fail financially, a Fund may experience delays in recovering
the loaned securities or exercising its rights in the collateral. In a
loan
transaction, a Fund will also bear the risk of any decline in value of
securities acquired with cash collateral. A Fund seeks to minimize this risk by
normally
limiting the investment of cash collateral to registered money market funds,
including money market funds advised by the Manager that invest
in U.S. Government and agency securities.
For
all funds that engage in securities lending, the Manager receives compensation
for administrative and oversight functions with respect to securities
lending,
including oversight of the securities lending agent. The amount of such
compensation depends on the income generated by the loan of the securities.
As
of the date of this SAI, each Fund, except for
the
American Beacon Garcia Hamilton Quality Bond Fund, intends to engage in
securities lending activities.
TRUSTEES
AND OFFICERS OF THE TRUST
The
Board of Trustees
The
Trust is governed by its Board of Trustees. The Board is responsible for and
oversees the overall management and operations of the Trust and the Funds,
which includes the general oversight and review of the Funds’ investment
activities, in accordance with federal law and the law of the Commonwealth
of Massachusetts as well as the stated policies of the Funds. The Board oversees
the Trust’s officers and service providers, including American
Beacon, which is responsible for the management of the day-to-day operations of
the Funds based on policies and agreements reviewed and approved
by the Board. In carrying out these responsibilities, the Board regularly
interacts with and receives reports from senior personnel of service
providers,
including American Beacon’s investment personnel and the Trust’s CCO. The Board
also is assisted by the Trust’s independent registered public
accounting firm (which reports directly to the Trust’s Audit and Compliance
Committee), independent counsel and other experts as appropriate, all
of whom are selected by the Board.
Risk
Oversight
Consistent
with its responsibility for oversight of the Trust and the Funds, the Board
oversees the management of risks relating to the administration and
operation of the Trust and the Funds. American Beacon, as part of its
responsibilities for the day-to-day operations of the Funds, is responsible for
day-to-day
risk management for the Funds. The Board, in the exercise of its reasonable
business judgment, also separately considers potential risks that may
impact the Funds. The Board performs this risk management oversight directly
and, as to certain matters, through its committees (described below)
and through the Board members who are not “interested persons” of the Trust as
defined in Section 2(a)(19) of the Investment Company Act (“Independent
Trustees”). The following provides an overview of the principal, but not all,
aspects of the Board’s oversight of risk management for the Trust
and the Funds.
In
general, a Fund’s risks include, among others, investment risk, credit risk,
liquidity risk, securities selection risk and valuation risk. The Board has
adopted,
and periodically reviews, policies and procedures designed to address these and
other risks to the Trust and the Funds. In addition, under the general
oversight of the Board, American Beacon, each Fund’s investment adviser, and
other service providers to the Funds have themselves adopted a variety
of policies, procedures and controls designed to address particular risks to the
Funds. Different processes, procedures and controls are employed with
respect to different types of risks. Further, American Beacon as manager of the
Funds oversees and regularly monitors the investments, operations and
compliance of the Funds’ investment advisers.
The
Board also oversees risk management for the Trust and the Funds through review
of regular reports, presentations and other information from officers
of the Trust and other persons. Senior officers of the Trust, and senior
officers of American Beacon, and the Funds’ CCO regularly report to the
Board
on a range of matters, including those relating to risk management. The Board
and the Investment Committee also regularly receive reports from American
Beacon with respect to the investments, securities trading and securities
lending activities of the Funds,
as applicable.
In addition to regular reports
from American Beacon, the Board also receives reports regarding other service
providers to the Trust, either directly or through American Beacon
or the Funds’ CCO, on a periodic or regular basis. At least annually, the Board
receives a report from the Funds’ CCO regarding the effectiveness
of the Funds’ compliance program. Also, typically on an annual basis, the Board
receives reports, presentations and other information from
American Beacon in connection with the Board’s consideration of the renewal of
each of the Trust’s agreements with American Beacon and the Trust’s
distribution plans under Rule 12b-1 under the Investment Company
Act.
Senior
officers of the Trust and American Beacon also report regularly to the Audit and
Compliance Committee on Fund valuation matters and on the Trust’s
internal controls and accounting and financial reporting policies and practices.
In addition, the Audit and Compliance Committee receives regular
reports from the Trust’s independent registered public accounting firm on
internal control and financial reporting matters. On at least a quarterly
basis, the Audit and Compliance Committee meets with the Funds’ CCO to discuss
matters relating to the Funds’ compliance program.
Board
Structure and Related Matters
Independent
Trustees constitute at least three-quarters of the Board. Brenda A. Cline, an
Independent Trustee, serves as Independent Chair of the Board.
The Independent Chair’s responsibilities include: setting an agenda for each
meeting of the Board; presiding at all meetings of the Board and
Independent
Trustees; and serving as a liaison with other Trustees, the Trust’s officers and
other management personnel, and counsel to the Funds. The Independent
Chair shall perform such other duties as the Board may from time to time
determine.
The
Trustees discharge their responsibilities collectively as a Board, as well as
through Board committees, each of which operates pursuant to a charter
approved
by the Board that delineates the responsibilities of that committee. The Board
has established three standing committees: the Audit and Compliance
Committee, the Investment Committee and the Nominating and Governance Committee.
For example, the Investment Committee is responsible
for oversight of the process, typically performed annually, by which the Board
considers and approves each Fund’s investment advisory agreement
with American Beacon, while specific matters related to oversight of the Funds’
independent auditors have been delegated by the Board to its
Audit and Compliance Committee, subject to approval of the Audit and Compliance
Committee’s recommendations by the Board. The members and
responsibilities of each Board committee are summarized below.
The
Board periodically evaluates its structure and composition as well as various
aspects of its operations. The Board believes that its leadership structure,
including its Independent Chair position and its committees, is appropriate for
the Trust in light of, among other factors, the asset size and nature
of the funds in the Trust, the number of series of the American Beacon Funds
Complex overseen by the Board, the arrangements for the conduct
of the Funds’ operations, the number of Trustees, and the Board’s
responsibilities. On an annual basis, the Board conducts a self-evaluation
that
considers, among other matters, whether the Board and its committees are
functioning effectively and whether, given the size and composition of
the
Board and each of its committees, the Trustees are able to oversee effectively
the number of Funds in the complex.
The
Trust is part of the American Beacon Funds Complex, which is comprised of
24 series
within the American Beacon Funds, 1 series within the American
Beacon Institutional Funds Trust, and 3 series
within the American Beacon Select Funds. The same persons who constitute the
Board of the Trust
also constitute the Board of the American Beacon Institutional Funds Trust and
the American Beacon Select Funds and each Trustee oversees the Trusts’
combined 28
series.
The
Board holds five (5) regularly scheduled meetings each year. The Board may hold
special meetings, as needed, either in person or by telephone, to address
matters arising between regular meetings. The Independent Trustees also hold at
least one in-person meeting each year during a portion of which
management is not present and may hold special meetings, as needed, either in
person or by telephone.
The
Trustees of the Trust are identified in the tables below, which provide
information as to their principal business occupations and directorships held
during
the last five years and certain other information. Subject to the Trustee
Retirement Plan described below, a Trustee serves until his or her successor
is elected and qualified or until his or her earlier death, resignation or
removal. The address of each Trustee listed below is 220 East Las Colinas
Boulevard, Suite 1200, Irving, Texas 75039. Each Trustee serves for an
indefinite term or until his or her removal, resignation, or
retirement.*
|
|
| |
Name
and Year of
Birth*
|
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
INTERESTED
TRUSTEE |
|
|
|
Eugene
J. Duffy (1954)**
|
Trustee
since 2008 |
Trustee
since 2017 |
Managing
Director, Global Investment Management Distribution, Mesirow Financial
Administrative
Corporation (2016-Present); Managing Director, Institutional Services,
Intercontinental
Real Estate Corporation (2014-2016); Trustee, American Beacon Sound
Point
Enhanced Income Fund (2018-2021); Trustee, American Beacon Apollo Total
Return Fund
(2018-2021). |
NON-INTERESTED
TRUSTEES |
|
|
|
Gilbert
G. Alvarado (1969) |
Trustee
since 2015 |
Trustee
since 2017 |
Chief
Financial Officer, The Conrad Prebys Foundation (2022-Present); President,
SJVIIF, LLC, Impact
Investment Fund (2018-2022); Director, Kura MD, Inc. (local telehealth
organization) (2015-2017);
Senior Vice President/CFO, Sierra Health Foundation (health conversion
private
foundation) (2006-2022); Senior Vice President/CFO, Sierra Health
Foundation: Center
for Health Program Management (California public benefit corporation)
(2012-2022);
Director, Sacramento Regional Technology Alliance (2011-2016); Director,
Valley
Healthcare Staffing (2017–2018); Trustee, American Beacon Sound Point
Enhanced Income
Fund (2018-2021); Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
Joseph
B. Armes (1962) |
Trustee
since 2015 |
Trustee
since 2017 |
Director,
Switchback Energy Acquisition (2019-2021); Chairman & CEO, CSW
Industrials f/k/a
Capital Southwest Corporation (investment company) (2015-Present);
Chairman of the Board
of Capital Southwest Corporation, predecessor to CSW Industrials, Inc.
(investment company)
(2014-2017); President & CEO, JBA Investment Partners (family
investment vehicle)
(2010-Present); Director and Chair of Audit Committee, RSP Permian (oil
and gas producer)
(2013-2018); Trustee, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
Gerard
J. Arpey (1958) |
Trustee
since 2012 |
Trustee
since 2017 |
Partner,
Emerald Creek Group (private equity firm) (2011-Present); Director, S.C.
Johnson & Son,
Inc. (privately held company) (2008-Present); Director, The Home Depot,
Inc. (NYSE: HD)
(2015-Present); Trustee, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
|
|
| |
Name
and Year of
Birth* |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
Brenda
A. Cline (1960) |
Chair
since 2019
Vice
Chair 2018
Trustee
since 2004 |
Chair
since 2019
Vice
Chair 2018
Trustee
since 2017 |
Chief
Financial Officer, Treasurer and Secretary, Kimbell Art Foundation
(1993-Present); Director,
Tyler Technologies, Inc. (public sector software solutions company)
(2014-Present); Director,
Range Resources Corporation (oil and natural gas company) (2015-Present);
Trustee,
Cushing Closed-End (2) and Open-End Funds (3) (2017-2021); Chair, American
Beacon
Sound Point Enhanced Income Fund (2019-2021), Vice Chair (2018), Trustee
(2018-2021);
Chair, American Beacon Apollo Total Return Fund (2019-2021), Vice Chair
(2018),
Trustee (2018-2021). |
Claudia
A. Holz (1957) |
Trustee
since 2018 |
Trustee
since 2018 |
Independent
Director, Blue Owl Capital Inc. (2021-Present); Partner, KPMG LLP
(1990-2017);
Trustee, American Beacon Sound Point Enhanced Income Fund (2018-2021);
Trustee,
American Beacon Apollo Total Return Fund (2018-2021). |
Douglas
A. Lindgren (1961) |
Trustee
since 2018 |
Trustee
since 2018 |
Director,
JLL Income Property Trust (2022-Present); CEO North America, Carne Global
Financial
Services (2016-2017); Consultant, Carne Financial Services (2017-2019);
Managing
Director, IPS Investment Management and Global Head, Content Management,
UBS
Wealth Management (2010-2016); Trustee, American Beacon Sound Point
Enhanced Income
Fund (2018-2021); Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
Barbara
J. McKenna (1963) |
Trustee
since 2012 |
Trustee
since 2017 |
President/Managing
Principal, Longfellow Investment Management Company (2005-Present,
President since 2009); Member, External Diversity Council of the Federal
Reserve
Bank of Boston (2021-Present); Member, Federal Reserve Bank of Boston CEO
Roundtable
(2021-Present); Board Advisor, United States Tennis Association
(2021-Present); Trustee,
American Beacon Sound Point Enhanced Income Fund (2018-2021); Trustee,
American
Beacon Apollo Total Return Fund
(2018-2021). |
* |
The
Board has adopted a retirement policy that requires Trustees to retire no
later than the last day of the calendar year in which they reach the age
of 75. |
** |
Mr.
Duffy is deemed to be an “interested person” of the Trust, as defined by
the Investment Company Act of 1940, as amended, by virtue of his position
with Mesirow |
|
Financial,
Inc., a broker-dealer. |
In
addition to the information set forth in the tables above and other relevant
qualifications, experience, attributes or skills applicable to a particular
Trustee,
the following provides further information about the qualifications and
experience of each Trustee.
Gilbert
G. Alvarado: Mr. Alvarado has extensive organizational management and financial
experience as senior vice president and chief financial officer in
public charities and private foundations, service as director of private
companies and non-profit organizations, service as president of non-profit
institutional
investment fund, an adjunct professor for a non-profit school of management at
University of San Francisco, and multiple years of service as
a Trustee.
Joseph
B. Armes: Mr. Armes has extensive financial, investment and organizational
management experience as chairman of the board of directors, president
and chief executive officer of an investment company listed on NASDAQ, president
and chief executive officer of a private family investment vehicle,
chief operating officer of a private holding company for a family office,
president, chief executive officer, chief financial officer and director of a
special
purpose acquisition company listed on the American Stock Exchange, a director
and audit committee chair of an oil and gas exploration and production
company listed on the New York Stock Exchange and as an officer of public
companies and as a director and officer of private companies, and
multiple years of service as a Trustee.
Gerard
J. Arpey: Mr. Arpey has extensive organizational management, financial and
international experience serving as chairman, chief executive officer,
and chief financial officer of one of the largest global airlines, service as a
director of public and private companies, service to several charitable
organizations,
and multiple years of service as a Trustee.
Brenda
A. Cline: Ms. Cline has extensive organizational management, financial and
investment experience as executive vice president, chief financial officer,
secretary and treasurer to a private foundation, service as a director, trustee,
audit committee chair, and member of the nominating and governance
committees of various publicly held companies and mutual funds, service as a
trustee to a private university, and several charitable boards, including
acting as a member of their investment and/or audit committees, extensive
experience as an audit senior manager with a large public accounting
firm, and multiple years of service as a Trustee.
Eugene
J. Duffy: Mr. Duffy has extensive experience in the investment management
business and organizational management experience as a member of
senior management, service as a director of a bank, service as a chairman of a
charitable fund and as a trustee to an association, service on the board
of a private university and non-profit organization, service as chair to a
financial services industry association, and multiple years of service as a
Trustee.
Claudia
A. Holz: Ms. Holz has extensive financial audit and organizational management
experience obtained as an audit partner with a major public accounting
firm for over 27 years. Prior to her retirement, she led audits of large public
investment company complexes and held several management roles
in the firm’s New York and national offices.
Douglas
A. Lindgren: Mr. Lindgren has extensive senior management experience in the
asset management industry, having overseen several organizations
and numerous fund structures and having served as an Adjunct Professor of
Finance at Columbia Business School.
Barbara
J. McKenna: Ms. McKenna has extensive experience in the investment management
industry, organizational management experience as a member
of senior management, service as a director of an investment manager, member of
numerous financial services industry associations, and multiple
years of service as a Trustee.
Committees
of the Board
The
Trust has an Audit and Compliance Committee (“Audit Committee”).
The
Audit Committee consists of Mses.
Holz
(Chair) and McKenna and Messrs.
Armes and Arpey.
Ms. Cline, as Chair of the Board, serves on the Audit Committee in an ex-officio
non-voting capacity. As set forth in its charter,
the primary purposes
of the Trust’s Audit Committee are: (a) to oversee the accounting and financial
reporting processes of the Trust and the Funds
and their internal controls and, as the Audit
Committee
deems appropriate, to inquire into the internal controls of certain third-party
service providers;
(b) to oversee the quality and integrity of the Trust’s financial statements and
the independent audit thereof; (c) to approve, prior to appointment,
the engagement of the Trust’s independent auditors and, in connection therewith,
to review and evaluate the qualifications, independence
and performance of the Trust’s independent auditors; (d) to oversee the Trust’s
compliance with all regulatory obligations arising under applicable
federal securities laws, rules and regulations and oversee management’s
implementation and enforcement of the Trust’s compliance policies and
procedures (“Compliance Program”); (e)
to coordinate the Board’s oversight of the Trust’s CCO in connection with his or
her implementation of the
Trust’s Compliance Program;
and (f) to assist the Board with the aspects of risk oversight of the Trust that
are relevant to the Audit Committee, including,
but not limited to, valuation, operational, and compliance risks. All members of
the Audit Committee are Independent Trustees.
The Audit Committee
met five
(5)
times
during the fiscal year ended October 31, 2023.
The
Trust has a Nominating and Governance Committee (“Nominating Committee”) that is
comprised of Messrs. Armes (Chair)
and Arpey, and Mses. Cline
and McKenna.
As set forth in its charter, the Nominating Committee’s primary purposes
are: (a) to make recommendations regarding the nomination
of non-interested Trustees to the Board; (b) to make recommendations regarding
the appointment of an Independent Trustee as Chair of the
Board; (c) to evaluate qualifications of potential “interested” members of the
Board and Trust officers; (d) to review shareholder recommendations for
nominations to fill vacancies on the Board; (e) to make recommendations to the
Board for nomination for membership on all committees of the Board;
(f) to consider and evaluate the structure, composition and operation of the
Board; (g) to review shareholder recommendations for proposals to be
submitted for consideration during a meeting of Fund
shareholders; and (h) to consider and make recommendations relating to the
compensation of
Independent Trustees and of those officers as to whom the Board is charged with
approving compensation. Shareholder recommendations for Trustee
candidates may be mailed in writing, including a comprehensive resume and any
supporting documentation, to the Nominating Committee in care
of the Secretary of the Funds, and must otherwise comply with the Declaration of
Trust and By-Laws of the Trust. The Nominating and Governance
Committee met four (4) times during the fiscal year ended October 31,
2023.
The
Trust has an Investment Committee that is comprised of Messrs.
Lindgren
(Chair), Alvarado,
and Duffy.
Ms. Cline, as Chair of the Board, serves on the
Investment Committee in an ex-officio non-voting capacity. As set forth in its
charter, the Investment Committee’s primary purposes
are: (a) to review
and evaluate the short- and long-term investment performance of the Manager and
each of the designated sub-advisors to the Funds; (b) to evaluate
recommendations by the Manager regarding the hiring or removal of designated
sub-advisors to the Funds; (c) to review material changes recommended
by the Manager to the allocation of Fund assets to a sub-advisor; (d) to review
proposed changes recommended by the Manager to the investment
objectives or principal investment strategies of the Funds; (e)
to review proposed changes recommended by the Manager to the material
provisions
of the advisory agreement with a sub-advisor, including, but not limited to,
changes to the provision regarding compensation;
and (f) to assist
the Board with the aspects of risk oversight of the Trust that are relevant to
the Investment Committee, including, but not limited to counterparty,
investment and liquidity risks.
The Investment Committee met five
(5) times
during the fiscal year ended October 31, 2023.
Trustee
Ownership in the Funds
The
following tables show the amount of equity securities owned in the Funds and all
series of the American Beacon Funds Complex by the Trustees as of
the calendar year ended December 31, 2023.
| |
INTERESTED
TRUSTEE |
American
Beacon Fund |
Duffy |
American
Beacon Balanced Fund |
None |
American
Beacon Garcia Hamilton Quality Bond Fund |
None |
American
Beacon International Equity Fund |
None |
American
Beacon Large Cap Value Fund |
None |
American
Beacon Small Cap Value Fund |
None |
Aggregate
Dollar Range of Equity Securities in all Trusts (27 Funds as
of December 31, 2023) |
Over
$100,000 |
|
|
|
|
|
|
| |
NON-INTERESTED
TRUSTEES |
|
|
|
|
|
|
|
American
Beacon Fund |
Alvarado |
Armes |
Arpey |
Cline |
Holz |
Lindgren |
McKenna |
American
Beacon Balanced Fund |
None |
None |
Over
$100,000 |
Over
$100,000 |
None |
None |
None |
American
Beacon Garcia Hamilton Quality Bond Fund |
None |
None |
None |
None |
$10,001-
$50,000 |
None |
None |
American
Beacon International Equity Fund |
$10,001-
$50,000 |
None |
Over
$100,000 |
$50,001
- $100,000 |
None |
None |
None |
American
Beacon Large Cap Value Fund |
None |
None |
None |
None |
$10,001-
$50,000 |
None |
None |
American
Beacon Small Cap Value Fund |
None |
None |
None |
None |
$10,001-
$50,000 |
None |
None |
Aggregate
Dollar Range of Equity Securities in all
Trusts (27 Funds as of December 31, 2023) |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Trustee
Compensation
As
compensation for their service to the American Beacon Funds Complex, including
the Trust (collectively, the “Trusts”), each Trustee is compensated from
the Trusts as follows: (1) an annual retainer of $140,000;
(2) meeting attendance fee (for attendance in person or via teleconference) of
(a) $12,000
for in-person attendance, or $5,000 for telephonic attendance, by Board members
for each regularly scheduled or special Board meeting, (b) $2,500
for attendance by Committee members at meetings of the Audit Committee and the
Investment Committee, (c) $1,000 for attendance by Committee
members at meetings of the Nominating and Governance Committee; and (d) $2,500
for attendance by Board members for each special telephonic
Board meeting; and (3) reimbursement of reasonable expenses incurred in
attending Board meetings, Committee meetings, and relevant educational
seminars. For this purpose, the Board considers attendance at regular meetings
held by videoconference to constitute in-person attendance
at a Board meeting. The Trustees also may be compensated for attendance at
special Board and/or Committee meetings from time to time.
For
her service as Board Chair, Ms. Cline receives an additional annual retainer of
$50,000. Although she attends several committee meetings at each quarterly
Board meeting, she receives a single $2,500 fee each quarter for her attendance
at the Audit Committee and Investment Committee meetings.
The chairpersons of the Audit Committee and the Investment Committee each
receive an additional annual retainer of $25,000 and the Chair
of the Nominating and Governance Committee receives an additional annual
retainer of $10,000.
|
| |
The
following table shows total compensation (excluding reimbursements) paid
by the Trusts to each Trustee for the fiscal year ended October 31,
2023. |
Name
of Trustee |
Aggregate
Compensation from the Trust |
Total
Compensation from the Trusts |
INTERESTED
TRUSTEE |
|
|
Eugene
J. Duffy |
$189,994 |
$201,000 |
NON-INTERESTED
TRUSTEES |
|
|
Gilbert
G. Alvarado |
$209,135 |
$221,250 |
Joseph
B. Armes |
$202,282 |
$214,000 |
Gerard
J. Arpey |
$201,337 |
$213,000 |
Brenda
A. Cline1
|
$250,490 |
$265,000 |
Claudia
A. Holz |
$218,115 |
$230,750 |
Douglas
A. Lindgren |
$218,115 |
$230,750 |
Barbara
J. McKenna |
$209,135 |
$221,250 |
1 |
Upon
her
retirement
from the Board, Ms.
Cline
is eligible for flight benefits afforded to Eligible
Trustees
who served on the Boards prior to September 12, 2008 as described
below. |
The
Boards have
adopted
a Trustee Retirement Plan. The Trustee Retirement Plan provides that a Trustee
who has served on the Boards prior to September
12, 2008, and who has reached a mandatory retirement age established by the
Board (currently 75) is eligible to elect Trustee Emeritus status
(“Eligible Trustees”). Eligible
Trustees who have served on the Board of one or more Trusts for at least five
years may elect to retire from the Board
at an earlier age and immediately assume Trustee Emeritus status. The Board has
determined that, other than the Trustee Retirement Plan established
for Eligible Trustees, no other retirement benefits will accrue for current or
future Trustees.
Ms. Cline is the only Eligible Trustee.
Each
Eligible Trustee and his or her spouse (or designated companion) may receive
annual flight benefits from the Trusts of up to $40,000 combined, on
a tax-grossed up basis, on American Airlines (a subsidiary of the Manager’s
former parent company) for a maximum period of 10 years, depending upon
length of service prior to September 12, 2008. Eligible Trustees may opt to
receive instead an annual retainer of $20,000 from the Trusts in lieu
of
flight benefits. No retirement benefits are accrued for Board service after
September 12, 2008.
A
Trustee Emeritus must be reasonably available to provide advice, counseling and
assistance to the Trustees and American Beacon as needed, as agreed
to from time to time by the parties involved; however, a Trustee Emeritus does
not have any voting rights at Board meetings and is not subject
to
election by shareholders of the Funds. Currently, three individuals who
retired from the Board and accrued retirement benefits for periods prior to
September
12, 2008, have assumed Trustee Emeritus status. Two individuals and their
spouses receive annual flight benefits of up to $40,000 combined,
on a tax-grossed up basis, on American Airlines. The other individual receives
an annual retainer of $20,000 from the Trusts in lieu of flight benefits.
Principal
Officers of the Trust
The
Officers of the Trust conduct and supervise its daily business. As of the date
of this SAI, the Officers of the Trust, their ages, their business address
and
their principal occupations and directorships during the past five years are as
set forth below. The address of each Officer is 220 East Las Colinas
Boulevard,
Suite 1200, Irving, Texas 75039. Each Officer serves for a term of one year or
until his or her resignation, retirement, or removal. Each Officer
has and continues to hold the same position with the American Beacon Funds, the
American Beacon Select Funds, and the American Beacon Institutional
Funds Trust.
|
|
| |
Name
and Year of
Birth |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
OFFICERS |
|
|
|
Jeffrey
K. Ringdahl (1975) |
President since
April 2022
Vice
President 2010-2022 |
President since
April 2022
Vice
President 2017-2022 |
Director
(2015-Present), President (2018-Present), Chief Executive Officer
(2022-Present), Chief
Operating Officer (2010-2022), American Beacon Advisors, Inc.; Director
(2015-Present),
President (2018-Present), Resolute Investment Holdings, LLC; Director
(2015-Present),
President (2018-Present), Resolute Topco, Inc.; Director
(2015-Present), President
(2018-Present), Resolute Acquisition, Inc.; Director (2015-Present),
President (2018-Present),
Chief Executive Officer (2022-Present), Chief Operating Officer
(2018-2022),
Resolute Investment Managers, Inc.; Director (2017-Present), President and
Chief
Executive Officer (2022-Present), Executive Vice President (2017-2022),
Resolute Investment
Distributors, Inc.; Director (2017-Present), President (2018-Present),
Chief Executive
Officer (2022-Present), Chief Operating Officer (2018-2022), Resolute
Investment Services,
Inc.; President (2022-Present), Senior Vice President (2017-2022), Manager
(2015-Present),
American Private Equity Management, L.L.C.; Trustee, American Beacon
NextShares
Trust (2015-2020); Director and Executive Vice President & Chief
Operating Officer,
Alpha Quant Advisors, LLC (2016-2020); Director, Shapiro Capital
Management, LLC
(2017-Present); Director and Executive Vice President, Continuous Capital,
LLC (2018-2022);
Director, RSW Investments Holdings, LLC (2019-Present); Manager, SSI
Investment
Management, LLC (2019-Present); Director, National Investment Services of
America,
LLC (2019-Present); Director (2014-Present), President (2022-Present) and
Vice President
(2014-2022), American Beacon Cayman Managed Futures Strategy Fund, Ltd.;
Director
(2018-Present) and, President (2022-Present), Vice President (2018-2022),
American
Beacon Cayman TargetRisk Company, Ltd.; Director and President,
American Beacon
Cayman Multi-Alternatives Company, Ltd. (2023-Present); Director and
President, American
Beacon Cayman Trend Company, Ltd. (2023-Present); Vice President, American
Beacon
Sound Point Enhanced Income Fund (2018-2021); Vice President, American
Beacon Apollo
Total Return Fund (2018-2021). |
Rosemary
K. Behan (1959) |
Vice
President, Secretary
and Chief
Legal Officer since
2006 |
Vice
President, Secretary
and Chief
Legal Officer since
2017 |
Senior
Vice President (2021-Present), Vice President (2006-2021), Secretary and
General Counsel
(2006-Present), American Beacon Advisors, Inc.; Secretary, Resolute
Investment Holdings,
LLC (2015-Present); Secretary, Resolute Topco, Inc. (2015-Present);
Secretary, Resolute
Acquisition, Inc. (2015-Present); Senior Vice President (2021-Present),
Vice President
(2015-2021), Secretary and General Counsel (2015-Present), Resolute
Investment Managers,
Inc.; Secretary, Resolute Investment Distributors, Inc. (2017-Present);
Senior Vice President
(2021-Present), Vice President (2017-2021), Secretary and General Counsel
(2017-Present),
Resolute Investment Services, Inc.; Secretary, American Private Equity
Management,
LLC (2008-Present); Secretary and General Counsel, Alpha Quant Advisors,
LLC
(2016-2020); Vice President and Secretary, Continuous Capital, LLC
(2018-2022); Secretary,
Green Harvest Asset Management, LLC (2019-2021); Secretary,
American Beacon
Cayman Managed Futures Strategy Fund, Ltd. (2014-Present); Secretary,
American Beacon
Cayman TargetRisk Company, Ltd (2018-Present); Secretary, American Beacon
Cayman
Multi-Alternatives Company, Ltd. (2023-Present); Secretary, American
Beacon Cayman
Trend Company, Ltd. (2023-Present); Vice President, Secretary, and Chief
Legal Officer,
American Beacon Sound Point Enhanced Income Fund (2018-2021); Vice
President, Secretary,
and Chief Legal Officer, American Beacon Apollo Total Return Fund
(2018-2021). |
Paul
B. Cavazos (1969) |
Vice
President since
2016 |
Vice
President since
2017 |
Chief
Investment Officer and Senior Vice President, American Beacon Advisors,
Inc. (2016-Present);
Vice President, American Private Equity Management, L.L.C. (2017-Present);
Vice
President, American Beacon Sound Point Enhanced Income Fund (2018-2021);
Vice President,
American Beacon Apollo Total Return Fund
(2018-2021). |
|
|
| |
Name
and Year of
Birth |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
Erica
B. Duncan (1970) |
Vice
President since
2011 |
Vice
President since
2017 |
Vice
President, American Beacon Advisors, Inc. (2011-Present); Vice President,
Resolute Investment
Managers, Inc. (2018-Present); Vice President, Resolute Investment
Services, Inc. (2018-Present);
Vice President, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Vice President, American Beacon Apollo Total Return Fund
(2018-2021). |
Rebecca
L. Harris (1966) |
Vice
President Since
2022 |
Vice
President Since
2022 |
Senior
Vice President (2021-Present), Vice President (2011-2021), American Beacon
Advisors,
Inc.; Senior Vice President (2021-Present), Vice President (2017-2021),
Resolute Investment
Managers, Inc.; Senior Vice President (2021-Present), Vice President
(2017-2021),
Resolute Investment Services, Inc.; Vice President, Alpha Quant Advisors,
LLC (2016-2020);
Vice President (2018-2022), Director (2022) Continuous Capital, LLC;
Director (2022-Present)
National Investment Services of America, LLC; Director (2022-Present) RSW
Investments
Holdings LLC; Director (2022-Present) Shapiro Capital Management LLC;
Director
(2022-Present) SSI Investment Management LLC; Assistant Secretary,
American Beacon
Sound Point Enhanced Income Fund (2018-2021); Assistant Secretary,
American Beacon
Apollo Total Return Fund (2018-2021); Assistant Secretary, American Beacon
Funds (2010
– 2022); Assistant Secretary, American Beacon Select Funds (2010 – 2022);
Assistant Secretary,
American Beacon Institutional Funds Trust (2017 –
2022). |
Terri
L. McKinney (1963) |
Vice
President since
2010 |
Vice
President since
2017 |
Senior
Vice President, (2021-Present) Vice President, (2009-2021), American
Beacon Advisors,
Inc.; Senior Vice President (2021-Present), Vice President (2017-2021),
Resolute Investment
Managers, Inc.; Senior Vice President (2021-Present), Vice President
(2018-2021),
Resolute Investment Services, Inc.; Vice President, Alpha Quant Advisors,
LLC (2016-2020);
Vice President, Continuous Capital, LLC (2018-2022); Vice President,
American
Beacon Sound Point Enhanced Income Fund (2018-2021); Vice President,
American
Beacon Apollo Total Return Fund (2018-2021). |
Samuel
J. Silver (1963) |
Vice
President since
2011 |
Vice
President since
2017 |
Vice
President (2011-Present), Chief Fixed Income Officer (2016-Present),
American Beacon Advisors,
Inc.; Vice President, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Vice President, American Beacon Apollo Total Return Fund
(2018-2021). |
Melinda
G. Heika (1961) |
Vice
President since
2021 |
Vice
President since
2021 |
Senior
Vice President (2021-Present), Treasurer and CFO (2010-Present), American
Beacon Advisors,
Inc.; Treasurer, Resolute Topco, Inc. (2015-Present); Treasurer, Resolute
Investment Holdings,
LLC (2015-Present); Treasurer, Resolute Acquisition, Inc. (2015-Present);
Senior Vice
President (2021-Present), Treasurer and CFO (2017-Present), Resolute
Investment Managers,
Inc.; Senior Vice President (2021-Present), Treasurer and CFO
(2017-Present), Resolute
Investment Services, Inc.; Treasurer, American Private Equity Management,
L.L.C. (2012-Present);
Treasurer and CFO, Alpha Quant Advisors, LLC (2016-2020); Treasurer,
Continuous
Capital, LLC (2018-2022); Director (2014-Present), Vice President
(2022-Present)
and Treasurer (2014-2022), American Beacon Cayman Managed Futures
Strategy
Fund, Ltd.; Director and Vice President (2022-Present), and Treasurer
(2018-2022), American
Beacon Cayman TargetRisk Company, Ltd.; Director and Vice President,
American Beacon
Cayman Multi-Alternatives Company, Ltd. (2023-Present); Director and Vice
President,
American Beacon Cayman Trend Company, Ltd. (2023-Present); Principal
Accounting
Officer and Treasurer, American Beacon Funds (2010-2021); Principal
Accounting
Officer and Treasurer, American Beacon Select Funds (2010-2021); Principal
Accounting
Officer and Treasurer, American Beacon Institutional Funds Trust
(2017-2021); Principal
Accounting Officer and Treasurer (2018-2021), Vice President (2021),
American Beacon
Sound Point Enhanced Income Fund; Principal Accounting Officer and
Treasurer (2018-2021),
Vice President (2021), American Beacon Apollo Total Return Fund
(2018-2021). |
Gregory
Stumm (1981) |
Vice
President since
2022 |
Vice
President since
2022 |
Senior
Vice President, American Beacon Advisors, Inc. (2022-Present); Senior Vice
President, Resolute
Investment Managers, Inc. (2022-Present); Senior Vice
President, Resolute Investment
Services, Inc. (2022-Present); Director and Senior Vice President,
Resolute Investment
Distributors, Inc. (2022-Present). |
|
|
| |
Name
and Year of
Birth |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
Sonia
L. Bates (1956) |
Principal
Accounting
Officer
and Treasurer since
2021 |
Principal
Accounting
Officer
and Treasurer since
2021 |
Assistant
Treasurer, American Beacon Advisors, Inc. (2023-Present); Vice President,
Fund and Tax
Reporting (2023-Present), Director, Fund and Tax Reporting (2011-2023),
Resolute Investment
Services, Inc; Assistant Treasurer, American Private Equity Management,
L.L.C. (2012-Present);
Treasurer, American Beacon Cayman Managed Futures Strategy Fund, Ltd.
(2022-Present);
Treasurer (2022-Present) and Assistant Treasurer (2018-2022), American
Beacon
Cayman TargetRisk Company, Ltd.; Treasurer, American Beacon Cayman
Multi-Alternatives
Company, Ltd. (2023-Present); Treasurer, American Beacon Cayman
Trend
Company, Ltd. (2023-Present); Assistant Treasurer (2018-2021), Principal
Accounting Officer
and Treasurer (2021), American Beacon Sound Point Enhanced Income Fund;
Assistant
Treasurer (2019-2021), Principal Accounting Officer and Treasurer (2021),
American
Beacon Apollo Total Return Fund; Assistant Treasurer, American Beacon
Funds (2011-2021);
Assistant Treasurer, American Beacon Select Funds (2011-2021); Assistant
Treasurer,
American Beacon Institutional Funds Trust (2017-2021). |
Christina
E. Sears (1971) |
Chief
Compliance
Officer since
2004
Assistant
Secretary since
1999 |
Chief
Compliance
Officer
and Assistant
Secretary since
2017 |
Chief
Compliance Officer (2004-Present), Vice President (2019-Present), American
Beacon Advisors,
Inc.; Vice President, Resolute Investment Managers, Inc. (2017-Present);
Vice President,
Resolute Investment Distributors, Inc. (2017-Present); Vice President,
Resolute Investment
Services, Inc. (2019-Present); Chief Compliance Officer, American Private
Equity Management,
LLC (2012-Present); Chief Compliance Officer, Green Harvest Asset
Management,
LLC (2019-2021); Chief Compliance Officer, RSW Investments Holdings, LLC
(2019-Present);
Chief Compliance Officer (2016-2019), Vice President (2016-2020), Alpha
Quant
Advisors, LLC; Chief Compliance Officer (2018-2019), Vice President
(2018-2022), Continuous
Capital, LLC.; Chief Compliance Officer and Assistant Secretary, American
Beacon
Sound Point Enhanced Income Fund (2018-2021); Chief Compliance Officer and
Assistant
Secretary, American Beacon Apollo Total Return Fund
(2018-2021). |
Shelley
L. Dyson (1969) |
Assistant
Treasurer since
2021 |
Assistant
Treasurer since
2021 |
Director
Fund Tax (2024-Present), Fund Tax Manager (2020-2024), Manager, Tax
(2014-2020),
Resolute Investment Services, Inc.; Assistant Treasurer, American Beacon
Cayman
Managed Futures Strategy Fund, Ltd. (2022-Present); Assistant Treasurer,
American Beacon
Cayman TargetRisk Company, Ltd (2022-Present); Assistant Treasurer,
American Beacon
Cayman Multi-Alternatives Company, Ltd. (2023-Present); Assistant
Treasurer, American
Beacon Cayman Trend Company, Ltd. (2023-Present); Assistant Treasurer,
American
Beacon Sound Point Enhanced Income Fund (2021); Assistant Treasurer,
American Beacon
Apollo Total Return Fund (2021). |
Shelley
D. Abrahams (1974) |
Assistant
Secretary since
2008 |
Assistant
Secretary since
2017 |
Corporate
Governance Manager (2023-Present), Senior Corporate Governance &
Regulatory
Specialist (2020-2023), Corporate Governance & Regulatory Specialist
(2017-2020),
Resolute Investment Services, Inc.; Assistant Secretary, American Beacon
Cayman
Managed Futures Strategy Fund, Ltd. (2022-Present); Assistant Secretary,
American Beacon
Cayman TargetRisk Company, Ltd (2022-Present); Assistant Secretary,
American Beacon
Cayman Multi-Alternatives Company, Ltd. (2023-Present); Assistant
Secretary, American
Beacon Cayman Trend Company, Ltd. (2023-Present); Assistant Secretary,
American
Beacon Sound Point Enhanced Income Fund (2018-2021); Assistant Secretary,
American
Beacon Apollo Total Return Fund (2018-2021). |
Teresa
A. Oxford (1958) |
Assistant
Secretary since
2015 |
Assistant
Secretary since
2017 |
Deputy
General Counsel (2024-Present), Assistant Secretary (2015-Present),
Associate General
Counsel (2015-2024), American Beacon Advisors, Inc.; Assistant Secretary
(2018-2021),
Resolute Investment Distributors, Inc.; Deputy General Counsel
(2024-Present),
Assistant Secretary (2017-Present), Associate General Counsel (2017-2024),
Resolute
Investment Managers, Inc.; Deputy General Counsel (2024-Present),
Assistant Secretary
(2018-Present), Associate General Counsel (2018-2024), Resolute Investment
Services,
Inc.; Assistant Secretary (2016-2020), Alpha Quant Advisors, LLC;
Assistant Secretary
(2020-2022), Continuous Capital, LLC.; Assistant Secretary, American
Beacon Sound
Point Enhanced Income Fund (2018-2021); Assistant Secretary, American
Beacon Apollo
Total Return Fund (2018-2021). |
CODE
OF ETHICS
The
Manager, the Trust, the Distributor, and the sub-advisors each have adopted a
Code of Ethics under Rule 17j-1 of the Investment Company Act. Each
Code of Ethics significantly restricts the personal trading of all employees
with access to non-public portfolio information. For example, each Code
of
Ethics generally requires pre-clearance of all personal securities trades (with
limited exceptions) and prohibits employees from purchasing or selling a
security
that is being purchased or sold or being considered for purchase (with limited
exceptions) or sale by any Fund. In addition, the Manager’s and the
Trust’s Code of Ethics requires employees to report trades in shares of the
Trusts. Each Code of Ethics is on public file with, and may be obtained
from,
the SEC.
PROXY
VOTING POLICIES
From
time to time, a Fund may own a security whose issuer solicits a proxy vote on
certain matters. The Board seeks to ensure that proxies are voted in
the
best interests of each Fund’s shareholders and has delegated proxy voting
authority to the Manager. The Manager in turn has delegated proxy voting
authority to each
sub-advisor with respect to a Fund’s assets under the sub-advisor’s management.
The Trust has adopted a Proxy Policy that governs
proxy voting by the Manager and sub-advisors, including procedures to address
potential conflicts of interest between a Fund’s shareholders and
the Manager, the sub-advisors
or their affiliates. The Board has approved the Manager’s proxy voting policies
and procedures with respect to Fund assets
under the Manager’s management. Please see Appendix A for a copy of the Proxy
Policy. The sub-advisors’ proxy voting policy and procedures are
summarized (or included in their entirety) in Appendix B. The Funds’ proxy
voting record for the most recent year ended June 30 is available as of
August
31 of each year upon request and without charge by calling 1-800-967-9009 or by
visiting the SEC’s website at http://www.sec.gov. The proxy voting
record can be found in Form N-PX on the SEC’s website.
The
American Beacon Garcia Hamilton Quality Bond Fund does not intend to own a
security for
which an
issuer solicits proxy votes.
CONTROL
PERSONS AND 5% SHAREHOLDERS
A
principal shareholder is any person who owns of record or beneficially 5% or
more of any class of a Fund’s outstanding shares. A control person is a
shareholder
that owns beneficially or through controlled companies more than 25% of the
voting securities of a company or acknowledges the existence
of control. Shareholders owning voting securities in excess of 25% may determine
the outcome of any matter affecting and voted on by shareholders
of a Fund. The actions of an entity or person that controls a Fund could have an
effect on other shareholders. For instance, a control person
may have effective voting control over a Fund or large redemptions by a control
person could cause a Fund’s other shareholders to pay a higher pro
rata portion of a Fund’s expenses.
Set
forth below are entities or persons that own 5% or more of the outstanding
shares of a class of the Funds as
of January
31, 2024.
The Trustees and
officers of
the Trusts, as
a group,
owned 15.32% of the R5 Class shares and 1.91% of the Investor Class shares of
the American Beacon Balanced Fund,
and 7.31%
of the R5 Class shares of the American Beacon Garcia
Hamilton Quality Bond Fund as of that date.
The Trustees and officers
of the Trusts, as a group,
owned less
than 1% of all other
classes of each
Fund’s shares outstanding.
American
Beacon Balanced Fund
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
AMERICAN
ENTERPRISE INV SVCS*
|
|
9.50% |
|
6.39% |
|
|
|
707
2ND AVE S |
|
|
|
|
|
|
|
MINNEAPOLIS
MN 55402-2405 |
|
|
|
|
|
|
|
CHARLES
SCHWAB & CO FOR THE* |
|
|
|
|
|
|
24.42% |
EXCLUSIVE
BENEFIT OF OUR CUSTOMERS |
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS OPS |
|
|
|
|
|
|
|
9601
E PANORAMA CIR |
|
|
|
|
|
|
|
ENGLEWOOD
CO 80112-3441 |
|
|
|
|
|
|
|
CHARLES
SCHWAB & CO INC* |
|
|
|
|
9.35% |
7.11% |
|
SPECIAL
CUST A/C |
|
|
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS |
|
|
|
|
|
|
|
211
MAIN ST |
|
|
|
|
|
|
|
SAN
FRANCISCO CA 94105-1901 |
|
|
|
|
|
|
|
LPL
FINANCIAL* |
|
27.71% |
44.28% |
25.54% |
4.93% |
32.12% |
|
4707
EXECUTIVE DR |
|
|
|
|
|
|
|
SAN
DIEGO CA 92121-3091 |
|
|
|
|
|
|
|
MERRILL
LYNCH PIERCE FENNER &* |
|
5.54% |
|
|
|
|
|
SMITH
INC (HOUSE ACCOUNT) |
|
|
|
|
|
|
|
THE
AMERICAN BEACON FUNDS |
|
|
|
|
|
|
|
4800
DEER LAKE DR EAST |
|
|
|
|
|
|
|
JACKSONVILLE
FL 32246-6484 |
|
|
|
|
|
|
|
MORGAN
STANLEY SMITH BARNEY LLC* |
|
17.46% |
|
|
|
|
7.68% |
FOR
THE EXCLUSIVE BENE OF ITS CUST |
|
|
|
|
|
|
|
1
NEW YORK PLZ FL 12 |
|
|
|
|
|
|
|
NEW
YORK NY 10004-1965 |
|
|
|
|
|
|
|
NATIONAL
FINANCIAL SERVICES LLC* |
|
5.90% |
9.81% |
38.71% |
|
18.26% |
26.73% |
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
FOR
EXCLUSIVE BENEFIT OF OUR |
|
|
|
|
|
|
|
CUSTOMERS |
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR |
|
|
|
|
|
|
|
499
WASHINGTON BLVD |
|
|
|
|
|
|
|
JERSEY
CITY NJ 07310-1995 |
|
|
|
|
|
|
|
PERSHING
LLC* |
|
|
5.70% |
|
|
|
4.99% |
1
PERSHING PLZ |
|
|
|
|
|
|
|
JERSEY
CITY NJ 07399-0001 |
|
|
|
|
|
|
|
RAYMOND
JAMES* |
|
6.41% |
|
8.39% |
|
|
|
OMNIBUS
FOR MUTUAL FUNDS |
|
|
|
|
|
|
|
ATTN
COURTNEY WALLER |
|
|
|
|
|
|
|
880
CARILLON PKWY |
|
|
|
|
|
|
|
ST
PETERSBURG FL 33716-1100 |
|
|
|
|
|
|
|
UBS
WM USA* |
|
|
14.06% |
4.99% |
|
|
|
OMNI
ACCOUNT M/F |
|
|
|
|
|
|
|
SPEC
CDY A/C EBOC UBSFSI |
|
|
|
|
|
|
|
1000
HARBOR BLVD |
|
|
|
|
|
|
|
WEEHAWKEN
NJ 07086-6761 |
|
|
|
|
|
|
|
WELLS
FARGO CLEARING SERVICES LLC* |
|
12.66% |
20.19% |
|
|
|
|
SPECIAL
CUSTODY ACCT FOR THE |
|
|
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
|
|
2801
MARKET ST |
|
|
|
|
|
|
|
SAINT
LOUIS MO 63103-2523 |
|
|
|
|
|
|
|
EMPOWER
TRUST FBO* |
|
|
|
|
61.72% |
|
|
EMPOWER
BENEFIT PLANS |
|
|
|
|
|
|
|
8515
E ORCHARD RD 2T2 |
|
|
|
|
|
|
|
GREENWOOD
VILLAGE CO 80111-5002 |
|
|
|
|
|
|
|
G
& L FAMILY PARTNERS LTD |
|
|
|
|
|
14.10% |
|
PO
BOX 219643 |
|
|
|
|
|
|
|
KANSAS
CITY, MO 64121-9643 |
|
|
|
|
|
|
|
MATRIX
TRUST COMPANY CUST. FBO |
|
|
|
|
8.61% |
|
|
TRUTAG
TECHNOLOGIES 401(K) PLAN |
|
|
|
|
|
|
|
717
17TH STREET |
|
|
|
|
|
|
|
SUITE
1300 |
|
|
|
|
|
|
|
DENVER
CO 80202-3304 |
|
|
|
|
|
|
|
NATIONWIDE
TRUST COMPANY FSB |
|
|
|
|
8.72% |
9.52% |
|
C/O
IPO PORTFOLIO ACCOUNTING |
|
|
|
|
|
|
|
PO
BOX 182029 |
|
|
|
|
|
|
|
COLUMBUS
OH 43218-2029 |
|
|
|
|
|
|
|
VANTAGEPOINT
TRADITIONAL IRA |
|
|
|
|
|
|
6.13% |
C/O
MISSIONSQUARE RETIREMENT |
|
|
|
|
|
|
|
777
NORTH CAPITOL STREET, NE |
|
|
|
|
|
|
|
WASHINGTON
DC 20002-4239 |
|
|
|
|
|
|
|
* |
Denotes
record owner of Fund shares only |
American
Beacon Garcia Hamilton Quality Bond Fund
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
Y
CLASS |
R6
CLASS |
R5
CLASS |
Investor
CLASS |
CHARLES
SCHWAB & CO INC*
|
|
43.54% |
|
21.16% |
22.18% |
SPECIAL
CUST A/C |
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
ATTN
MUTUAL FUNDS |
|
|
|
|
|
211
MAIN ST |
|
|
|
|
|
SAN
FRANCISCO CA 94105-1901 |
|
|
|
|
|
LPL
FINANCIAL* |
|
11.46% |
|
|
|
4707
EXECUTIVE DR |
|
|
|
|
|
SAN
DIEGO CA 92121-3091 |
|
|
|
|
|
NATIONAL
FINANCIAL SERVICES LLC* |
|
43.28% |
|
|
70.37% |
FOR
EXCLUSIVE BENEFIT OF |
|
|
|
|
|
OUR
CUSTOMERS |
|
|
|
|
|
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR |
|
|
|
|
|
499
WASHINGTON BLVD |
|
|
|
|
|
JERSEY
CITY NJ 07310-1995 |
|
|
|
|
|
CAPINCO |
|
|
|
37.61% |
|
C/O
US BANK NA |
|
|
|
|
|
PO
BOX 1787 |
|
|
|
|
|
MILWAUKEE
WI 53201-1787 |
|
|
|
|
|
KEYBANK
NA |
|
|
|
|
5.71% |
CLE
FDN PARADIGM INV CUST PRI USD |
|
|
|
|
|
PO
BOX 94871 |
|
|
|
|
|
CLEVELAND
OH 44101-4871 |
|
|
|
|
|
KEYBANK
NA |
|
|
|
13.71% |
|
PF-SCATTERGOOD
BEHAV HEALTH CUST PR |
|
|
|
|
|
PO
BOX 94871 |
|
|
|
|
|
CLEVELAND
OH 44101-4871 |
|
|
|
|
|
LINCOLN
RETIREMENT SERVICES COMPANY |
|
|
|
17.87% |
|
FBO:GARCIA
HAMILTON & ASSOC LP 401K |
|
|
|
|
|
PO
BOX 7876 |
|
|
|
|
|
FORT
WAYNE IN 46801-7876 |
|
|
|
|
|
UBATCO
& CO |
83.38% |
|
99.56% |
|
|
FBO
COLLEGE SAVINGS GROUP |
|
|
|
|
|
PO
BOX 82535 |
|
|
|
|
|
LINCOLN
NE 68501-2535 |
|
|
|
|
|
* |
Denotes
record owner of Fund shares only |
American
Beacon International Equity Fund
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
AMERICAN
ENTERPRISE INV SVCS*
|
|
5.44% |
7.43% |
20.98% |
|
|
|
|
707
2ND AVE S |
|
|
|
|
|
|
|
|
MINNEAPOLIS
MN 55402-2405 |
|
|
|
|
|
|
|
|
CHARLES
SCHWAB & CO FOR THE* |
|
|
|
|
|
|
|
35.47% |
EXCLUSIVE
BENEFIT OF OUR CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS OPS |
|
|
|
|
|
|
|
|
9601
E PANORAMA CIR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
ENGLEWOOD
CO 80112-3441 |
|
|
|
|
|
|
|
|
CHARLES
SCHWAB & CO INC* |
|
|
7.79% |
30.24% |
10.06% |
|
35.37% |
|
SPECIAL
CUST A/C |
|
|
|
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS |
|
|
|
|
|
|
|
|
211
MAIN ST |
|
|
|
|
|
|
|
|
SAN
FRANCISCO CA 94105-1901 |
|
|
|
|
|
|
|
|
LPL
FINANCIAL* |
|
|
|
18.77% |
|
|
|
|
OMNIBUS
CUSTOMER ACCOUNT |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUND TRADING |
|
|
|
|
|
|
|
|
4707
EXECUTIVE DR |
|
|
|
|
|
|
|
|
SAN
DIEGO CA 92121-3091 |
|
|
|
|
|
|
|
|
NATIONAL
FINANCIAL SERVICES LLC* |
|
|
4.94% |
13.92% |
9.44% |
|
30.10% |
29.80% |
FOR
EXCLUSIVE BENEFIT OF OUR |
|
|
|
|
|
|
|
|
CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR |
|
|
|
|
|
|
|
|
499
WASHINGTON BLVD |
|
|
|
|
|
|
|
|
JERSEY
CITY NJ 07310-1995 |
|
|
|
|
|
|
|
|
RAYMOND
JAMES* |
|
|
5.39% |
|
|
|
|
|
OMNIBUS
FOR MUTUAL FUNDS |
|
|
|
|
|
|
|
|
ATTN
COURTNEY WALLER |
|
|
|
|
|
|
|
|
880
CARILLON PKWY |
|
|
|
|
|
|
|
|
ST
PETERSBURG FL 33716-1100 |
|
|
|
|
|
|
|
|
COLORADO
RETIREMENT ASSOCIATION FBO |
|
|
|
|
48.24% |
|
|
|
CRA
401A & 457 PLANS |
|
|
|
|
|
|
|
|
C/O
FASCORE LLC |
|
|
|
|
|
|
|
|
8515
E ORCHARD RD 2T2 |
|
|
|
|
|
|
|
|
GREENWOOD
VILLAGE CO 80111-5002 |
|
|
|
|
|
|
|
|
DCGT
AS TTEE AND/OR CUST |
|
|
|
|
|
6.07% |
|
|
FBO
PLIC VARIOUS RETIREMENT PLANS |
|
|
|
|
|
|
|
|
OMNIBUS |
|
|
|
|
|
|
|
|
ATTN
NPIO TRADE DESK |
|
|
|
|
|
|
|
|
711
HIGH STREET |
|
|
|
|
|
|
|
|
DES
MOINES IA 50392-0001 |
|
|
|
|
|
|
|
|
EMPOWER
TRUST FBO* |
|
5.91% |
|
|
|
|
|
|
EMPLOYEE
BENEFITS CLIENTS 401K |
|
|
|
|
|
|
|
|
8515
E ORCHARD RD 2T2 |
|
|
|
|
|
|
|
|
GREENWOOD
VILLAGE CO 80111-5002 |
|
|
|
|
|
|
|
|
EMPOWER
TRUST FBO* |
|
|
|
|
|
|
|
16.55% |
EMPOWER
IRA ADVANTAGE |
|
|
|
|
|
|
|
|
C/O
FASCORE LLC |
|
|
|
|
|
|
|
|
8515
E ORCHARD RD 2T2 |
|
|
|
|
|
|
|
|
GREENWOOD
VILLAGE CO 80111-5002 |
|
|
|
|
|
|
|
|
NABANK
& CO.* |
|
|
|
|
8.28% |
|
|
|
PO
BOX 2180 |
|
|
|
|
|
|
|
|
TULSA
OK 74101-2180 |
|
|
|
|
|
|
|
|
NATIONWIDE
TRUST COMPANY FSB |
|
|
|
|
|
81.20% |
|
|
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
C/O
IPO PORTFOLIO ACCOUNTING |
|
|
|
|
|
|
|
|
PO
BOX 182029 |
|
|
|
|
|
|
|
|
COLUMBUS
OH 43218-2029 |
|
|
|
|
|
|
|
|
PIMS/PRUDENTIAL
RETIREMENT |
|
21.57% |
|
|
|
|
|
|
AS
NOMINEE FOR THE TTEE/CUST PL 820 |
|
|
|
|
|
|
|
|
MHI
GROUP 401(K) PLAN |
|
|
|
|
|
|
|
|
20
GREENWAY PLZ STE 600 |
|
|
|
|
|
|
|
|
HOUSTON
TX 77046-2019 |
|
|
|
|
|
|
|
|
STATE
STREET BANK TTEE CUSTODIAN |
|
|
|
|
|
8.19% |
|
|
CUST
FBO ADP ACCESS 401K PLAN |
|
|
|
|
|
|
|
|
401(K)
PLAN |
|
|
|
|
|
|
|
|
1
LINCOLN STREET |
|
|
|
|
|
|
|
|
BOSTON
MA 02111-2901 |
|
|
|
|
|
|
|
|
VOYA
RETIREMENT INSURANCE & ANNUITY* |
|
6.52% |
|
|
|
|
|
|
COMPANY |
|
|
|
|
|
|
|
|
ATTN
MICHAEL KAMINSKI |
|
|
|
|
|
|
|
|
1
ORANGE WAY |
|
|
|
|
|
|
|
|
WINDSOR
CT 06095-4773 |
|
|
|
|
|
|
|
|
VRSCO |
|
7.88% |
|
|
|
|
|
|
FBO
VTC CUST TTEE FBO |
|
|
|
|
|
|
|
|
MIAMI
JEWISH HEALTH SYSTEM 403B |
|
|
|
|
|
|
|
|
2727-A
ALLEN PARKWAY, 4-D1 |
|
|
|
|
|
|
|
|
HOUSTON
TX 77019-2107 |
|
|
|
|
|
|
|
|
* |
Denotes
record owner of Fund shares only |
American
Beacon Large Cap Value Fund
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
CHARLES
SCHWAB & CO FOR THE*
|
|
|
|
|
|
|
|
26.13% |
EXCLUSIVE
BENEFIT OF OUR CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS OPS |
|
|
|
|
|
|
|
|
9601
E PANORAMA CIR |
|
|
|
|
|
|
|
|
ENGLEWOOD
CO 80112-3441 |
|
|
|
|
|
|
|
|
CHARLES
SCHWAB & CO INC* |
|
|
|
4.98% |
5.66% |
|
10.95% |
|
SPECIAL
CUST A/C |
|
|
|
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS |
|
|
|
|
|
|
|
|
211
MAIN ST |
|
|
|
|
|
|
|
|
SAN
FRANCISCO CA 94105-1901 |
|
|
|
|
|
|
|
|
LPL
FINANCIAL* |
|
13.08% |
51.29% |
21.84% |
|
|
|
|
4707
EXECUTIVE DR |
|
|
|
|
|
|
|
|
SAN
DIEGO CA 92121-3091 |
|
|
|
|
|
|
|
|
MERRILL
LYNCH PIERCE FENNER &* |
|
5.22% |
|
|
11.52% |
|
|
|
SMITH
INC (HOUSE ACCOUNT) |
|
|
|
|
|
|
|
|
THE
AMERICAN BEACON FUNDS |
|
|
|
|
|
|
|
|
4800
DEER LAKE DR EAST |
|
|
|
|
|
|
|
|
JACKSONVILLE
FL 32246-6484 |
|
|
|
|
|
|
|
|
MORGAN
STANLEY SMITH BARNEY LLC* |
|
|
|
|
|
|
|
5.75% |
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
FOR
THE EXCLUSIVE BENE OF ITS CUST |
|
|
|
|
|
|
|
|
1
NEW YORK PLZ FL 12 |
|
|
|
|
|
|
|
|
NEW
YORK NY 10004-1965 |
|
|
|
|
|
|
|
|
NATIONAL
FINANCIAL SERVICES LLC* |
45.19% |
50.38% |
13.80% |
42.38% |
38.19% |
|
54.45% |
49.01% |
FOR
EXCLUSIVE BENEFIT OF OUR |
|
|
|
|
|
|
|
|
CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR |
|
|
|
|
|
|
|
|
499
WASHINGTON BLVD |
|
|
|
|
|
|
|
|
JERSEY
CITY NJ 07310-1995 |
|
|
|
|
|
|
|
|
PERSHING
LLC* |
|
|
5.53% |
|
|
|
|
|
1
PERSHING PLZ |
|
|
|
|
|
|
|
|
JERSEY
CITY NJ 07399-0001 |
|
|
|
|
|
|
|
|
RAYMOND
JAMES* |
|
|
8.05% |
|
|
|
|
|
OMNIBUS
FOR MUTUAL FUNDS |
|
|
|
|
|
|
|
|
ATTN
COURTNEY WALLER |
|
|
|
|
|
|
|
|
880
CARILLON PKWY |
|
|
|
|
|
|
|
|
ST
PETERSBURG FL 33716-1100 |
|
|
|
|
|
|
|
|
UBS
WM USA* |
|
|
|
7.44% |
|
|
|
|
OMNI
ACCOUNT M/F |
|
|
|
|
|
|
|
|
SPEC
CDY A/C EBOC UBSFSI |
|
|
|
|
|
|
|
|
1000
HARBOR BLVD |
|
|
|
|
|
|
|
|
WEEHAWKEN
NJ 07086-6761 |
|
|
|
|
|
|
|
|
WELLS
FARGO CLEARING SERVICES LLC* |
|
|
15.23% |
|
|
|
|
|
SPECIAL
CUSTODY ACCT FOR THE |
|
|
|
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
|
|
|
2801
MARKET ST |
|
|
|
|
|
|
|
|
SAINT
LOUIS MO 63103-2523 |
|
|
|
|
|
|
|
|
DCGT
AS TTEE AND/OR CUST |
|
|
|
|
|
6.22% |
|
|
FBO
PLIC VARIOUS RETIREMENT PLANS |
|
|
|
|
|
|
|
|
OMNIBUS |
|
|
|
|
|
|
|
|
ATTN
NPIO TRADE DESK |
|
|
|
|
|
|
|
|
711
HIGH STREET |
|
|
|
|
|
|
|
|
DES
MOINES IA 50392-0001 |
|
|
|
|
|
|
|
|
EMPOWER
TRUST FBO* |
|
|
|
|
9.13% |
|
|
|
EMPLOYEE
BENEFIT CLIENTS 401K |
|
|
|
|
|
|
|
|
8515
E ORCHARD RD 2T2 |
|
|
|
|
|
|
|
|
GREENWOOD
VILLAGE CO 80111-5002 |
|
|
|
|
|
|
|
|
EMPOWER
TRUST FBO* |
|
|
|
|
|
48.34% |
|
|
EMPOWER
BENEFIT PLANS |
|
|
|
|
|
|
|
|
8515
E ORCHARD RD 2T2 |
|
|
|
|
|
|
|
|
GREENWOOD
VILLAGE CO 80111-5002 |
|
|
|
|
|
|
|
|
JOHN
HANCOCK TRUST COMPANY LLC* |
|
|
|
|
|
6.16% |
|
|
200
BERKELEY ST STE 7 |
|
|
|
|
|
|
|
|
BOSTON
MA 02116-5038 |
|
|
|
|
|
|
|
|
MASSACHUSETTS
MUTUAL INSURANCE CO* |
|
|
|
|
|
15.38% |
|
|
1295
STATE ST MTP C105 |
|
|
|
|
|
|
|
|
SPRINGFIELD
MA 01111-0001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
MATRIX
TRUST COMPANY CUST FBO |
|
|
|
|
|
7.77% |
|
|
NATIONAL
PETROLEUM COUNCIL RETIREME |
|
|
|
|
|
|
|
|
PO
BOX 52129 |
|
|
|
|
|
|
|
|
PHOENIX
AZ 85072-2129 |
|
|
|
|
|
|
|
|
VRSCO |
|
|
|
5.17% |
|
|
|
|
FBO
VTC CUST TTEE FBO |
|
|
|
|
|
|
|
|
NASSAU
HEALTHCARE CORPORATION 457 |
|
|
|
|
|
|
|
|
2727-A
ALLEN PARKWAY, 4-D1 |
|
|
|
|
|
|
|
|
HOUSTON
TX 77019-2107 |
|
|
|
|
|
|
|
|
* |
Denotes
record owner of Fund shares only |
American
Beacon Small Cap Value Fund
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
AMERICAN
ENTERPRISE INV SVCS*
|
|
|
8.92% |
|
|
|
|
|
707
2ND AVE S |
|
|
|
|
|
|
|
|
MINNEAPOLIS
MN 55402-2405 |
|
|
|
|
|
|
|
|
CHARLES
SCHWAB & CO INC* |
|
|
17.60% |
6.72% |
5.99% |
|
26.82% |
24.22% |
SPECIAL
CUST A/C |
|
|
|
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS |
|
|
|
|
|
|
|
|
211
MAIN ST |
|
|
|
|
|
|
|
|
SAN
FRANCISCO CA 94105-1901 |
|
|
|
|
|
|
|
|
LPL
FINANCIAL* |
|
|
26.20% |
60.80% |
|
|
|
|
4707
EXECUTIVE DR |
|
|
|
|
|
|
|
|
SAN
DIEGO CA 92121-3091 |
|
|
|
|
|
|
|
|
MERRILL
LYNCH PIERCE FENNER &* |
|
|
|
|
7.76% |
|
|
|
SMITH
INC (HOUSE ACCOUNT) |
|
|
|
|
|
|
|
|
THE
AMERICAN BEACON FUNDS |
|
|
|
|
|
|
|
|
4800
DEER LAKE DR EAST |
|
|
|
|
|
|
|
|
JACKSONVILLE
FL 32246-6484 |
|
|
|
|
|
|
|
|
NATIONAL
FINANCIAL SERVICES LLC* |
36.60% |
6.27% |
|
13.51% |
39.95% |
3.20% |
37.98% |
48.79% |
FOR
EXCLUSIVE BENEFIT OF OUR |
|
|
|
|
|
|
|
|
CUSTOMERS |
|
|
|
|
|
|
|
|
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR |
|
|
|
|
|
|
|
|
499
WASHINGTON BLVD |
|
|
|
|
|
|
|
|
JERSEY
CITY NJ 07310-1995 |
|
|
|
|
|
|
|
|
DCGT
AS TTEE AND/OR CUST |
|
|
13.88% |
|
|
19.52% |
|
|
FBO
PLIC VARIOUS RETIREMENT PLANS |
|
|
|
|
|
|
|
|
OMNIBUS |
|
|
|
|
|
|
|
|
ATTN
NPIO TRADE DESK |
|
|
|
|
|
|
|
|
711
HIGH STREET |
|
|
|
|
|
|
|
|
DES
MOINES IA 50392-0001 |
|
|
|
|
|
|
|
|
EMPOWER
TRUST FBO* |
|
20.16% |
|
|
|
5.06% |
|
|
EMPLOYEE
BENEFIT CLIENTS 401K |
|
|
|
|
|
|
|
|
8515
E ORCHARD RD 2T2 |
|
|
|
|
|
|
|
|
GREENWOOD
VILLAGE CO 80111-5002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R6
CLASS |
Advisor
CLASS |
R5
CLASS |
Investor
CLASS |
LINCOLN
RETIREMENT SERVICES COMPANY |
|
6.79% |
|
|
|
|
|
|
FBO
BCPS 403B |
|
|
|
|
|
|
|
|
PO
BOX 7876 |
|
|
|
|
|
|
|
|
FORT
WAYNE IN 46801-7876 |
|
|
|
|
|
|
|
|
NATIONWIDE
TRUST COMPANY FSB |
|
|
|
|
|
7.10% |
|
|
C/O
IPO PORTFOLIO ACCOUNTING |
|
|
|
|
|
|
|
|
PO
BOX 182029 |
|
|
|
|
|
|
|
|
COLUMBUS
OH 43218-2029 |
|
|
|
|
|
|
|
|
RELIANCE
TRUST COMPANY FBO* |
|
|
|
|
10.42% |
|
|
|
T
ROWE PRICE RETIREMENT |
|
|
|
|
|
|
|
|
PLAN
CLIENTS |
|
|
|
|
|
|
|
|
PO
BOX 78446 |
|
|
|
|
|
|
|
|
ATLANTA
GEORGIA 30357 |
|
|
|
|
|
|
|
|
TALCOTT
RESOLUTION LIFE INSURANCE |
|
|
|
|
|
13.78% |
|
|
COMPANY |
|
|
|
|
|
|
|
|
PO
BOX 5051 |
|
|
|
|
|
|
|
|
HARTFORD
CT 06102-5051 |
|
|
|
|
|
|
|
|
VOYA
INSTITUTIONAL TRUST COMPANY |
|
10.08% |
|
|
|
|
|
|
ONE
ORANGE WAY B3N |
|
|
|
|
|
|
|
|
WINDSOR
CT 06095-4773 |
|
|
|
|
|
|
|
|
VOYA
RETIREMENT INSURANCE & ANNUITY* |
|
|
|
|
|
7.71% |
|
|
COMPANY |
|
|
|
|
|
|
|
|
ATTN
MICHAEL KAMINSKI |
|
|
|
|
|
|
|
|
1
ORANGE WAY |
|
|
|
|
|
|
|
|
WINDSOR
CT 06095-4773 |
|
|
|
|
|
|
|
|
* |
Denotes
record owner of Fund shares only |
INVESTMENT
SUB-ADVISORY AGREEMENTS
The
Funds’ sub-advisors are listed below with information regarding their
controlling persons or entities. According to the Investment Company Act, a
person
or entity with control with respect to an investment advisor has “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.” Persons and entities affiliated with a sub-advisor may
be
considered affiliates of a Fund for which the sub-advisor manages a
portion of the Fund’s assets.
|
| |
American
Century Investment Management, Inc. (“American
Century”) |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
American
Century Companies, Inc. |
Parent
Company |
Holding
Company |
Stowers
Institute for Medical Research |
Ownership
of Parent Company |
Medical
Research |
|
| |
Barrow,
Hanley, Mewhinney & Strauss, LLC (“Barrow”) |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
Perpetual
Limited |
Parent
Company |
Financial
Services |
|
| |
Brandywine
Global Investment Management, LLC (“Brandywine
Global”) |
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
Legg
Mason, Inc. |
Direct
Owner |
Financial
Services |
Franklin
Resources, Inc. |
Indirect
Owner |
Financial
Services |
|
| |
Causeway
Capital Management LLC (“Causeway”) |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
Causeway
Capital Holdings LLC |
Parent
Company |
Parent
Company |
|
| |
DePrince,
Race & Zollo, Inc. (“DRZ”) |
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
Victor
A. Zollo, Jr. |
*Indirect
Majority Shareholder / Officer |
Individual |
John
D. Race |
*Indirect
Majority Shareholder / Officer |
Individual |
Kelly
W. Carbone |
*Indirect
Minority Shareholder / Management Committee |
Individual |
Gregory
T. Ramsby |
*Indirect
Minority Shareholder / Management Committee |
Individual |
Angela
Johnston |
Chief
Financial Officer / Management Committee |
Individual |
Adelbert
Sanchez |
Chief
Compliance Officer |
Individual |
* |
This
individual’s respective equity ownership of DePrince, Race & Zollo,
Inc. is directly held by a trust, wholly owned and controlled by the
individual. |
|
| |
Garcia
Hamilton & Associates, L.P. (“Garcia Hamilton”) |
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
New
Southwest GP Holdings, Inc. |
General
Partner, wholly owned by Gilbert Andrew
Garcia |
Financial
Services |
|
| |
Hotchkis
and Wiley Capital Management, LLC (“Hotchkis”) |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
HWCap
Holdings, LLC |
Majority
Owner |
Financial
Services |
Stephens-H&W,
LLC |
Minority
Owner |
Financial
Services |
|
| |
Lazard
Asset Management LLC (“Lazard”) |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
Lazard
Freres & Co. LLC |
Parent
Company |
Financial
Services |
|
| |
Massachusetts
Financial Services Company (“MFS”) |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
Sun
Life Financial, Inc |
Majority
Owner |
Financial
Services |
|
| |
Newton
Investment Management North America, LLC (“NIMNA”) |
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity Business |
Bank
of New York Mellon Corporation |
Parent
Company |
Financial
Services |
The
Trust, on behalf of each Fund, and the Manager have entered into an Investment
Advisory Agreement with each sub-advisor pursuant to which a Fund
has agreed to pay its sub-advisor an annualized sub-advisory fee that is
calculated and accrued daily based on a percentage of the applicable
Fund’s
average daily net assets.
MANAGEMENT,
ADMINISTRATIVE, SECURITIES LENDING, AND DISTRIBUTION SERVICES
The
Manager
The
Manager, located at 220 East Las Colinas Boulevard, Suite 1200, Irving, Texas
75039,
is a Delaware corporation and a wholly-owned subsidiary of Resolute
Investment Managers, Inc. (“RIM”).
RIM is, in turn, a wholly-owned subsidiary of
Resolute Acquisition, Inc., a
wholly-owned subsidiary of
Resolute
Topco, Inc.
(“Topco”).
Topco
is owned primarily by various
institutional investment funds that are managed by financial institutions and
other investment
advisory firms. No owner of Topco owns 25% or more of the outstanding equity or
voting interests of Topco.
The address of Topco
is 220 East
Las Colinas Boulevard, Suite 1200, Irving, TX 75039.
Listed
below are individuals and entities that may be deemed control persons of the
Manager.
|
| |
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity’s Business |
Resolute
Topco, Inc. |
Parent
Company |
Holding
Company – Founded in 2015 |
On
December 29, 2023, RIM and certain of its affiliates (collectively, “Resolute”)
and their equity owners completed a transaction (“Transaction”) with
certain
creditors of RIM to strengthen Resolute’s capital structure (the “Closing”).
Upon the Closing, the Manager became wholly owned indirectly by
Resolute’s
new equity owners. This change in control was deemed to constitute an
“assignment” under the 1940 Act, of the (i) then-existing management
agreement (“Prior Management Agreement”) between the Manager and the Trust with
respect to each Fund, and (ii) then-existing investment
advisory agreements (collectively with the Prior Management Agreement, the
“Prior Agreements”) among the Manager, a Fund’s sub-advisor(s)
and the Trust, on behalf of each Fund. As required by the 1940 Act, the Prior
Agreements provided for their automatic termination in the event
of an assignment.
In
advance of the Closing, the Board approved with respect to the Funds a new
Management Agreement (“New Management Agreement”) and new Investment
Advisory Agreements (collectively with the New Management Agreement, the “New
Agreements”), with the Management Agreement being
subject to prior shareholder approval. Shareholders of the American Beacon
Balanced Fund, American Beacon Garcia Hamilton Quality Bond Fund
and American Beacon International Equity Fund approved the New Management
Agreement at a shareholder meeting held prior to the Closing and,
upon the Closing, the New Agreements replaced the Prior Agreements with respect
to these Funds.
As
of the Closing, shareholders of the American Beacon Large Cap Value Fund (“Large
Cap Value Fund”) and the American Beacon Small Cap Value Fund
(“Small Cap Value Fund”) had not yet reached a quorum at their shareholder
meetings to take action on the approval of the New Management Agreement.
Accordingly, to provide for continuity of management and allow additional time
for the Funds to achieve a quorum, the Board approved (i) the
termination of the Prior Agreements for the Large Cap Value Fund and Small Cap
Value Fund, and (ii) an interim Management Agreement (“Interim
Management Agreement”) and interim Investment Advisory Agreements (collectively
with the Interim Management Agreement, the “Interim Agreements”)
for the Large Cap Value Fund and the Small Cap Value Fund, pursuant to Rule
15a-4 under the 1940 Act. Each Interim Agreement became
effective upon the Closing, and will continue in effect until the earlier of (1)
May 27, 2024, or (2) approval of the New Management Agreement
by a Fund’s shareholders. In the event that a quorum is not achieved by that
time, the Board will consider other appropriate actions.
The
Manager is paid a management fee as compensation for providing each Fund with
management and administrative services. The expenses are allocated
daily to each class of shares of a Fund based upon the relative proportion of
net assets represented by such class. The Management Agreement
provides for the Manager to receive an annualized management fee based on a
percentage of a Fund’s average daily net assets that is calculated
and accrued daily according to the following schedule:
The
Manager is paid a management fee for the
American Beacon Balanced Fund, American Beacon International Equity Fund,
American Beacon Large Cap
Value Fund, and American Beacon Small Cap Value Fund
based on the following schedule:
| |
First
$15 billion |
0.35% |
Next
$15 billion |
0.325% |
Over
$30 billion |
0.30% |
The
Manager also receives a fee of 0.15% of the average daily net assets of the
American Beacon Balanced Fund as compensation for the management
of a portion of the Fund’s assets.
For
the American Beacon Garcia Hamilton Quality Bond Fund, the Management Agreement
provides for the Manager to receive an annualized fee based
on a percentage of the Fund’s average daily net assets that is
calculated and accrued daily according to the following schedule:
| |
First
$5 billion |
0.35% |
Next
$5 billion |
0.325% |
Next
$10 billion |
0.30% |
Over
$20 billion |
0.275% |
Operating
expenses directly attributable to a specific class are charged against the
assets of that class. Pursuant
to the Management Agreement, the Manager
provides the Trust with office space, office equipment and personnel necessary
to manage and administer the Trust’s operations. This includes:
■ |
complying
with reporting requirements; |
■ |
corresponding
with shareholders; |
■ |
maintaining
internal bookkeeping, accounting and auditing services and
records; |
■ |
supervising
the provision of services to the Trust by third parties;
and |
■ |
administering
the interfund lending facility and lines of credit, if
applicable. |
In
addition to its oversight of the sub-advisors, the Manager may invest the
portion of a Fund’s assets that a sub-advisor determines to be allocated to
short-term
investments.
The
Funds are responsible for expenses not otherwise assumed by the Manager,
including the following: audits by independent auditors; transfer agency,
custodian, dividend disbursing agent and shareholder recordkeeping services;
taxes, if any, and the preparation of a Fund’s tax returns; interest;
costs of Trustee and shareholder meetings; preparing, printing and mailing
prospectuses and reports to existing shareholders; fees for filing reports
with regulatory bodies and the maintenance of a Fund’s existence; legal
fees; fees to federal and state authorities for the registration of shares;
fees
and expenses of Trustees; insurance and fidelity bond premiums; fees paid to
service providers providing reports regarding adherence by sub-advisors
to the investment style of a Fund; fees paid for brokerage commission analysis
for the purpose of monitoring best execution practices of the
sub-advisors; and any extraordinary expenses of a nonrecurring
nature.
The
Manager has contractually agreed from time to time to waive fees and/or
reimburse expenses for a
Fund in order to maintain competitive expense ratios
for a
Fund. The contractual expense reimbursement can be changed or terminated only in
the discretion and with the approval of a majority of a
Fund’s
Board of Trustees. The Manager will itself waive fees and/or reimburse expenses
of a Fund to maintain the contractual expense ratio caps for each
applicable class of shares or make arrangements with other service providers to
do so. The Manager may also, from time to time, voluntarily waive
fees and/or reimburse expenses of a Fund. The Board approved a policy whereby
the Manager may seek repayment for such fee waivers and expense
reimbursements. Under the policy, the Manager can be reimbursed by a Fund for
any contractual or voluntary fee waivers or expense reimbursements
if reimbursement to the Manager (a) occurs within three years from the date of
the Manager’s waiver/reimbursement and (b) does not cause
a
Fund’s Total Annual Fund Operating Expenses to exceed the lesser of the
contractual percentage limit in effect at the time of the waiver/reimbursement
or the time of recoupment.
The
following tables show the total management fees paid to the Manager for
management and administrative services and the investment advisory fees
paid to each sub-advisor based on each Fund’s average daily net assets for each
Fund’s three most recent fiscal years ended October 31. The following
tables also show the management fees waived or recouped by the Manager and the
sub-advisory fees waived by the
sub-advisors,
if applicable.
The fees paid to the Manager were equal to 0.35% of the
Fund’s average daily net assets. In the tables below, the fees paid to the
sub-advisors
are expressed both as a dollar amount and percentage of the
Fund’s average daily net assets.
|
|
| |
Management
Fees Paid to American Beacon Advisors, Inc. (Gross) |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$659,962 |
$557,973 |
$466,356 |
American
Beacon Garcia Hamilton Quality Bond Fund |
$1,272,684 |
$1,418,724 |
$1,085,007 |
American
Beacon International Equity Fund |
$8,961,334 |
$6,115,636 |
$3,905,678 |
American
Beacon Large Cap Value Fund |
$14,897,334 |
$12,744,518 |
$11,152,815 |
American
Beacon Small Cap Value Fund |
$21,141,368 |
$18,029,676 |
$15,897,278 |
|
|
| |
Sub-Advisor
Fees (Gross) |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$300,641 |
$265,063 |
$206,610 |
|
0.17% |
0.17% |
0.17% |
American
Beacon Garcia Hamilton Quality Bond Fund |
$727,476 |
$811,192 |
$620,004 |
|
0.20% |
0.20% |
0.20% |
American
Beacon International Equity Fund |
$6,533,628 |
$4,387,673 |
$3,133,428 |
|
0.26% |
0.26% |
0.26% |
American
Beacon Large Cap Value Fund |
$8,420,545 |
$7,321,565 |
$6,360,972 |
|
0.20% |
0.20% |
0.20% |
American
Beacon Small Cap Value Fund*
|
$23,358,692 |
$18,405,314 |
$15,888,739 |
|
0.38% |
0.36% |
0.35% |
* |
Sub-Advisor
Fees includes fees paid to Foundry Partners LLC (“Foundry”) and Hillcrest
Asset Management, LLC (“Hillcrest”), each formerly a sub-advisor of the
American Beacon
Small Cap Value Fund (“Small Cap Value Fund”), for the fiscal year ended
October 31, 2023. On February 8, 2022, Foundry and Hillcrest were
terminated as sub-advisors
to the Small Cap Value Fund, and the assets previously managed by Foundry
and Hillcrest were allocated among the remaining sub-advisors. On March
10, 2022,
DePrince, Race & Zollo, Inc. was appointed as a sub-advisor to the
Small Cap Value Fund. |
|
|
| |
Management
Fees (Waived)/Recouped* |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$0 |
$0 |
$0 |
American
Beacon Garcia Hamilton Quality Bond Fund |
$(720,361) |
$(773,688) |
$(670,072) |
American
Beacon International Equity Fund |
$(2,734) |
$(37,459) |
$(206,621) |
American
Beacon Large Cap Value Fund |
$0 |
$0 |
$0 |
American
Beacon Small Cap Value Fund |
$0 |
$0 |
$0 |
* |
The
sub-advisors for the Funds have not waived fees during the three most
recent fiscal years ended October 31. |
Distribution
Fees
The
Manager (or another entity approved by the Board) under a distribution plan
adopted pursuant to Rule 12b-1 under the Investment Company Act, is
paid up to 0.25% per annum of the average daily net assets of the A Class shares
and Advisor Class shares, and up to 1.00% per annum of the average
daily net assets of the C Class shares of the Funds for distribution and
shareholder servicing related services, including expenses relating to
selling
efforts of various broker-dealers, shareholder servicing fees and the
preparation and distribution of A Class, C Class, and Advisor Class advertising
material and sales literature. The Manager will receive Rule 12b-1 fees from the
A Class, C Class, and Advisor Class regardless of the amount
of the Manager’s actual expenses related to distribution and shareholder
servicing efforts on behalf of each Class. Thus, the Manager may realize
a profit or a loss based upon its actual distribution and shareholder servicing
related expenditures for the A Class, C Class, and Advisor Class shares.
The Manager anticipates that the Rule 12b-1 plan will benefit shareholders by
providing broader access to a Fund through broker-dealers and other
financial intermediaries who require compensation for their expenses in order to
offer shares of the Funds. The Board has not authorized Y
Class,
R5
Class, R6 Class,
or Investor Class shares of a Fund to pay any fees pursuant to a distribution
plan. Distribution fees pursuant to Rule 12b-1 under the
Investment Company Act for the fiscal year ended October 31, 2023
were:
| |
A
Class |
Fund |
Distribution
Fee |
American
Beacon Balanced Fund |
$34,424 |
American
Beacon International Equity Fund |
$19,975 |
American
Beacon Large Cap Value Fund |
$33,113 |
American
Beacon Small Cap Value Fund |
$105,096 |
| |
C
Class |
Fund |
Distribution
Fee |
American
Beacon Balanced Fund |
$146,122 |
American
Beacon International Equity Fund |
$31,298 |
American
Beacon Large Cap Value Fund |
$50,298 |
American
Beacon Small Cap Value Fund |
$82,251 |
| |
Advisor
Class |
Fund |
Distribution
Fee |
American
Beacon Balanced Fund |
$2,441 |
American
Beacon International Equity Fund |
$36,163 |
American
Beacon Large Cap Value Fund |
$111,427 |
American
Beacon Small Cap Value Fund |
$75,508 |
Certain
sub-advisors of the Funds or other series of the American Beacon Funds
Complex
contribute
to the Manager to support distribution
activities.
Service
Plan Fees
The
A Class, C Class, Advisor Class, and Investor Class have each adopted a Service
Plan (collectively, the “Service Plans”). The Service Plans authorize
the
payment to the Manager (or another entity approved by the Board) of up to 0.375%
per annum of the average daily net assets of the Investor Class
shares and up to 0.25% per annum of the average daily net assets of the A Class
shares, C Class shares, and Advisor Class shares. In addition, a Fund
may reimburse the Manager for certain non-distribution shareholder services
provided by financial intermediaries attributable to Y Class and R5 Class
shares,
but not
R6 Class shares.
The Manager or other approved entities may spend such amounts on any activities
or expenses primarily intended
to result in or relate to the servicing of A Class, C Class, Y Class, R5 Class,
Advisor Class, and Investor Class shares including, but not limited to,
payment of shareholder service fees and transfer agency or sub-transfer agency
expenses. The fees, which are included as part of a
Fund’s “Other Expenses”
in the Table of Fees and Expenses in the Prospectus, will be payable monthly in
arrears. The primary non-distribution shareholder fees paid to
financial intermediaries, such as plan sponsors and broker-dealers, generally
include shareholder servicing, record keeping and servicing fees.
Service
Plan fees paid by the A Class, C Class, Advisor Class and Investor Class shares
of each Fund pursuant to the applicable Service Plan for the three most
recent fiscal years ended October 31 are set forth below.
|
|
| |
A
Class |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$11,684 |
$11,322 |
$11,896 |
American
Beacon International Equity Fund |
$16,348 |
$12,849 |
$11,183 |
American
Beacon Large Cap Value Fund |
$21,723 |
$3,073 |
$18,126 |
American
Beacon Small Cap Value Fund |
$124,070 |
$101,226 |
$80,529 |
|
|
| |
C
Class |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$18,636 |
$15,253 |
$12,414 |
American
Beacon International Equity Fund |
$4,715 |
$3,895 |
$3,548 |
American
Beacon Large Cap Value Fund |
$5,423 |
$5,488 |
$4,423 |
American
Beacon Small Cap Value Fund |
$15,153 |
$11,540 |
$9,725 |
|
|
| |
Advisor
Class |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$4,618 |
$3,381 |
$2,257 |
American
Beacon International Equity Fund |
$46,182 |
$39,395 |
$36,056 |
American
Beacon Large Cap Value Fund |
$147,343 |
$137,060 |
$111,682 |
American
Beacon Small Cap Value Fund |
$130,077 |
$86,310 |
$75,523 |
|
|
| |
Investor
Class |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$255,866 |
$206,334 |
$149,923 |
American
Beacon Garcia Hamilton Quality Bond Fund |
$1,645 |
$3,571 |
$3,311 |
American
Beacon International Equity Fund |
$404,950 |
$361,759 |
$359,278 |
American
Beacon Large Cap Value Fund |
$3,146,405 |
$2,540,172 |
$1,991,555 |
American
Beacon Small Cap Value Fund |
$1,423,149 |
$1,105,627 |
$996,291 |
Securities
Lending Fees
For
each of American Beacon Balanced Fund, American Beacon Garcia Hamilton Quality
Bond Fund and American Beacon International Equity Fund:
As
compensation for services provided by the Manager in connection with securities
lending activities conducted by a Fund, the lending Fund pays to
the
Manager, with respect to cash collateral posted by borrowers, a fee of 10% of
the net monthly investment income (the income earned in the form of
interest, dividends and realized capital gains from the investment of cash
collateral, plus any negative rebate fees paid by borrowers, less the rebate
amount
paid to borrowers as well as related expenses) and, with respect to collateral
other than cash, a fee up to 10% of loan fees and demand premiums
paid by borrowers.
For
each of American Beacon Large Cap Value Fund and American Beacon Small Cap Value
Fund:
As
compensation for services provided by the Manager in connection with securities
lending activities conducted by a Fund, the lending Fund pays to the
Manager, with respect to cash collateral posted by borrowers, a fee of 10% of
the net monthly interest income (the gross interest income earned by
the investment of cash collateral, less the amount paid to borrowers and related
expenses) from such activities and, with respect to loan fees paid by
borrowers
when a borrower posts collateral other than cash, a fee up to 10% of such loan
fees.
Securities
lending income is generated from the demand premium (if any) paid by the
borrower to borrow a specific security and from the return on investment
of cash collateral, reduced by negotiated rebate fees paid to the borrower and
transaction costs. To the extent that a loan is secured by non-cash
collateral, securities lending income is generated as a demand premium reduced
by transaction costs.
As
of the date of this SAI, each Fund, except for the American Beacon Garcia
Hamilton Quality Bond Fund, intends to engage in securities lending activities.
Fees
received by the Manager from securities lending for the last three fiscal years
ended October 31 were approximately as follows:
|
|
| |
Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$2,237 |
$355 |
$426 |
American
Beacon Garcia Hamilton Quality Bond Fund |
- |
- |
- |
American
Beacon International Equity Fund |
$113,627 |
$38,911 |
$26,768 |
American
Beacon Large Cap Value Fund |
$59,470 |
$7,248 |
$20,493 |
American
Beacon Small Cap Value Fund |
$121,008 |
$17,746 |
$14,838 |
State
Street serves as securities lending agent for each Fund that engages in
securities lending and, in that role, administers each
Fund’s securities lending
program pursuant to the terms of a securities lending authorization agreement
entered into between each Fund and State Street (“Securities Lending
Agreement”).
As
securities lending agent, State Street is responsible for the implementation and
administration of each Fund’s securities lending program. State Street’s
responsibilities include: (1) lending available securities to approved
borrowers; (2) continually monitoring the creditworthiness of approved
borrowers
and potential borrowers; (3) determining whether a loan shall be made and
negotiating the terms and conditions of the loan with the borrower,
provided that such terms and conditions are consistent with the terms and
conditions of the Securities Lending Agreement; (4) receiving and holding,
on the Fund’s behalf, or transferring to a fund account, upon instruction by the
Fund, collateral from borrowers to secure obligations of borrowers
with respect to any loan of available securities; (5) marking loaned securities
and collateral to their market value each business day; (6) obtaining
additional collateral, as needed, to maintain the value of the collateral
relative to the market value of the loaned securities at the levels required
by the Securities Lending Agreement; (7) returning the collateral to the
borrower, at the termination of the loan, upon the return of the loaned
securities; (8) investing cash collateral in permitted investments, including
the American Beacon U.S. Government Money Market Select Fund; and
(9) establishing and maintaining records related to the Fund’s securities
lending activities. Additionally, State Street has indemnified each Fund for
borrower
default as it relates to the securities lending program administered by State
Street.
State
Street is compensated for the above-described services from its securities
lending revenue split, as provided in the Securities Lending Agreement.
The
table below shows the income each Fund earned and the fees and compensation it
paid to service providers (including fees paid to State Street as securities
lending agent and the Manager for administrative and oversight functions) in
connection with its securities lending activities during its most recent
fiscal year.
The
American Beacon Garcia Hamilton Quality Bond Fund did not earn any income and
did not pay any fees or other compensation to service providers (including
State Street as securities lending agent and the Manager for administrative and
oversight functions) in connection with securities lending activities
during its most recent fiscal year.
|
|
|
| |
|
American
Beacon
Balanced
Fund |
American
Beacon
International
Equity
Fund |
American
Beacon
Large Cap
Value Fund |
American
Beacon
Small Cap
Value Fund |
Gross
income earned by the fund from securities lending
activities |
$28,778 |
$647,252 |
$1,329,125 |
$701,845 |
Fees
and/or compensation paid by the fund for securities lending activities and
related services: |
|
|
|
|
Fees
paid to securities lending agent from a revenue split |
$426 |
$26,768 |
$20,493 |
$14,838 |
Fees
paid for any cash collateral management service (including fees deducted
from a pooled
cash collateral reinvestment vehicle) that are not included in the revenue
split |
$515 |
$8,998 |
$23,623 |
$12,001 |
Administrative
fees not included in revenue split |
$0 |
$0 |
$0 |
$0 |
Indemnification
fee not included in revenue split |
$0 |
$0 |
$0 |
$0 |
Rebate
(paid to borrower) |
$23,784 |
$340,457 |
$1,094,959 |
$544,905 |
Other
fees not included in revenue split (administrative and oversight functions
provided
by the Manager) |
$426 |
$26,768 |
$20,493 |
$14,838 |
Aggregate
fees/compensation paid by the fund for securities lending
activities |
$25,151 |
$402,991 |
$1,159,568 |
$586,582 |
Net
income from securities lending activities |
$3,627 |
$244,261 |
$169,557 |
$115,263 |
The
SEC has granted exemptive relief that permits each Fund to invest cash
collateral received from securities lending transactions in shares of one or
more
private or registered investment companies managed by the Manager.
The
Distributor
Resolute
Investment Distributors, Inc. (“RID” or “Distributor”) is the Funds’ distributor
and principal underwriter of the Funds’ shares.
RID,
located at 220 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039, is a
registered broker-dealer and is a member of FINRA. The Distributor is
affiliated
with the Manager through common ownership. Under a Distribution Agreement with
the Trust, the Distributor acts as the distributor and principal
underwriter of the Trust in connection with the continuous offering of shares of
the Funds. The Distributor continually distributes shares of the Funds
on a best efforts basis. The Distributor has no obligation to sell any specific
quantity of the Funds’ shares.
Pursuant to the Distribution Agreement,
to the extent applicable, the Distributor receives, and may re-allow to
broker-dealers, all or a portion of the sales charge paid by the purchasers
of A Class and C Class shares. For A Class and C Class shares, the Distributor
receives commission revenue consisting of the portion of the A
Class and C Class sales charge remaining after the allowances by the Distributor
to the broker-dealers.
The Distributor retains any portion of the commission
fees that are not paid to the broker-dealers for use solely to pay distribution
related expenses.
The
aggregate sales charges paid to, or retained by, the Distributor from the sale
of shares and the CDSC retained by the Distributor on the redemption
of shares during the three most recent fiscal years ended October 31 are
shown in the table below:
|
|
|
|
| |
American
Beacon Fund |
|
Sales
Charge Revenue |
Deferred
Sales Charge Revenue |
|
Fiscal
Year |
Amount
Paid to Distributor |
Amount
Retained
by Distributor |
Amount
Paid to Distributor |
Amount
Retained
by Distributor |
American
Beacon Balanced Fund |
2023 |
$17,553 |
$2,044 |
$947 |
- |
|
2022 |
$28,664 |
$5,051 |
$862 |
- |
|
2021 |
$20,321 |
$2,699 |
$485 |
- |
American
Beacon Garcia Hamilton Quality Bond Fund |
2023 |
- |
- |
- |
- |
|
2022 |
- |
- |
- |
- |
|
2021 |
- |
- |
- |
- |
American
Beacon International Equity Fund |
2023 |
$10,400 |
$2,595 |
$18 |
- |
|
2022 |
$3,363 |
$518 |
$77 |
- |
|
2021 |
$2,725 |
$202 |
$7 |
- |
American
Beacon Large Cap Value Fund |
2023 |
$5,531 |
$589 |
$66 |
- |
|
2022 |
$8,323 |
$1,413 |
$315 |
- |
|
2021 |
$48,853 |
$6,094 |
$1,063 |
- |
American
Beacon Small Cap Value Fund |
2023 |
$11,215 |
$1,294 |
$109 |
- |
|
2022 |
$16,350 |
$1,392 |
$583 |
- |
|
2021 |
$19,446 |
$723 |
$132 |
- |
RID
does not receive compensation on redemptions and repurchases, brokerage
commissions, or other compensation. However, as shown in a separate chart,
RID may receive distribution fees (i.e., Rule 12b-1 fees) from certain share
classes of the
Funds.
OTHER
SERVICE PROVIDERS
State
Street, located at One Congress
Street, Suite
1, Boston,
Massachusetts 02114-2016,
serves as custodian (“Custodian”)
for
the Funds. State Street also
serves as the Funds’ Foreign Custody Manager pursuant to rules adopted under the
Investment Company Act, whereby it selects and monitors eligible
foreign sub-custodians. The Manager also has entered into a sub-administration
agreement with State Street. Under the sub-administration agreement,
State Street provides the
Funds
with certain financial reporting and tax services.
Pursuant
to an administrative services agreement among the Manager, the Trust, American
Beacon Institutional Funds Trust,
and Parametric Portfolio Associates
LLC (“Parametric”), located at 800 Fifth Avenue, Suite 2800, Seattle, Washington
98104, Parametric provides certain administrative services related
to the equitization of cash balances for certain series
of the American Beacon Funds Complex.
SS&C GIDS,
Inc., located at 2000 Crown Colony Drive, Quincy, Massachusetts
02169
is the transfer agent and dividend paying agent for the Trust and provides
these services to Fund shareholders.
The
Funds’ independent registered public accounting firm is PricewaterhouseCoopers
LLP, which is located at 101
Seaport Blvd., Suite 500, Boston, MA 02210.
K&L
Gates LLP, 1601 K Street, NW, Washington, D.C. 20006, serves as legal counsel to
the Funds.
PORTFOLIO
MANAGERS
The
portfolio managers to each Fund (the “Portfolio Managers”) have responsibility
for the day-to-day management of accounts other than the respective
Fund. Information regarding these other accounts has been provided by each
sub-advisor and is set forth below. The number of accounts and
assets is shown as of October 31, 2023.
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
American
Beacon Advisors, Inc. |
|
|
|
|
|
Kirk
L. Brown |
1
($0.5 bil) |
None |
3
($12.2 bil) |
None |
None |
None |
Paul
B. Cavazos |
2
($0.9 bil) |
1
($0.5 bil) |
3
($12.2 bil) |
None |
None |
None |
Colin
J. Hamer |
2
($0.9 bil) |
1
($0.5 bil) |
2
($11.7 bil) |
None |
None |
None |
Erin
Higginbotham |
None |
None |
4
($11.35 bil) |
None |
None |
None |
Robyn
A. Serrano |
None |
1
($0.5 bil) |
2
($1.2 bil) |
None |
None |
None |
Samuel
Silver |
None |
None |
None |
None |
None |
None |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
American
Century Investment Management, Inc. |
Jonathan
Veiga |
1
($529 mil) |
None |
2
($116 mil) |
None |
None |
None |
Bert
Whitson |
1
($529 mil) |
None |
2
($116 mil) |
None |
None |
None |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Barrow,
Hanley, Mewhinney & Strauss, LLC |
Mark
Giambrone |
6
($2.3 bil) |
1
($160.2 mil) |
28
($6.1 bil) |
None |
None |
None |
W.
Coleman Hubbard |
2
($7.3 mil) |
1
($21 mil) |
7
($272 mil) |
None |
None |
None |
Justin
Martin |
1
($51.2 mil) |
1
($26.8 mil) |
11
($827 mil) |
None |
None |
None |
James
S. McClure |
2
($7.3 mil) |
1
($21 mil) |
7
($272 mil) |
None |
None |
None |
J.
Scott McDonald |
1
($51.2 mil) |
1
($26.8 mil) |
14
($856.6 mil) |
None |
None |
None |
Deborah
A. Petruzzelli |
1
($47.8 mil) |
1
($26.8 mil) |
7
($402.2 mil) |
None |
None |
None |
Matthew
Routh |
1
($51.2 mil) |
1
($26.8 mil) |
11
($827 mil) |
None |
None |
None |
DJ
Taylor |
2
($7.3 mil) |
1
($21 mil) |
7
($272 mil) |
None |
None |
None |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Brandywine
Global Investment Management, LLC |
Michelle
K. Bevan |
None |
3
($156 mil) |
1
($147 mil) |
None |
None |
None |
Henry
F. Otto |
8
($4.7 bil) |
8
($220 mil) |
42
($824 mil) |
None |
None |
2
($936 mil) |
Steven
M. Tonkovich |
8
($4.9 bil) |
8
($234 mil) |
42
($845 mil) |
None |
None |
2
($936 mil) |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Causeway
Capital Management LLC |
Sarah
H. Ketterer |
15
($13.1 bil) |
15
($3.7 bil) |
131
($19.5 bil) |
None |
None |
3
($1.6 bil) |
Harry
W. Hartford |
15
($13.1 bil) |
15
($3.7 bil) |
103
($19.2 bil) |
None |
None |
3
($1.6 bil) |
Jonathan
P. Eng |
15
($13.1 bil) |
15
($3.7 bil) |
96
($19.2 bil) |
None |
None |
3
($1.6 bil) |
Conor
Muldoon |
15
($13.1 bil) |
15
($3.7 bil) |
99
($19.2 bil) |
None |
None |
3
($1.6 bil) |
Ellen
Lee |
15
($13.1 bil) |
15
($3.7 bil) |
90
($19.2 bil) |
None |
None |
3
($1.6 bil) |
Alessandro
Valentini |
15
($13.1 bil) |
15
($3.7 bil) |
91
($19.2 bil) |
None |
None |
3
($1.6 bil) |
Steven
Nguyen |
15
($13.1 bil) |
15
($3.7 bil) |
91
($19.2 bil) |
None |
None |
3
($1.6 bil) |
Brian
Cho |
15
($13.1 bil) |
15
($3.7 bil) |
91
($19.2 bil) |
None |
None |
3
($1.6 bil) |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
DePrince,
Race & Zollo, Inc. |
Gregory
Ramsby |
None |
2
($141.2 mil) |
23
($800 mil) |
None |
None |
4
($316 mil) |
Randy
Renfrow |
None |
2
($141.2 mil) |
28
($968 mil) |
None |
None |
4
($316 mil) |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and
Assets by Account Type |
Number
of Accounts and Assets for which Advisory
Fee is Performance-Based |
Name
of Investment
Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Garcia
Hamilton & Associates, L.P. |
Gilbert
Andrew Garcia |
None |
2
($65.9 mil) |
387
($19.6 bil) |
None |
None |
3
($275.9 mil) |
Karen
H. Tass*
|
None |
2
($67.2 mil) |
382
($19.7 bil) |
None |
None |
3
($242.5 mil) |
Jeffrey
D. Detwiler*
|
None |
2
($67.2 mil) |
382
($19.7 bil) |
None |
None |
3
($242.5 mil) |
Nancy
Rodriguez |
None |
2
($65.9 mil) |
387
($19.6 bil) |
None |
None |
3
($275.9 mil) |
* |
As
of December 31, 2023. |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Hotchkis
and Wiley Capital Management, LLC |
George
Davis |
22
($16.7 bil) |
10
($1.8 bil) |
55
($6 bil) |
2
($11.3 bil) |
1
($49.5 mil) |
4
($688.9 mil) |
Scott
McBride |
22
($16.7 bil) |
10
($1.8 bil) |
55
($6 bil) |
2
($11.3 bil) |
1
($49.5 mil) |
4
($688.9 mil) |
Patricia
McKenna |
22
($16.7 bil) |
10
($1.8 bil) |
55
($6 bil) |
2
($11.3 bil) |
1
($49.5 mil) |
4
($688.9 mil) |
Judd
Peters |
22
($16.9 bil) |
10
($1.8 bil) |
55
($6 bil) |
2
($11.3 bil) |
1
($49.5 mil) |
4
($688.9 mil) |
David
Green |
23
($16.9 bil) |
10
($1.8 bil) |
55
($6 bil) |
2
($11.3 bil) |
1
($49.5 mil) |
4
($688.9 mil) |
Jim
Miles |
23
($16.9 bil) |
10
($1.8 bil) |
55
($6 bil) |
2
($11.3 bil) |
1
($49.5 mil) |
4
($688.9 mil) |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Lazard
Asset Management LLC |
Michael
A. Bennett |
10
($10.8 bil) |
14
($4.9 bil) |
145
($18.2 bil) |
1
($4.9 bil) |
None |
3
($239.7 mil) |
Giles
Edwards |
5
($6.2 bil) |
8
($1.3 bil) |
108
($10.6 bil) |
1
($4.9 bil) |
None |
3
($239.7 mil) |
Michael
G. Fry |
5
($6.2 bil) |
8
($1.3 bil) |
108
($10.6 bil) |
1
($4.9 bil) |
None |
3
($239.7 mil) |
Michael
S. Powers |
8
($6.3 bil) |
8
($1.3 bil) |
107
($10.6 bil) |
1
($4.9 bil) |
None |
3
($239.7 mil) |
Paul
Selvey-Clinton |
5
($6.2 bil) |
15
($1.9 bil) |
115
($11.1 bil) |
1
($4.9 bil) |
None |
3
($239.7 mil) |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Massachusetts
Financial Services Company |
Katherine
Cannan |
10
($63.2 bil) |
3
($5.3 bil) |
16
($5.7 bil) |
None |
None |
None |
Nevin
Chitkara |
10
($63.2 bil) |
3
($5.3 bil) |
16
($5.7 bil) |
None |
None |
None |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for Which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other Pooled
Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other Pooled
Investment
Vehicles |
Other
accounts |
Newton
Investment Management North America, LLC |
Joseph
M. Corrado |
3
($15.1 bil) |
3
($25.4 mil) |
9
($731 mil) |
None |
None |
None |
Andrew
Leger |
7
($4.3 bil) |
9
($283.0 mil) |
23
($2.0 bil) |
None |
None |
3
($98.3 mil) |
Conflicts
of Interest
As
noted in the table above, the Portfolio Managers manage accounts other than the
Funds. This side-by-side management may present potential conflicts
between a Portfolio Manager’s management of the Funds’ investments, on the one
hand, and the investments of the other accounts, on the
other
hand. Set forth below is a description by the Manager and each sub-advisor of
any foreseeable material conflicts of interest that may arise from the
concurrent management of a Fund and other accounts. The information regarding
potential conflicts of interest of a sub-advisor was provided by the
sub-advisors as of October 31, 2023.
The Manager
The Manager’s Portfolio Managers are responsible for managing the Funds and
other accounts, including separate accounts and unregistered
funds. The Manager typically assigns Funds and accounts with similar investment
strategies to the same Portfolio Manager to mitigate the potentially
conflicting investment strategies of accounts. Other than potential conflicts
between investment strategies, the side-by-side management of both
the Funds and other accounts may raise potential conflicts of interest due to
the interest held by the Manager or one of its affiliates in an account
and
certain trading practices used by the Portfolio Managers (e.g., cross trades
between a Fund and another account and allocation of aggregated trades).
The Manager has developed policies and procedures reasonably designed to
mitigate those conflicts. In particular, the Manager has adopted policies
limiting the ability of Portfolio Managers to cross securities between a Fund
and a separate account and policies designed to ensure the fair allocation
of securities purchased on an aggregated basis.
Portfolio
Managers of the Manager with responsibility for oversight of Fund sub-advisors
are also responsible for overseeing sub-advisors selected by the
Manager to manage other client accounts. In some cases, the same investment
process and overall investment strategy are used for both a Fund and
another client account. When a sub-advisor has a limited capacity for managing
assets, these Portfolio Managers may have an incentive to allocate the
capacity disproportionately among clients. Certain Portfolio Managers oversee
fixed income assets managed internally by the Manager as well as equity
and fixed income assets managed externally by sub-advisors. Potential conflicts
of interest may occur when the Manager’s Portfolio Managers allocate
Fund assets to internal fixed income Portfolio Managers rather than external
Portfolio Managers, since the Manager has the potential to earn more
fees under this scenario. These potential conflicts of interest are disclosed to
the Board in connection with the process of approving the Manager as
an investment advisor to the Funds.
American Century Investment Management, Inc.
(“American Century”)
This information was provided by American Century as of October 31, 2023.
Certain conflicts of interest may arise in connection with the management of
multiple portfolios. Potential conflicts include, for example, conflicts
among investment strategies, such as one portfolio buying or selling a security
while another portfolio has a differing, potentially opposite position
in such security. This may include one portfolio taking a short position in the
security of an issuer that is held long in another portfolio (or vice
versa).
Other potential conflicts may arise with respect to the allocation of investment
opportunities, which are discussed in more detail below. American
Century has adopted policies and procedures that are designed to minimize the
effects of these conflicts.
Responsibility
for managing American Century client portfolios is organized according to
investment discipline. Investment disciplines include, for example,
disciplined equity, global growth equity, global value equity, global fixed
income, multi-asset strategies, exchange traded funds, and Avantis Investors
funds. Within each discipline are one or more portfolio teams responsible for
managing specific client portfolios. Generally, client portfolios with
similar strategies are managed by the same team using the same objective,
approach, and philosophy. Accordingly, portfolio holdings, position sizes,
and industry and sector exposures tend to be similar across similar portfolios,
which minimizes the potential for conflicts of interest. In addition,
American
Century maintains an ethical wall that restricts real time access to information
regarding any portfolio’s transaction activities and positions to team
members that have responsibility for a given portfolio or are within the same
equity investment discipline. The ethical wall is intended to aid in
preventing
the misuse of portfolio holdings information and trading activity in the other
disciplines.
For
each investment strategy, one portfolio is generally designated as the “policy
portfolio.” Other portfolios with similar investment objectives, guidelines
and restrictions, if any, are referred to as “tracking portfolios.” When
managing policy and tracking portfolios, a portfolio team typically purchases
and sells securities across all portfolios that the team manages. American
Century’s trading systems include various order entry programs that
assist in the management of multiple portfolios, such as the ability to purchase
or sell the same relative amount of one security across several funds.
In some cases, a tracking portfolio may have additional restrictions or
limitations that cause it to be managed separately from the policy portfolio.
Portfolio managers make purchase and sale decisions for such portfolios
alongside the policy portfolio to the extent the overlap is appropriate,
and separately, if the overlap is not.
American
Century may aggregate orders to purchase or sell the same security for multiple
portfolios when it believes such aggregation is consistent with
its duty to seek best execution on behalf of its clients. Orders of certain
client portfolios may, by investment restriction or otherwise, be determined
not available for aggregation. American Century has adopted policies and
procedures to minimize the risk that a client portfolio could be systematically
advantaged or disadvantaged in connection with the aggregation of orders. To the
extent equity trades are aggregated, shares purchased
or sold are generally allocated to the participating portfolios pro rata based
on order size. Because initial public offerings (IPOs) are usually available
in limited supply and in amounts too small to permit across-the-board pro rata
allocations, American Century has adopted special procedures designed
to promote a fair and equitable allocation of IPO securities among clients over
time. A centralized trading desk executes all fixed income securities
transactions for Avantis ETFs and mutual funds. For all other funds in the
American Century complex, portfolio teams are responsible for executing
fixed income trades with broker/dealers in a predominantly dealer marketplace.
Trade allocation decisions are made by the portfolio manager at
the time of trade execution and orders entered on the fixed income order
management system. There is an ethical wall between the Avantis trading
desk
and all other American Century traders. The Advisor’s Global Head of Trading
monitors all trading activity for best execution and to make sure no
set
of clients is being systematically disadvantaged.
Finally,
investment of American Century’s corporate assets in proprietary accounts may
raise additional conflicts of interest. To mitigate these potential conflicts
of interest, American Century has adopted policies and procedures intended to
provide that trading in proprietary accounts is performed in a manner
that does not give improper advantage to American Century to the detriment of
client portfolios. None of the portfolio managers or investment
analysts servicing the American Beacon International Equity Fund perform
services for hedge funds or other private investment companies.
Barrow, Hanley, Mewhinney & Strauss, LLC
(“Barrow Hanley”)
Actual or potential conflicts of interest may
arise when a Portfolio
Manager
has management
responsibilities for more than one account including mutual fund,
CLO, or Private Fund accounts. When one Client has a relationship or
fee
arrangement with the adviser that is more valuable or could accelerate the fees
due to the adviser than another Client’s, the adviser might have an incentive
to favor that Client when allocating investment opportunities among multiple
Client accounts.
Barrow Hanley manages potential conflicts
between
funds,
CLOs, and/or
types of accounts through trade
allocation
policies and procedures, internal review processes, and oversight by the CCO,
directors,
and independent third
parties. The
Firm’s
investment management and trading policies are designed to address potential
conflicts in situations
where two or more funds,
CLOs,
or accounts participate in investment decisions involving the same securities or
issuer.
Brandywine Global Investment Management, LLC
(“Brandywine Global”)
Brandywine Global does not foresee any potentially material conflicts
of
interest as a result of concurrent management of the American Beacon Small Cap
Value Fund and other accounts. Brandywine Global follows the same
buy and sell discipline for all positions across all portfolios, subject to
client-specific
restrictions. Portfolios may differ in a strategy slightly due to differences
in available cash, contributions and withdrawals.
Causeway Capital Management LLC
(“Causeway”)
The Causeway portfolio managers who manage a portion, or “Sleeve,” of the
American Beacon
International Equity Fund (the “Sleeve”) also manage their own personal accounts
and other accounts, including corporations, pension plans, public
retirement plans, sovereign wealth funds, superannuation funds, Taft-Hartley
pension plans, endowments and foundations, mutual funds and other
collective investment vehicles, charities, private trusts and funds, wrap fee
programs, and other institutions (collectively, “Other Accounts”). In
managing
the Other Accounts, the portfolio managers employ investment strategies similar
to that used in managing the Sleeve, subject to certain variations
in investment restrictions. The portfolio managers purchase and sell securities
for the Sleeve that they also recommend to Other Accounts. The
portfolio managers at times give advice or take action with respect to certain
accounts that differs from the advice given other accounts with similar
investment strategies. The Other Accounts pay higher management fee rates than
the Sleeve or pay performance-based fees to Causeway. Causeway
is the investment adviser and sponsor of a number of mutual funds: Causeway
International Value Fund, Causeway Global Value Fund, Causeway
Emerging Markets Fund, Causeway International Opportunities Fund, Causeway
International Small Cap Fund, and Causeway Concentrated Equity
Fund (together, the “Causeway Mutual Funds”). Causeway also sponsors and manages
certain other commingled vehicles in its international value
equity strategy that are offered to institutional investors. Most of the
portfolio managers have personal investments in one or more of the Causeway
Mutual Funds. Each of Ms. Ketterer and Mr. Hartford hold, through estate
planning vehicles, a controlling voting stake in Causeway’s parent holding
company and Messrs. Eng, Muldoon, Valentini, Nguyen, Cho and Ms. Lee have
minority interests in Causeway’s parent holding company.
Actual
or potential conflicts of interest arise from the Sleeve’s portfolio managers’
management responsibilities with respect to the Other Accounts and their
own personal accounts. These responsibilities may cause portfolio managers to
devote unequal time and attention across client accounts and the differing
fees, incentives and relationships with the various accounts provide incentives
to favor certain accounts. Causeway has written compliance policies
and procedures designed to mitigate or manage these conflicts of interest. These
include policies and procedures to seek fair and equitable allocation
of investment opportunities (including IPOs) and trade allocations among all
client accounts and policies and procedures concerning the disclosure
and use of portfolio transaction information. Causeway also has a Code of Ethics
which, among other things, limits personal trading by portfolio
managers and other employees of Causeway. There is no guarantee that any such
policies or procedures will cover every situation in which a conflict
of interest arises.
DePrince, Race & Zollo, Inc.
(“DRZ”)
DRZ manages several accounts in accordance with its small cap value investment
strategy. There are varying fee structures
across the managed accounts, including performance/incentive fee structures.
Performance fee arrangements have the possibility of substantially
increasing DRZ’s compensation and therefore may create an incentive for the
portfolio manager to allocate investments with favorable return
characteristics to clients paying higher fees.
As
a matter of policy, DRZ’s investment professionals are prohibited from
considering performance fees, management fees and/or the status of performance
hurdles when allocating investment opportunities. In order to mitigate these
conflicts, DRZ’s investment allocation process is pre-set and is automated
via the firm’s order management system. Executed orders are allocated on a
prorated basis to all eligible accounts. Investment teams do not have
access to change the allocation process within the system.
Garcia Hamilton & Associates,
L.P. (“Garcia Hamilton”)
Garcia Hamilton’s investment teams and individual portfolio managers often
manage multiple
accounts, including separate accounts and mutual funds, according to the same or
a similar investment strategy. Side-by-side management of the
funds and other accounts raises the possibility of favorable or preferential
treatment of a client or a group of clients.
Garcia
Hamilton receives fees based on performance in cases where a client has proposed
and the Firm has accepted a performance-based fee arrangement.
Entitlement to a performance-based fee arrangement may create an incentive for
Garcia Hamilton to take risks in managing assets which may
be riskier or more speculative than those which would be recommended under a
different fee arrangement.
To
eliminate or significantly reduce the potential for conflicts of interest, all
accounts invested in a product are managed alike, subject to client restrictions,
in determining the timing of as well as the securities to be bought or sold
regardless of the fee arrangements. Garcia Hamilton has adopted
policies and procedures designed to address such conflicts, including, but not
limited to, aggregation of trades, allocation of investment opportunities,
and soft dollars. In addition, Garcia Hamilton does not have any broker-dealer
affiliates or have economic relationships that create a material
conflict of interest. Orders are placed and trades are executed subject to “Best
execution”, with brokers or dealers that Garcia Hamilton believes
are responsible and effect execution of such orders under conditions most
favorable to its accounts.
Garcia
Hamilton’s Code of Ethics is designed to assure that the personal securities
transactions, activities and interests of its employees will not interfere
with
(i) making decisions in the best interest of advisory clients and (ii)
implementing such decisions while, at the same time, allowing employees to
invest
for their own accounts.
To
help mitigate the potential for conflicts of interest, Garcia Hamilton’s Code of
Ethics imposes restrictions on the purchase or sale of securities for an
employee’s
own accounts and the accounts of certain household members and seeks to ensure
that employees do not personally benefit from the short-term
market effects of Garcia Hamilton’s investment decisions in client
accounts.
Hotchkis and Wiley Capital Management, LLC
(“Hotchkis”)
The Portfolio is managed by Hotchkis’ investment team (“Investment Team”). The
Investment
Team also manages institutional accounts and other mutual funds in several
different investment strategies. The portfolios within an investment
strategy are managed using a target portfolio; however, each portfolio may have
different restrictions, cash flows, tax and other relevant
considerations
which may preclude a portfolio from participating in certain transactions for
that investment strategy. Consequently, the performance of
portfolios may vary due to these different considerations. The Investment Team
may place transactions for one investment strategy that are directly
or
indirectly contrary to investment decisions made on behalf of another investment
strategy. Hotchkis also provides model portfolio investment recommendations
to sponsors without trade execution or additional services. The timing of model
delivery recommendations will vary depending on the
contractual arrangement with the program Sponsor. As a result, depending on the
program arrangement and circumstances surrounding a trade order,
Hotchkis’ discretionary clients may receive prices that are more favorable than
those received by a client of a program Sponsor or vice versa. Hotchkis
may be restricted from purchasing more than a limited percentage of the
outstanding shares of a company or otherwise restricted from trading
in a company’s securities due to other regulatory limitations. If a company is a
viable investment for more than one investment strategy, Hotchkis
has adopted policies and procedures reasonably designed to ensure that all of
its clients are treated fairly and equitably. Additionally, potential
and
actual conflicts of interest may also arise as a result of Hotchkis’ other
business activities and Hotchkis’ possession of material non-public information
about an issuer, which may have an adverse impact on one group of clients while
benefiting another group. In certain situations, Hotchkis will
purchase different classes of securities of the same company (e.g. senior debt,
subordinated debt, and or equity) in different investment strategies
which
can give rise to conflicts where Hotchkis may advocate for the benefit of one
class of security which may be adverse to another security that is held
by clients of a different strategy. Hotchkis seeks to mitigate the impact of
these conflicts on a case by case basis. Hotchkis utilizes soft dollars to
obtain
brokerage and research services, which may create a conflict of interest in
allocating clients’ brokerage business. Research services may be used
in
servicing any or all of Hotchkis’ clients (including model portfolio delivery
clients) across all of the firm’s investment strategies, and may benefit
certain
client accounts more than others. Certain discretionary client accounts may also
pay a less proportionate amount of commissions for research services.
If a research product provides both a research and a non-research function,
Hotchkis will make a reasonable allocation of the use and pay for the
non-research portion with hard dollars. Hotchkis will make decisions involving
soft dollars in a manner that satisfies the requirements of Section 28(e)
of the Securities Exchange Act of 1934. Different types of accounts and
investment strategies may have different fee structures. Additionally,
certain
accounts pay Hotchkis performance-based fees, which may vary depending on how
well the account performs compared to a benchmark. Because
such fee arrangements have the potential to create an incentive for Hotchkis to
favor such accounts in making investment decisions and allocations,
Hotchkis has adopted policies and procedures reasonably designed to ensure that
all of its clients are treated fairly and equitably, including in
respect of allocation decisions, such as initial public offerings. Since
accounts are managed to a target portfolio by the Investment Team, adequate
time
and resources are consistently applied to all accounts in the same investment
strategy. Investment personnel of the firm or its affiliates may be permitted
to be commercially or professionally involved with an issuer of securities. Any
potential conflicts of interest from such involvement would be monitored
for compliance with the firm’s Code of Ethics.
Lazard Asset Management LLC
(“Lazard”) Although
the potential for conflicts of interest exist when an investment adviser and
portfolio managers manage
other accounts that invest in securities in which the American Beacon
International Equity 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
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 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 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. As illustrated in the table above, most of the 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. |
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. |
Massachusetts Financial Services Company
(“MFS”)
MFS seeks to identify potential conflicts of interest resulting from a portfolio
manager’s management
of both the Fund and other accounts, and has adopted policies and procedures
reasonably
designed
to address such potential conflicts. There
is no guarantee that MFS will be successful in identifying or mitigating
conflicts of interest.
The
management of multiple funds and accounts (including accounts in which MFS or an
affiliate has an interest) gives rise to conflicts of interest if the
funds
and accounts have different objectives and strategies, benchmarks, time
horizons, and fees, as a portfolio manager must allocate his or her time
and
investment ideas across multiple funds and accounts. In certain instances, there
are securities which are suitable for the Fund’s portfolio as well as
for
one or more other accounts advised by MFS or its subsidiaries (including
accounts in which MFS or an affiliate has an interest) with similar investment
objectives. MFS’ trade allocation policies could have a detrimental effect on
the Fund if the Fund’s orders do not get fully executed or are delayed
in getting executed due to being aggregated with those of other accounts advised
by MFS or its subsidiaries. A portfolio manager may execute transactions
for another fund or account that may adversely affect the value of the Fund’s
investments. Investments selected for funds or accounts other
than the Fund may outperform investments selected for the Fund.
When
two or more accounts are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner
believed by MFS to be fair and equitable to each over time. Allocations may be
based on many factors and may not always be pro rata based on
assets managed. The allocation methodology could have a detrimental effect on
the price or availability of a security with respect to the Fund.
MFS
and/or a portfolio manager may have a financial incentive to allocate favorable
or limited opportunity investments or structure the timing of investments
to favor accounts other than the Fund; for instance, those that pay a higher
advisory fee and/or have a performance adjustment, those that
include an investment by the portfolio manager, and/or those in which MFS, its
officers and/or employees, and/or its affiliates own or have an interest.
To
the extent permitted by applicable law, certain accounts may invest their assets
in other accounts advised by MFS or its affiliates, including accounts
that
are advised by one or more of the same portfolio manager(s), which could result
in conflicts of interest relating to asset allocation, timing of purchases
and redemptions, and increased profitability for MFS, its affiliates, and/or its
personnel, including portfolio managers.
Newton Investment Management North America,
LLC (“NIMNA”)
It is the policy of NIMNA to make business decisions free from conflict.
NIMNA’s
objective is to recognize potential conflicts of interest and work to eliminate
or control and disclose such conflicts as they are identified. NIMNA’s
business decisions are based on its duty to its clients, and not driven by any
personal interest or gain.
As
an asset manager with
a diverse client base in a variety of strategies, conflicts of interest are
inherent. Furthermore, as an indirect subsidiary of The Bank
of New York Mellon Corporation (“BNY
Mellon”),
potential conflicts may also arise between NIMNA and other BNY
Mellon
companies. NIMNA will
take steps to provide reasonable assurance that no client or group of clients is
advantaged at the expense of any other client.
Compensation
The
following is a description provided by the Manager and each investment
sub-advisor regarding the structure of and criteria for determining the
compensation
of each Portfolio Manager as of October 31, 2023.
The Manager
Compensation of the Manager’s Portfolio Managers is comprised of base salary and
annual cash bonus. Each Portfolio Manager’s base annual
salary is fixed. The Manager determines base salary based upon comparison to
industry salary data. In addition, all Portfolio Managers participate
in the Manager’s annual cash bonus plan. The amount of the total bonus pool is
based upon the profitability of the Manager. Each Portfolio Manager
has a target bonus award expressed as a percentage of base salary, which is
determined by the Portfolio Manager’s level of responsibility. Additionally,
the Portfolio Managers may
participate
in the Manager’s equity incentive plan.
American
Century
The portfolio managers’ compensation is
structured to align the interests of portfolio managers with those of the
shareholders whose
assets they manage. It includes the components described below, each of which is
determined with reference to a number of factors such as overall
performance, market competition, and internal equity.
Base
Salary
Portfolio
managers receive base pay
in the form of a fixed annual salary.
Bonus
A
significant portion of portfolio manager compensation takes the form of an
annual incentive bonus which
is
determined by a combination of factors. One
factor is investment
performance. The
mutual funds‘
investment performance is generally
measured
by a combination of one-, three- and five-year pre-tax
performance relative to various benchmarks and/or internally
customized peer groups. The performance comparison periods may be adjusted
based
on a fund’s inception date or a portfolio manager’s tenure on the fund.
Portfolio
managers may have responsibility for multiple American Century Investments
mutual
funds. In such cases, the performance of each is assigned
a percentage weight appropriate for the portfolio manager’s relative levels of
responsibility.
Portfolio
managers also may have responsibility for other
types of managed portfolios or ETFs.
If the performance of a managed
account or
ETF is
considered
for purposes of compensation, it is generally
measured
via
the same criteria
as an American Century Investments
mutual fund (i.e., relative to
the performance of a benchmark and/or peer group.
A
second factor in the bonus calculation relates
to the performance of a
number of
American Century Investments
mutual funds
managed according to
one
of the following investment disciplines:
global growth equity, global value equity, disciplined equity, global
fixed-income,
and multi-asset strategies.
The
performance of American Century ETFs may also be included for certain investment
disciplines. Performance
is measured for each product
individually as described above and then combined to create an overall composite
for the product group. These composites may measure one-year
performance (equal weighted) or a combination of one-, three- and five-year
performance (equal or asset weighted) depending on the portfolio
manager’s responsibilities and products managed,
and the composite for certain portfolio managers may include multiple
disciplines. This feature
is designed to encourage effective teamwork among portfolio management teams in
achieving long-term investment success for similarly styled
portfolios.
A
portion of portfolio
managers’ bonuses may
be
discretionary and may be tied to factors such as profitability, or individual
performance goals, such as research
projects and/or
the development of new products.
Restricted
Stock Plans
Portfolio
managers are eligible for grants of restricted stock of ACC.
These grants are discretionary, and eligibility and availability can vary from
year to year.
The size of an individual’s grant is determined by individual and product
performance as well as other product-specific considerations such as
profitability.
Grants can appreciate/depreciate in value based on the performance of the ACC
stock during the restriction period (generally three to four years).
Deferred
Compensation Plans
Portfolio
managers are eligible for grants of deferred compensation. These grants are used
in very
limited
situations, primarily for retention purposes. Grants
are fixed and can appreciate/depreciate in value based on the performance of the
American Century Investments
mutual
funds in which the portfolio
manager chooses to invest them.
Barrow
Hanley
Compensation
for
our investment professionals is closely
tied
to their overall contribution to the success of our
clients’ investment results,
as well as the success of Barrow
Hanley. In addition to base
salary, all portfolio managers are
eligible to participate in a bonus pool. Portfolio
managers
are evaluated on the value each adds
to the overall investment process and performance.
The
amount of bonus compensation is based on a very extensive quantitative and
qualitative factor/matrix and may be substantially higher than an investment
professional’s base compensation. The compensation weightings between the two
measures are 50% quantitative and 50% qualitative. The
quantitative measures include their trailing one-year and three-year investment
performance. For the portfolio managers, investment performance is
measured relative to their respective strategies’ benchmark. Additionally, if a
portfolio manager produces strong and consistent relative performance
which
leads to retention or growth in their respective strategies, they will also be
incentivized based on their strategy’s contribution to the overall profitability
of the firm as well as their strategy’s contribution to the bonus
pool.
On
the qualitative measurement matrix, contributions in other areas are also
considered, such as meetings with clients and consultants, leadership and
mentoring,
and many other factors. All employees, including portfolio managers, receive an
annual profit-sharing contribution into their 401(k) account
of typically 15% (up to IRS limits) of their annual salary.
The
final component
of compensation of
key employees, including portfolio
managers,
is their interest in our equity plan. Each quarter, equity owners receive
a share of the firm’s
profits in the form of a dividend, which is
related to the performance of the entire firm.
We are a meritocracy-based firm where
the largest contributors to the success of our firm are compensated
appropriately.
Brandywine
Global
All portfolio managers, research analysts and traders earn a base salary and
bonus tied to investment performance. The performance
bonus is awarded based on performance compared to a proprietary performance
universe created for each team on a one-quarter, one-year,
three-year and five-year basis. The performance calculation is weighted to place
more emphasis on longer-term outperformance, and less emphasis
on the short-term. Investment professionals also receive a second quarterly
bonus based on the profitability of their product group. Each investment
team at Brandywine Global manages its own P&L and retains the bulk of its
profits at the end of each quarter. The portion that is not retained
is shared with the other investment teams in an effort to smooth income and to
promote cross-team fertilization and cooperation. Brandywine Global
has found that this form of compensation aligns the interests of investment
professionals and clients and leads to accountability and low-turnover
among Brandywine Global’s staff. In essence, the portfolio management teams own
all of the residual profits of the Firm, which Brandywine
Global believes leads to responsibility, accountability, and low turnover of
people.
The
percentage of compensation derived from each of the above components changes
over time. In general, the larger the percentage of total compensation
that will result from incentive pay will be paid to the more senior and
successful group.
Brandywine
Global believes that its compensation structure allows its investment team
members to focus on generating premium returns and building lasting
client relationships in which its interests are properly aligned with its
clients’ interests.
Causeway
Causeway provides subadvisory services to a portion or “Sleeve” of the American
Beacon International Equity Fund. Ms. Ketterer and Mr. Hartford,
the chief executive officer and president of Causeway, respectively, receive
annual salary and are entitled, as controlling owners of Causeway’s
parent holding company, to distributions of Causeway parent holding company’s
profits based on their ownership interests. They do not receive
incentive compensation. Causeway’s other portfolio managers receive salary and
may receive incentive compensation (including potential cash, awards
of growth units, or awards of equity units). Portfolio managers also receive,
directly or through estate planning vehicles, distributions of profits
based
on their minority ownership interests in Causeway’s parent holding
company.
Causeway’s
Compensation Committee, weighing a variety of objective and subjective factors,
determines salary and incentive compensation and, subject
to approval of Causeway’s parent holding company Board of Managers, may award
equity units. Portfolios are team-managed and salary and
incentive
compensation are not based on the specific performance of any single client
account, but take into account the performance of the individual portfolio
manager, the relevant team and Causeway’s overall performance and financial
results. For Fundamental portfolio managers, the performance of
stocks selected for client portfolios within a particular industry or sector
over a multi-year period relative to appropriate benchmarks will be relevant
for
portfolio managers assigned to that industry or sector.
Causeway
takes into account both quantitative and qualitative factors when determining
the amount of incentive compensation awarded, including the
following factors: individual research contribution, portfolio and team
management contribution, group research contribution, client service and
recruiting
contribution, and other contributions to client satisfaction and firm
development. The assessment of these factors takes into account both
current
and future risks and different factors can be weighted differently.
DRZ
The compensation structure consists of a base salary and participation in a
bonus program. Bonus compensation is determined by the firm’s profitability,
the investment strategies’ relative performance and relative rankings versus our
peers, as well as individual contributions to portfolio construction.
In addition, the firm’s professionals are eligible to own equity in the
firm.
Garcia
Hamilton Garcia
Hamilton offers a competitive salary based on an individual’s experience and
expected contribution to the firm. All Garcia Hamilton
portfolio managers are eligible for a general annual bonus that is tied directly
to the overall performance of the individual as well as the profitability
of the firm. In addition, all Garcia Hamilton portfolio managers are eligible
for equity ownership. Investment professionals with equity ownership
receive a fixed percentage of authorized distributions of Garcia Hamilton’s
profits based on their respective ownership stake in the company. The
Portfolio Manager’s compensation, which is flexible, is not based on the value
of the Fund’s assets.
Hotchkis
The Investment Team, including portfolio managers, is compensated in various
forms, which may include one or more of the following: (i) a base
salary, (ii) bonus, (iii) profit sharing and (iv) equity ownership. Compensation
is used to reward, attract and retain high quality investment professionals.
The Investment Team is evaluated and accountable at three levels. The first
level is individual contribution to the research and decision-making
process, including the quality and quantity of work achieved. The second level
is teamwork, generally evaluated through contribution within
sector teams. The third level pertains to overall portfolio and firm
performance. Fixed salaries and discretionary bonuses for investment
professionals
are determined by the Chief Executive Officer of Hotchkis using tools which may
include annual evaluations, compensation surveys, feedback
from other employees and advice from members of the firm’s Executive and
Compensation Committees. The amount of the bonus is determined
by the total amount of the firm’s bonus pool available for the year, which is
generally a function of revenues. No investment professional receives
a bonus that is a pre-determined percentage of revenues or net income.
Compensation is thus subjective rather than formulaic. The portfolio
managers
of the Funds own equity in Hotchkis. Hotchkis believes that the employee
ownership structure of the firm will be a significant factor in ensuring
a motivated and stable employee base going forward. Hotchkis believes that the
combination of competitive compensation levels and equity ownership
provides Hotchkis with a demonstrable advantage in the retention and motivation
of employees. Portfolio managers who own equity in Hotchkis
receive their pro rata share of Hotchkis’ profits. Investment professionals may
also receive contributions under Hotchkis’ profit sharing/401(k) plan.
Lazard Lazard’s
portfolio managers are generally responsible for managing multiple types of
accounts that may, or may not, invest in securities in which
the Fund may invest or pursue a strategy similar to the Fund’s strategies.
Portfolio managers responsible for managing the Fund may also manage
sub-advised registered investment companies, collective investment trusts,
unregistered funds and/or other pooled investment vehicles, separate
accounts, separately managed account programs (often referred to as “wrap
accounts”) and model portfolios.
Lazard
compensates portfolio managers 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 the teams of which they are a
member 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.
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, generally 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. The portfolio manager’s bonus also
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 Lazard Portfolios, in shares that vest in two to three
years. Certain portfolio managers’ bonus compensation may be tied
to a fixed percentage of revenue or assets generated by the accounts managed by
such portfolio management teams.
MFS
MFS’ philosophy is to align portfolio manager compensation with the goal to
provide shareholders with long-term value through a collaborative investment
process. Therefore, MFS uses long-term investment performance as well as
contribution to the overall investment process and collaborative culture
as key factors in determining portfolio manager compensation. In addition, MFS
seeks to maintain total compensation programs that are competitive
in the asset management industry in each geographic market where it has
employees. MFS uses competitive compensation data to ensure that
compensation practices are aligned with its goals of attracting, retaining, and
motivating the highest-quality professionals.
MFS
reviews portfolio manager compensation annually. In determining portfolio
manager compensation, MFS uses quantitative means and qualitative means
to help ensure a durable
investment process. As of December 31, 2022,
portfolio manager total cash compensation is a combination of base salary
and performance bonus:
Base
Salary
– Base salary generally represents a smaller percentage of portfolio manager
total cash compensation than performance bonus.
Performance
Bonus
– Generally, the performance bonus represents more than a majority of portfolio
manager total cash compensation.
The
performance bonus is based on a combination of quantitative and qualitative
factors, generally with more weight given to the former and less weight
given to the latter.
The
quantitative portion is primarily based on the pre-tax performance of accounts
managed by the portfolio manager over a range of fixed-length time
periods, intended to provide the ability to assess performance over time periods
consistent with a full market cycle and a strategy’s investment horizon.
The fixed-length time periods include the portfolio manager’s full tenure on
each fund/strategy
and, when available, ten-, five-, and three-year periods.
For portfolio managers who have served for less than three years, shorter-term
periods, including the one-year period, will also be considered, as
will performance in previous roles, if any, held at the firm. Emphasis is
generally placed on longer performance periods when multiple performance
periods
are available. Performance is evaluated across the full set of strategies and
portfolios managed by a given portfolio manager, relative to appropriate
peer group universes and/or representative indices (“benchmarks”). As of
December 31, 2022,
the following benchmarks were used to measure
the following portfolio managers’ performance for the portion of the American
Beacon Large Cap Value Fund sub-advised by MFS:
| |
Portfolio
Manager |
Benchmark(s) |
Katherine
Cannan |
Russell
1000®
Value Index |
Nevin
Chitkara |
Russell
1000®
Value Index |
Benchmarks
may include versions and components of indices, custom indices, and linked
indices that combine performance of different indices for different
portions of the time period, where appropriate.
The
qualitative portion is based on the results of an annual internal peer review
process (where portfolio managers are evaluated by other portfolio managers,
analysts, and traders) and management’s assessment of overall portfolio manager
contributions
to the MFS investment process and the client
experience (distinct from fund and other account performance).
The
performance bonus may
be in the form
of cash and/or
a deferred cash award,
at the discretion of management.
A deferred cash award is issued for
a cash value and becomes payable over a three-year vesting period if the
portfolio manager remains in the continuous employ of MFS or its affiliates.
During the vesting period, the value of the unfunded deferred cash award will
fluctuate as though the portfolio manager had invested the cash
value of the award in an MFS fund(s)
selected by the portfolio manager.
A selected fund may, but is not required to, be a fund that is managed by
the
portfolio manager.
MFS
Equity Plan
– Portfolio managers also typically benefit from the opportunity to participate
in the MFS Equity Plan. Equity interests are awarded by management,
on a discretionary basis, taking into account tenure at MFS, contribution to the
investment process, and other factors.
Finally,
portfolio managers also participate in benefit plans (including a defined
contribution plan and health and other insurance plans) and programs
available
generally to other employees of MFS. The percentage such benefits represent of
any portfolio manager’s compensation depends upon the length
of the individual’s tenure at MFS and salary level, as well as other
factors.
NIMNA
NIMNA employees are remunerated using a combination of base salary and
discretionary annual incentive which is delivered in a mix of cash and
deferred incentive depending on the level of incentive and appropriateness for
the role.
Discretionary
deferred incentive arrangements can include a mix of a long-term incentive plan
(LTIP), which has Newton real equity, and awards made under
a deferred cash plan linked to the performance of a basket of Newton-managed
portfolios (pooled vehicles). This approach aligns us closely with clients
and provides employees with an appropriately balance discretionary incentive
arrangement. Most discretionary incentive-eligible employees now receive
100% of their deferred awards in the deferred cash plan linked to the
performance of a basket of Newton-managed portfolios (pooled vehicles),
with members of the executive team receiving a portion of their incentive award
in the Newton real equity plan and a portion in the deferred cash
plan linked to the performance of a basket of Newton-managed portfolios (pooled
vehicles).
For
portfolio managers, a portion of the deferred cash award is linked to the
performance of a portfolio (pooled vehicle) where they form part of the
portfolio
management team, and the remaining portion is linked to the performance of the
Newton-wide basket of portfolios, providing and tangible and
direct link between compensation and the performance of the fund they are
responsible for.
For
awards made under the Newton equity plan the value of Newton equity is
calculated twice a year. The valuation is based on current and future
forecasted
financial performance of the Newton business. The class of shares, which the
participants hold, is non-voting and non-dividend-bearing and the
parent company (holding dividend-bearing NIM shares with voting rights) retains
100% control of Newton.
It
is intended that discretionary incentive awards will be made annually with
deferred elements having a three-year vesting period. For the Newton
equity
awards, the vesting period will be followed by a minimum further six-month and
one-day holding period.
Ownership of the
Funds
A
Portfolio Manager’s beneficial ownership of a Fund is defined as the Portfolio
Manager having the opportunity to share in any profit from transactions
in the Fund, either directly or indirectly, as the result of any contract,
understanding, arrangement, relationship or otherwise. Therefore, ownership
of Fund shares by members of the Portfolio Manager’s immediate family or by a
trust of which the Portfolio Manager is a trustee could be considered
ownership by the Portfolio Manager. The tables below set forth each Portfolio
Manager’s beneficial ownership of the Fund(s) under that
Portfolio
Manager’s management as of October 31, 2023 as
provided by the Manager and the Funds’ sub-advisors. In the following tables,
“N/A” indicates
that the Portfolio Manager does not have responsibility for that
Fund.
|
|
|
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Balanced
Fund |
American
Beacon International
Equity
Fund |
American
Beacon Large
Cap Value Fund |
American
Beacon Small
Cap Value Fund |
American
Beacon Advisors, Inc. |
|
|
|
|
Kirk
L. Brown |
None |
$100,001-
$500,000 |
$100,001-
$500,000 |
N/A |
Paul
B. Cavazos |
None |
$100,001-
$500,000 |
$100,001-
$500,000 |
$100,001-
$500,000 |
Colin
J. Hamer |
N/A |
N/A |
N/A |
$50,001-
$100,000 |
Erin
Higginbotham |
None |
N/A |
N/A |
N/A |
Robyn
A. Serrano |
N/A |
$10,001-$50,000 |
$10,001-$50,000 |
$10,001-$50,000 |
Samuel
Silver |
None |
N/A |
N/A |
N/A |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon International
Equity
Fund |
American
Century Investment Management, Inc. |
Jonathan
Veiga |
None |
Bert
Whitson |
None |
|
|
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Balanced
Fund |
American
Beacon Large
Cap Value Fund |
American
Beacon Small
Cap Value Fund |
Barrow,
Hanley, Mewhinney & Strauss, LLC |
Mark
Giambrone |
None |
None |
N/A |
W.
Coleman Hubbard |
N/A |
N/A |
None |
Justin
Martin |
None |
N/A |
N/A |
James
S. McClure |
N/A |
N/A |
None |
J.
Scott McDonald |
None |
N/A |
N/A |
Deborah
A. Petruzzelli |
None |
N/A |
N/A |
Matthew
Routh |
None |
N/A |
N/A |
DJ
Taylor |
N/A |
N/A |
$1-$10,000 |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Small Cap Value Fund |
Brandywine
Global Investment Management, LLC |
Michelle
K. Bevan |
None |
Henry
F. Otto |
Over
$1,000,000 |
Steven
M. Tonkovich |
$100,001
- $500,000 |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon International
Equity
Fund |
Causeway
Capital Management LLC |
Sarah
H. Ketterer |
None |
Harry
W. Hartford |
None |
Jonathan
Eng |
None |
Conor
Muldoon |
None |
Ellen
Lee |
None |
Alessandro
Valentini |
None |
Steven
Nguyen |
None |
Brian
Cho |
None |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Small
Cap Value Fund |
DePrince,
Race & Zollo, Inc. |
Gregory
Ramsby |
$100,001-$500,000 |
Randy
Renfrow |
None |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Garcia
Hamilton Quality
Bond Fund |
Garcia
Hamilton & Associates, L.P. |
Gilbert
Andrew Garcia |
Over
$1,000,000 |
Karen
H. Tass*
|
None |
Jeffrey
D. Detwiler*
|
$500,001-$1,000,000 |
Nancy
Rodriguez |
None |
* |
As
of December 31, 2023. |
|
|
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Balanced
Fund |
American
Beacon Large
Cap Value Fund |
American
Beacon Small
Cap Value Fund |
Hotchkis
and Wiley Capital Management, LLC |
|
|
|
George
Davis |
None |
None |
N/A |
David
Green |
N/A |
N/A |
None |
Scott
McBride |
None |
None |
N/A |
Patricia
McKenna |
None |
None |
N/A |
Jim
Miles |
N/A |
N/A |
None |
Judd
Peters |
None |
None |
N/A |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon International
Equity
Fund |
Lazard
Asset Management LLC |
Michael
A. Bennett |
None |
Giles
Edwards |
None |
Michael
G. Fry |
None |
Michael
Powers |
None |
Paul
Selvey-Clinton |
None |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Large
Cap Value Fund |
Massachusetts
Financial Services Company |
Katherine
Cannan |
None |
Nevin
Chitkara |
None |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Small
Cap Value Fund |
Newton
Investment Management North America, LLC |
Joseph
M. Corrado |
None |
Andrew
Leger |
None |
PORTFOLIO
SECURITIES TRANSACTIONS
In
selecting brokers or dealers to execute particular transactions, the Manager and
the sub-advisors are authorized to consider “brokerage and research services”
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934, as amended), provision of statistical quotations (including the
quotations necessary to determine a Fund’s NAV), and other information
provided to the applicable Fund, to the Manager and/or to the sub-advisors
(or their affiliates), provided, however, that the Manager or a sub-advisor must
always seek best execution. Research and brokerage
services
may include information on portfolio companies, economic analyses, and other
investment research services. The Trust does not allow the Manager
or sub-advisors to enter arrangements to direct transactions to broker-dealers
as compensation for the promotion or sale of Trust shares by those
broker-dealers. The Manager and the sub-advisors are also authorized to
cause a Fund to pay a commission (as defined in SEC interpretations) to
a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of the commission
another broker or dealer would have charged for effecting that transaction. The
Manager or the sub-advisors, as appropriate, must determine
in good faith, however, that such commission was reasonable in relation to the
value of the brokerage and research services provided, viewed
in terms of that particular transaction or in terms of all the accounts over
which the Manager or a sub-advisor exercises investment discretion. The
fees of the sub-advisors are not reduced by reason of receipt of such brokerage
and research services. However, with disclosure to and pursuant to written
guidelines approved by the Board, as applicable, the Manager, or the
sub-advisors (or a broker-dealer affiliated with them) may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 under the Investment Company Act) for
doing so. Brokerage and research services obtained with Fund commissions might
be used by the Manager and/or the sub-advisors, as applicable, to
benefit their other accounts under management.
The
Manager and each sub-advisor will place its own orders to execute securities
transactions that are designed to implement the applicable Fund’s investment
objective and policies. In placing such orders, each sub-advisor will seek best
execution. The full range and quality of services offered by the executing
broker or dealer will be considered when making these determinations. Pursuant
to written guidelines approved by the Board, as appropriate,
a sub-advisor of a Fund, or its affiliated broker-dealer, may execute
portfolio transactions and receive usual and customary brokerage commissions
(within the meaning of Rule 17e-1 of the Investment Company Act) for doing
so. A Fund’s turnover rate, or the frequency of portfolio transactions,
will vary from year to year depending on market conditions and a Fund’s
cash flows. High portfolio turnover increases a Fund’s transaction
costs,
including brokerage commissions, and may result in a greater amount of
recognized capital gains.
The
Investment Advisory Agreements provide, in substance, that in executing
portfolio transactions and selecting brokers or dealers, the principal
objective
of each sub-advisor is to seek best execution. In assessing available execution
venues, each sub-advisor shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the value of any eligible research, the financial condition and execution
capability of the broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. Transactions
with respect to the securities of small and emerging growth companies in
which a Fund may invest may involve specialized services on the
part
of the broker or dealer and thereby may entail higher commissions or spreads
than would be the case with transactions involving more widely traded
securities.
Each
Fund may establish brokerage commission recapture arrangements with certain
brokers or dealers. If a sub-advisor chooses to execute a transaction
through a participating broker, the broker rebates a portion of the commission
back to a Fund. Any collateral benefit received through participation
in the commission recapture program is directed exclusively to the Fund. Neither
the Manager nor any of the sub-advisors receive any benefits
from the commission recapture program. A sub-advisor’s participation in the
brokerage commission recapture program is optional. Each sub-advisor
retains full discretion in selecting brokerage firms for securities transactions
and is instructed to use the commission recapture program for a
transaction only if it is consistent with the sub-advisor’s obligation to seek
the best execution available.
Commission
Recapture
For
the fiscal year ended October 31, 2023,
the following Funds received the amounts shown below
as
a result of participation in the commission recapture
program:
| |
American
Beacon Fund |
Amount
Received |
American
Beacon Balanced Fund |
$851 |
American
Beacon Garcia Hamilton Quality Bond Fund |
- |
American
Beacon International Equity Fund |
$6 |
American
Beacon Large Cap Value Fund |
- |
American
Beacon Small Cap Value Fund |
$66,859 |
Brokerage
Commissions
For
the three most recent fiscal years ended October 31, the following brokerage
commissions were paid by the Funds. Fluctuations in brokerage commissions
from year to year were primarily due to increases or decreases in Fund assets
resulting in increased trading. Shareholders of these Funds bear
only their pro-rata portion of such expenses.
|
|
| |
American
Beacon Fund |
2021 |
2022 |
2023 |
American
Beacon Balanced Fund |
$47,789 |
$31,042 |
$31,814 |
American
Beacon Garcia Hamilton Quality Bond Fund |
$0 |
$0 |
$0 |
American
Beacon International Equity Fund |
$1,466,713 |
$988,348 |
$928,099 |
American
Beacon Large Cap Value Fund |
$1,264,057 |
$730,929 |
$757,891 |
American
Beacon Small Cap Value Fund |
$4,421,838 |
$5,066,612 |
$4,603,699 |
Soft
Dollars
The
table below reflects the amount of transactions each Fund directed to brokers in
part because of research services provided and the amount paid in
commissions on such transactions for the fiscal year ended October 31,
2023.
|
| |
American
Beacon Fund |
Amounts
Directed |
Amounts
Paid in Commissions |
American
Beacon Balanced Fund |
$343,517,595 |
$301,921 |
American
Beacon Garcia Hamilton Quality Bond Fund |
$0 |
$0 |
American
Beacon International Equity Fund |
$1,223,305,829 |
$434,985 |
American
Beacon Large Cap Value Fund |
$625,017,034 |
$342,087 |
American
Beacon Small Cap Value Fund |
$4,410,765,784 |
$1,867,045 |
Affiliated
Broker Commissions
For
the three most recent fiscal years ended October 31, the following
brokerage commissions were paid to affiliated brokers by the Funds:
|
|
|
|
| |
American
Beacon Fund |
Broker |
Affiliated
With |
2021
Commissions |
2022
Commissions |
2023
Commissions |
American
Beacon Small Cap Value Fund |
Keybanc
Capital Markets (cleared with affiliate
Pershing) |
Newton
Investment Management
North America |
$74,614 |
$89,171 |
$53,206 |
American
Beacon Small Cap Value Fund |
Leerink
Partners LLC (cleared with affiliate Pershing) |
Newton
Investment Management
North America |
$18,551 |
$14,782 |
$3,408 |
American
Beacon Small Cap Value Fund |
Needham
& Company (cleared with affiliate Pershing) |
Newton
Investment Management
North America |
$1,249 |
$0 |
$0 |
American
Beacon Small Cap Value Fund |
Berenberg
Capital Markets (cleared with affiliate
Pershing) |
Newton
Investment Management
North America |
$4,071 |
$19,568 |
$0 |
American
Beacon Small Cap Value Fund |
Piper
Jaffray Ltd. (cleared with affiliate Pershing) |
Newton
Investment Management
North America |
$167,908 |
$146,624 |
$92,901 |
The
percentage of total commissions of the American Beacon Small Cap Value Fund paid
to affiliated brokers in fiscal year 2021
was 6.02%.
The transactions
represented 3.01%
of the American Beacon Small Cap Value Fund’s total dollar value of portfolio
transactions for the fiscal year ended October
31, 2021.
The
percentage of total commissions of the American Beacon Small Cap Value Fund paid
to affiliated brokers in fiscal year 2022
was 5.33%.
The transactions
represented 3.90%
of the American Beacon Small Cap Value Fund’s total dollar value of portfolio
transactions for the fiscal year ended October
31, 2022.
The
percentage of total commissions of the American Beacon Small Cap Value Fund paid
to affiliated brokers in fiscal year 2023
was 3.26%.
The transactions
represented 2.91%
of the American Beacon Small Cap Value Fund’s total dollar value of portfolio
transactions for the fiscal year ended October
31, 2023
Securities
Issued by Top 10 Brokers
The
following table lists each Fund that as of the fiscal year ended October
31, 2023 held
securities issued by a broker-dealer (or by its parent) that was one
of the top ten brokers or dealers through which a Fund executed transactions or
sold shares.
|
| |
Regular
Broker-Dealers |
American
Beacon Fund |
Aggregate
Value
of Securities (000’s) |
Bank
of America Corp |
American
Beacon Balanced Fund |
$239 |
State
Street Corp |
American
Beacon Balanced Fund |
$472 |
Goldman
Sachs Group Inc |
American
Beacon Balanced Fund |
$597 |
BNY
Mellon |
American
Beacon Balanced Fund |
$650 |
Citigroup
Inc |
American
Beacon Balanced Fund |
$1,119 |
Wells
Fargo & Co |
American
Beacon Balanced Fund |
$1,826 |
Citigroup
Inc |
American
Beacon Garcia Hamilton Quality Bond Fund |
$5,028 |
UBS
Group |
American
Beacon International Equity Fund |
$1,435 |
Barclays
PLC |
American
Beacon International Equity Fund |
$14,401 |
Bank
of America Corp |
American
Beacon Large Cap Value Fund |
$7,333 |
State
Street Corp |
American
Beacon Large Cap Value Fund |
$14,359 |
Morgan
Stanley |
American
Beacon Large Cap Value Fund |
$16,325 |
|
| |
Regular
Broker-Dealers |
American
Beacon Fund |
Aggregate
Value
of Securities (000’s) |
Goldman
Sachs Group |
American
Beacon Large Cap Value Fund |
$18,657 |
BNY
Mellon |
American
Beacon Large Cap Value Fund |
$20,259 |
JP
Morgan Chase & Co |
American
Beacon Large Cap Value Fund |
$39,316 |
Stifel
Financial Corp |
American
Beacon Small Cap Value Fund |
$12,574 |
ADDITIONAL
PURCHASE AND SALE INFORMATION FOR A CLASS SHARES
Sales Charge Reductions and
Waivers
As
described in the Prospectus, there are various ways to reduce your sales charge
when purchasing A Class shares. Additional information about A Class
sales charge reductions is provided below.
LOI.
The LOI may be revised upward at any time during the 13-month period of the LOI
(“LOI Period”), and such a revision will be treated as a new LOI, except
that the LOI Period during which the purchases must be made will remain
unchanged. Purchases made from the date of revision will receive the
reduced
sales charge, if any, resulting from the revised LOI. The LOI will be considered
completed if the shareholder dies within the 13-month LOI Period.
Commissions to dealers will not be adjusted or paid on the difference between
the LOI amount and the amount invested before the shareholder’s
death.
All
dividends and other distributions on shares held in escrow will be credited to
the shareholder’s account in shares (or paid in cash, if requested). If
the
intended investment is not completed within the specified LOI Period, the
purchaser may be required to remit to the transfer agent the difference
between
the sales charge actually paid and the sales charge which would have been paid
if the total of such purchases had been made at a single time.
Any dealers assigned to the shareholder’s account at the time a purchase was
made during the LOI Period will receive a corresponding commission
adjustment if appropriate. If the difference is not paid by the close of the LOI
Period, the appropriate number of shares held in escrow will be
redeemed to pay such difference. If the proceeds from this redemption are
inadequate, the purchaser may be liable to the Funds for the balance still
outstanding.
Rights of
Accumulation.
Subject to the limitations described in the aggregation policy, you may take
into account your accumulated holdings in any class
of the American Beacon Funds to determine your sales charge for A Class shares
on investments in accounts eligible to be aggregated. If you make
a gift of A Class shares, upon your request, you may purchase the shares at the
sales charge discount allowed under rights of accumulation of all of
your investments in any class of the American Beacon Funds.
Aggregation.
Qualifying investments for aggregation include those made by you and your
“immediate family” as defined in the Prospectus, if all parties
are purchasing shares for their own accounts and/or:
■ |
individual-type
employee benefit plans, such as an IRA, individual 403(b) plan or
single-participant Keogh-type plan; |
■ |
business
accounts solely controlled by you or your immediate family (for example,
you own the entire business); |
■ |
trust
accounts established by you or your immediate family (for trusts with only
one primary beneficiary, upon the trustor’s death the trust account
may
be aggregated with such beneficiary’s own accounts; for trusts with
multiple primary beneficiaries, upon the trustor’s death the trustees of
the trust
may instruct the
Funds’
transfer agent to establish separate trust accounts for each primary
beneficiary; each primary beneficiary’s separate trust account
may then be aggregated with such beneficiary’s own
accounts); |
■ |
endowments
or foundations established and controlled by you or your immediate family;
or |
■ |
529
accounts, which will be aggregated at the account owner level (Class 529-E
accounts may only be aggregated with an eligible employer
plan). |
Individual
purchases by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are:
■ |
for
a single trust estate or fiduciary account, including employee benefit
plans other than the individual-type employee benefit plans described
above; |
■ |
made
for two or more employee benefit plans of a single employer or of
affiliated employers as defined in the Investment Company Act, excluding
the
individual-type employee benefit plans described
above; |
■ |
for
nonprofit, charitable or educational organizations, or any endowments or
foundations established and controlled by such organizations, or any
employer-sponsored
retirement plans established for the benefit of the employees of such
organizations, their endowments, or their foundations;
or |
■ |
for
individually established participant accounts of a 403(b) plan that is
treated similarly to an employer-sponsored plan for sales charge purposes
(see
“Purchases by certain 403(b) plans” under “Sales Charges” above), or made
for two or more such 403(b) plans that are treated similarly to
employer-sponsored
plans for sales charge purposes, in each case of a single employer or
affiliated employers as defined in the Investment Company Act.
Purchases made for nominee or street name accounts (securities held in the
name of a broker-dealer or another nominee such as a bank trust
department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or
street name accounts unless otherwise qualified as described
above. |
Concurrent
Purchases.
As described in the Prospectus, you may reduce your A Class sales charge by
combining simultaneous purchases in any of the American
Beacon Funds.
Other Purchases.
Pursuant to a determination of eligibility by the Manager, A Class shares of a
Fund may be sold at NAV per share (without the imposition
of a front-end sales charge) to:
1 |
current
or retired trustees, and officers of the American Beacon Funds family,
current or retired employees and directors of the Manager and its
affiliated
companies, certain family members and employees of the above persons, and
trusts or plans primarily for such persons; |
2 |
currently
registered representatives and assistants directly employed by such
representatives, retired registered representatives with respect to
accounts
established while active, or full-time employees (collectively, “Eligible
Persons”) (and their spouses, and children, including children in step
and
adoptive relationships, sons-in-law and daughters-in-law, if the Eligible
Persons or the spouses or children of the Eligible Persons are listed in
the
account registration with the spouse or parent) of broker-dealers who have
sales agreements with the Distributor (or who clear transactions
through
such dealers), plans for the dealers, and plans that include as
participants only the Eligible Persons, their spouses and/or
children; |
3 |
companies
exchanging securities with the Funds through a merger, acquisition or
exchange offer; |
4 |
insurance
company separate accounts; |
5 |
accounts
managed by the Manager, a sub-advisor to the Funds and their affiliated
companies; |
6 |
the
Manager or a sub-advisor to the Funds and their affiliated
companies; |
7 |
an
individual or entity with a substantial business relationship with, which
may include the officers and employees of the Funds’ custodian or
transfer
agent, the Manager or a sub-advisor to the Funds and their affiliated
companies, or an individual or entity related or relating to such
individual
or entity; |
8 |
full-time
employees of banks that have sales agreements with the Distributor, who
are solely dedicated to directly supporting the sale of mutual
funds; |
9 |
directors,
officers and employees of financial institutions that have a selling group
agreement with the Distributor; |
10 |
banks,
broker-dealers and other financial institutions (including registered
investment advisors and financial planners) that have entered into an
agreement
with the Distributor or one of its affiliates, purchasing shares on behalf
of clients participating in a fund
supermarket or in a wrap program,
asset allocation program or other program in which the clients pay an
asset-based fee; |
11 |
clients
of authorized dealers purchasing shares in fixed or flat fee brokerage
accounts; |
12 |
Employer-sponsored
defined contribution - type plans, including 401(k) plans, 457 plans,
employer sponsored 403(b) plans, profit-sharing and money
purchase pension plans, defined benefit plans and non-qualified deferred
compensation plans, and IRA rollovers involving retirement plan
assets
invested in a Fund in the American Beacon Funds fund family;
and |
13 |
Employee
benefit and retirement plans for the Manager and its
affiliates. |
Shares
are offered at NAV per share to these persons and organizations due to
anticipated economies in sales effort and expense. Once an account is
established
under this NAV per share privilege, additional investments can be made
at NAV per share for the life of the account.
It
is possible that a broker-dealer may not be able to offer one or more of these
waiver categories. If this situation occurs, it is possible that the investor
would
need to invest through another broker-dealer in order to take advantage of these
waiver categories. The Funds may terminate or amend the terms
of these sales charge waivers at any time.
Moving Between
Accounts.
Investments in certain account types may be moved to other account types without
incurring additional A Class sales charges.
These transactions include, for example:
■ |
redemption
proceeds from a non-retirement account (for example, a joint tenant
account) used to purchase Fund shares in an IRA or other individual-type
retirement account; |
■ |
“required
minimum distributions” (as described in Section 401(a)(9) of the Internal
Revenue Code) from an IRA or other individual-type retirement
account
used to purchase Fund shares in a non-retirement account;
and |
■ |
death
distributions paid to a beneficiary’s account that are used by the
beneficiary to purchase Fund shares in a different
account. |
It
is possible that a broker-dealer may not be able to offer the ability to move
between accounts. If this situation occurs, it is possible that the investor
would
need to invest through another broker-dealer in order to take advantage of this
privilege. Please contact your financial intermediary for additional
information.
ADDITIONAL
INFORMATION REGARDING CONTINGENT DEFERRED SALES CHARGES
As
discussed in the Prospectus, the redemption of C Class shares may be subject to
a CDSC if you redeem your shares within 12 months of purchase. If you
purchased $1,000,000 or more of A Class shares of a Fund (and therefore paid no
initial sales charges) and subsequently redeem your shares within
18 months of your purchase, you may be charged a CDSC upon redemption. In
determining whether the CDSC is payable, it is assumed that shares
not subject to the CDSC are the first redeemed followed by other shares held for
the longest period of time. The CDSC will not be imposed upon
shares representing reinvested dividends or other distributions, or upon amounts
representing share appreciation. As described in the Prospectus, there
are various circumstances under which the CDSC will be waived. Additional
information about CDSC waivers is provided below.
The
CDSC is waived under the following circumstances:
■ |
Any
partial or complete redemption following death or “disability” (as defined
in the Internal Revenue Code) of a shareholder (including one who
owns
the shares with his or her spouse as a joint tenant with rights of
survivorship) from an account in which the deceased or disabled is named.
The
Manager or a Fund’s transfer agent may require documentation prior to
waiver of the charge, including death certificates, physicians’
certificates,
etc. |
■ |
Redemptions
from a systematic withdrawal plan. If the systematic withdrawal plan is
based on a fixed dollar amount or number of shares, systematic
withdrawal
redemptions are limited to no more than 10% of your account value or
number of shares per year, as of the date the Manager or a Fund’s
transfer agent receives your request. If the systematic withdrawal plan is
based on a fixed percentage of your account value, each redemption
is
limited to an amount that would not exceed 10% of your annual account
value at the time of withdrawal. |
■ |
Redemptions
from retirement plans qualified under Section 401 of the Internal Revenue
Code. The CDSC will be waived for benefit payments made by
American Beacon Funds directly to plan participants. Benefit payments
include, but are not limited to, payments resulting from death,
“disability,” “retirement,”
“separation from service” (each as defined in the Internal Revenue Code),
“required minimum distributions” (as described in Section 401(a)(9)
of the Internal Revenue Code), in-service distributions, hardships, loans
and qualified domestic relations orders. The CDSC waiver will not
apply
in the event of termination of the plan or transfer of the plan to another
financial institution. |
■ |
Redemptions
that are required minimum distributions from a traditional IRA as required
by the Internal Revenue Service. |
■ |
Involuntary
redemptions as a result of your account not meeting the minimum balance
requirements, the termination and liquidation of the Fund, or other
actions by the Fund. |
■ |
Distributions
from accounts for which the broker-dealer of record has entered into a
written agreement with the Distributor (or Manager) allowing this
waiver. |
■ |
To
return excess contributions made to a retirement
plan. |
■ |
To
return contributions made due to a mistake of
fact. |
The
following example illustrates the operation of the CDSC. Assume that you open an
account and purchase 1,000 shares at $10 per share and that six
months later the NAV per share is $12 and, during such time, you have acquired
50 additional shares through reinvestment of distributions. If at such
time you should redeem 450 shares (proceeds of $5,400), 50 shares will not be
subject to the charge because of dividend reinvestment. With respect
to the remaining 400 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in NAV per share of $2 per share.
Therefore, $4,000 of the $5,400 redemption proceeds will pay the charge. At the
rate of 1.00%, the CDSC would be $40 for redemptions of C Class
shares. In determining whether an amount is available for redemption without
incurring a deferred sales charge, the purchase payments made for
all shares in your account are aggregated.
REDEMPTIONS
IN KIND
Although
each Fund intends to redeem shares in cash, each Fund reserves the right to pay
the redemption price in whole or in part by a distribution of securities
or other assets. However, shareholders always will be entitled to redeem shares
for cash up to the lesser of $250,000 or 1% of the applicable Fund’s
net asset value during any 90-day period. Redemption in kind is not as liquid as
a cash redemption. In addition, to the extent a Fund redeems its shares
in this manner, the shareholder assumes the risk of a subsequent change in the
market value of those securities, the cost of liquidating the securities
and the possibility of a lack of a liquid market for those
securities.
TAX
INFORMATION
The
tax information in the Prospectus and in this section relates solely to the
federal income tax law and assumes that each Fund
will continue to qualify
each taxable year as a “regulated investment company” (“RIC”) under the Internal
Revenue Code (as discussed below). The tax information in this
section is only a summary of certain key federal tax considerations affecting
the Funds and their shareholders and is in addition to the tax information
provided in the Prospectus. No attempt has been made to present a complete
explanation of the federal income tax treatment of the Funds
or the tax implications to their
shareholders. The discussions here and in the Prospectus are not intended as
substitutes for careful tax planning. The
tax information is based on the Internal Revenue Code and applicable regulations
in effect, and administrative pronouncements and judicial decisions
publicly available, on the date of this SAI. Future legislative, regulatory or
administrative changes or court decisions may significantly change the
tax rules applicable to each
Fund and its
shareholders. Any of these changes or court decisions may have a retroactive
effect.
Taxation of the
Funds
Each
Fund intends to continue to qualify each taxable year for treatment as a
RIC under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue
Code. To so qualify, a
Fund (which is treated as a separate corporation for these purposes) must, among
other requirements:
■ |
Derive
at least 90% of its gross income each taxable year from (1) dividends,
interest, payments with respect to securities loans and gains from the
sale
or other disposition of securities or foreign currencies (together with
Qualifying Other Income (as defined below), “Qualifying Income”), or other
income,
including gains from options, futures or forward contracts, derived with
respect to its business of investing in securities or those currencies
(“Qualifying
Other Income”) and (2) net income derived from an interest in a “qualified
publicly traded partnership” (“QPTP”) (“Gross Income Requirement”).
A QPTP is a “publicly traded partnership” (that is, a partnership the
interests in which are “traded on an established securities market”
or “readily tradable on a secondary market (or the substantial equivalent
thereof)” (a “PTP”)) that meets certain qualifying income requirements
other than a partnership at least 90% of the gross income of which is
Qualifying Income; |
■ |
Diversify
its investments so that, at the close of each quarter of its taxable year,
(1) at least 50% of the value of its total assets is represented by cash
and
cash items, Government securities, securities of other RICs, and other
securities, with those other securities limited, in respect of any one
issuer, to
an amount that does not exceed 5% of the value of the Fund’s total assets
and that does not represent more than 10% of the issuer’s outstanding
voting securities (equity securities of QPTPs being considered voting
securities for these purposes), and (2) not more than 25% of the
value
of its total assets is invested in (a) the securities (other than
Government securities or securities of other RICs) of any one
issuer, (b) the securities
(other than securities of other RICs) of two or more issuers the Fund
controls (by owning 20% or more of their voting power) that are
determined
to be engaged in the same, similar or related trades or businesses, or (c)
the securities of one or more QPTPs (“Diversification Requirements”);
and |
■ |
Distribute
annually to its shareholders at least the sum of 90% of its investment
company taxable income (generally, net investment income, the excess
(if any) of net short-term capital gain over net long-term capital loss,
and net gains and losses (if any) from certain foreign currency
transactions,
all determined without regard to any deduction for dividends paid) and 90%
of its net exempt interest income (“Distribution Requirement”). |
By
qualifying for treatment as a RIC, a Fund (but not its shareholders) will be
relieved of federal income tax on the part of its investment company
taxable
income and net capital gain (i.e., the excess of net long-term capital gain over
net short-term capital loss) that it distributes to its shareholders.
If
for any taxable year a Fund does not qualify for that treatment - either (1) by
failing to satisfy the Distribution Requirement, even if it satisfies the
Gross
Income and Diversification Requirements (“Other Requirements”), or (2) by
failing to satisfy any of the Other Requirements and is unable to, or
determines
not to, avail itself of Internal Revenue Code provisions that enable a RIC to
cure a failure to satisfy any of the Other Requirements as long as the
failure “is due to reasonable cause and not due to willful neglect” and the RIC
pays a deductible tax calculated in accordance with those provisions
and
meets certain other requirements - then for federal tax purposes, all of its
taxable income (including its net capital gain) would be subject to tax at
the
regular corporate rate without any deduction for dividends paid to its
shareholders, and the dividends it pays would be taxable to its shareholders
as
ordinary income (or possibly, (a) for individual and certain other non-corporate
shareholders (each, an “individual”), as “qualified dividend income”
(as
described in the Prospectus) (“QDI”), and/or (b) in the case of corporate
shareholders that meet certain holding period and other requirements
regarding
their Fund shares, as eligible for the dividends-received deduction (“DRD”)) to
the extent of the Fund’s current and accumulated earnings and
profits. Failure to qualify for RIC treatment would therefore have a negative
impact on a Fund’s income and performance. Furthermore, a Fund could
be required to recognize unrealized gains, pay substantial taxes and interest,
and make substantial distributions before requalifying for RIC treatment.
It is possible that a Fund will not qualify as a RIC in any given taxable
year.
A
Fund will be subject to a nondeductible 4% federal excise tax (“Excise Tax”) to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and substantially all of its “capital
gain net income” for the one-year period ending on
October 31 of
that year, plus certain other amounts. Each Fund intends to make sufficient
distributions by the end of each calendar year to avoid liability for the
Excise
Tax.
Taxation of Certain Investments and
Strategies
Hedging
strategies, such as entering into forward contracts and selling (writing) and
purchasing options and futures contracts, involve complex rules that
will determine for federal income tax purposes the amount, character and timing
of recognition of gains and losses a Fund may realize in connection
therewith. In general, a Fund’s (1) gains from the disposition of foreign
currencies and (2) gains from such contracts will be treated as Qualifying
Income under the Gross Income Requirement.
Dividends
and interest a Fund receives, and gains it realizes, on foreign securities may
be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions (collectively, “foreign taxes”) that would
reduce the yield and/or total return on its securities. Tax treaties
between
certain countries and the United States may reduce or eliminate foreign taxes,
however, and many foreign countries do not impose taxes on capital
gains realized on investments by foreign investors. It is impossible to
determine the effective rate of any Fund’s foreign tax in advance, since the
amount
of its assets to be invested in various countries is not known.
Each
Fund may invest in the stock of “passive foreign investment companies”
(“PFICs”). A PFIC is any foreign corporation (with certain exceptions)
that,
in general, meets either of the following tests for a taxable year: (1) at least
75% of its gross income is passive; or (2) an average of at least 50%
of
the value (or adjusted tax basis, if elected) of its assets produce, or are held
for the production of, passive income. Under certain circumstances, a
Fund
will be subject to federal income tax on a portion of any “excess distribution”
it receives on the PFIC stock and of any gain on its disposition of that
stock (collectively, “PFIC income”), plus interest thereon, even if the Fund
distributes the PFIC income as a dividend to its shareholders. The balance
of the PFIC income will be included in a Fund’s investment company taxable
income and, accordingly, will not be taxable to it to the extent it distributes
that income to its shareholders. Fund distributions thereof will not be eligible
to be treated as QDI or for the DRD.
If
a Fund invests in a PFIC and elects to treat the PFIC as a “qualified electing
fund” (“QEF”), then in lieu of incurring the foregoing tax and interest
obligation,
the Fund would be required to include in income each taxable year its pro rata
share of the QEF’s annual ordinary earnings and net capital gain
— which the Fund likely would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax — even if the QEF
did
not distribute those earnings and gain to the Fund. In most instances, however,
it will be very difficult, if not impossible, to make this election because
of certain requirements thereof.
Alternatively,
each Fund may elect to “mark to market” any stock in a PFIC it owns at the end
of its taxable year, in which event it likely would be required
to distribute to its shareholders any resulting gains to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax. “Marking-to-market,”
in this context, means including in gross income each taxable year (and treating
as ordinary income) the excess, if any, of the fair market
value of the stock over a Fund’s adjusted basis therein (including any net
mark-to-market gain or loss for each prior taxable year for which an
election
was in effect) as of the end of that year. Pursuant to the election, a Fund also
would be allowed to deduct (as an ordinary, not a capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market
gains with respect to that stock the Fund included in income for prior taxable
years under the election. A Fund’s adjusted basis in each PFIC’s
stock subject to the election would be adjusted to reflect the amounts of income
included and deductions taken thereunder.
Investors
should be aware that determining whether a foreign corporation is a PFIC is a
fact-intensive determination that is based on various facts and circumstances
and thus is subject to change, and the principles and methodology used therein
are subject to interpretation. As a result, a Fund may not be
able, at the time it acquires a foreign corporation’s stock, to ascertain
whether the corporation is a PFIC and a foreign corporation may become a
PFIC
after the Fund acquires stock therein. While each Fund generally will seek to
minimize its investment in PFIC stock, and to make appropriate elections
when they are available, to lessen the adverse tax consequences detailed above,
there are no guarantees that it will be able to do so, and each
Fund reserves the right to make those investments as a matter of its investment
policy.
A
Fund may invest in one or more LLCs and limited partnerships (“LPs”) that will
be classified for federal tax purposes as partnerships (and, except as
expressly
stated below, this discussion assumes that classification). LLCs and LPs in
which a Fund may invest may include a “publicly traded partnership”
(that is, a partnership the interests in which are “traded on an established
securities market” or “readily tradable on a secondary market (or
the substantial equivalent thereof)”) (a “PTP”), which may be a QPTP, which
satisfies certain qualifying income requirements as describe above, or a
non-QPTP,
which does not satisfy those income requirements.
If
an LLC or LP in which a Fund invests is a QPTP, all its net income (regardless
of source) will be Qualifying Income for the Fund under the Gross Income
Requirement.
A Fund’s investment in QPTPs, together with certain other investments, however,
may not exceed 25% of the value of its total assets at the
end of each quarter of its taxable year in order to satisfy one of the
Diversification Requirements.
With
respect to non-QPTPs, (1) if an LLC or LP (including a PTP) is treated for
federal tax purposes as a corporation, distributions from it to a Fund
might
be treated as QDI and eligible for the DRD and disposition of the Fund’s
interest therein would generate gain or loss from the disposition of a
security,
or (2) if such an LLC or LP is not treated for those purposes as a corporation,
the Fund would be treated as having earned its proportionate share
of each item of income the LLC or LP earned. In the latter case, the Fund would
be able to treat its share of the entity’s income as Qualifying Income
under the Gross Income Requirement only to the extent that income would be such
if realized directly by the Fund in the same manner as realized
by the LLC or LP. Certain LLCs and LPs (e.g., private funds) in which a Fund may
invest may generate income and gains that are not such Qualifying
Income. Each Fund will monitor its investments in LLCs and LPs to assure its
compliance with the requirements for continued qualification as a
RIC.
Some
futures contracts, foreign currency contracts, and “non-equity” options (i.e.,
certain listed options, such as those on a “broad-based” securities index)
- except any “securities futures contract” that is not a “dealer securities
futures contract” (both as defined in the Internal Revenue Code) and
any
interest rate swap, currency swap, basis swap, interest rate cap, interest rate
floor, commodity swap, equity swap, equity index swap, credit default
swap,
or similar agreement - in which a Fund invests may be subject to Internal
Revenue Code section 1256 (collectively, “Section 1256 contracts”). Any
Section 1256 contract a Fund holds at the end of its taxable year must be
“marked-to-market” (that is, treated as having been sold at that time
for
its fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized.
Sixty
percent of any net gain or loss realized on these deemed sales, and 60% of any
net realized gain or loss 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 1256 contracts also
may be marked-to-market for purposes of the Excise Tax. These rules may operate
to increase the amount that a Fund must distribute to satisfy the
Distribution Requirement (i.e., with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary
income
when distributed to them, and to increase the net capital gain a Fund
recognizes, without in either case increasing the cash available to
it.
Under
Internal Revenue Code section 988, a gain or loss (1) from the disposition of
foreign currencies, (2) except in certain circumstances, from options,
futures, and forward contracts on foreign currencies (and on financial
instruments involving foreign currencies) and from notional principal
contracts
(e.g., swaps, caps, floors, and collars) involving payments denominated in
foreign currencies, (3) on the disposition of each foreign-currency-denominated
debt security that is attributable to fluctuations in the value of the foreign
currency between the dates of acquisition and
disposition of the security, and (4) that is attributable to exchange rate
fluctuations between the time a Fund accrues interest, dividends, or other
receivables
or expenses or other liabilities denominated in a foreign currency and the time
it actually collects the receivables or pays the liabilities generally
will be treated as ordinary income or loss. These gains or losses will
increase or decrease the amount of a Fund’s investment company taxable
income
to be distributed to its shareholders as ordinary income, rather than affecting
the amount of its net capital gain. If a Fund’s section 988 losses exceed
its other investment company taxable income for a taxable year, the Fund would
not be able to distribute any dividends, and any distributions made
during that year (including those made before the losses were realized) would be
characterized as a non-taxable “return of capital” to shareholders,
rather than as a dividend, thereby reducing each shareholder’s basis in his or
her Fund shares and treating any part of such distribution exceeding
that basis as gain from the disposition of those shares.
Offsetting
positions a Fund enters into or holds in any actively traded option, futures or
forward contract may constitute a “straddle” for federal income
tax purposes. Straddles are subject to certain rules that may affect the amount,
character and timing of recognition of a Fund’s gains and losses with
respect to positions of the straddle by requiring, among other things, that (1)
losses realized on disposition of one position of a straddle be deferred
to the extent of any unrealized gain in an offsetting position until the latter
position is disposed of, (2) a Fund’s holding period in certain straddle
positions not begin until the straddle is terminated (possibly resulting in gain
being treated as short-term rather than long-term capital gain), and
(3) losses recognized with respect to certain straddle positions, that otherwise
would constitute short-term capital losses, be treated as long-term capital
losses. Applicable regulations also provide certain “wash sale” rules, which
apply to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and “short sale” rules
applicable to straddles. Different elections are available, which may
mitigate
the effects of the straddle rules, particularly with respect to a “mixed
straddle” (i.e., a straddle at least one, but not all, positions of which are
Section
1256 contracts).
When
a covered call option written (sold) by a Fund expires, it will realize a
short-term capital gain equal to the amount of the premium it received for
writing
the option. When a Fund terminates its obligations under such an option by
entering into a closing transaction, it will realize a short-term capital
gain (or loss), depending on whether the cost of the closing transaction is less
(or more) than the premium it received when it wrote the option. When
a covered call option written by a Fund is exercised, it will be treated as
having sold the underlying security, producing long-term or short-term
capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the
premium received when it wrote the option is more or less than the underlying
security’s basis.
If
a Fund has an “appreciated financial position” — generally, any position
(including an interest through an option, futures or forward contract or
short
sale) with respect to any stock, debt instrument (other than “straight debt”) or
partnership interest the fair market value of which exceeds its adjusted
basis — and enters into a “constructive sale” of the position, the Fund will be
treated as having made an actual sale thereof, with the result that
it will recognize gain at that time. A constructive sale generally consists of a
short sale, an offsetting notional principal contract or a futures or
forward
contract a Fund or a related person enters into with respect to the same or
substantially identical property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive
sale. The foregoing will not apply, however, to any transaction of a
Fund during any taxable year that otherwise would be treated as a
constructive
sale if the transaction is closed within 30 days after the end of that year and
the Fund holds the appreciated financial position unhedged for
60 days after that closing (i.e., at no time during that 60-day period is the
Fund’s risk of loss regarding that position reduced by reason of certain
specified
transactions with respect to substantially identical or related property, such
as having an option to sell, being contractually obligated to sell, making
a short sale or granting an option to buy substantially identical stock or
securities).
Certain
aspects of the tax treatment of derivative instruments are currently unclear and
may be affected by changes in legislation, regulations, administrative
rules, and/or other legally binding authority that could affect the
treatment of income from those instruments and the character, timing
of
recognition and amount of a Fund’s taxable income or net realized gains and
distributions. If the Internal Revenue Service (“IRS”) were to assert
successfully
that income a Fund derives from those investments does not constitute Qualifying
Income, the Fund might cease to qualify as a RIC (with the
consequences described above under “Taxation of the Funds”) or might be required
to reduce its exposure to such investments.
A
Fund may acquire zero coupon or other securities issued with original issue
discount (“OID”) (such as STRIPS). As a holder of those securities, a Fund
must
include in its gross income the OID that accrues on them during the taxable
year, even if it receives no corresponding payment on them during the
year. Similarly, a Fund must include in its gross income each taxable year
securities it receives as interest on pay-in-kind securities. Because a Fund
annually
must distribute substantially all of its investment company taxable income,
including any accrued OID and other non-cash income (such as that
interest), to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax, it may be required in a particular taxable year to distribute
as
a dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from a Fund’s cash assets or
from
the proceeds of sales of its portfolio securities, if necessary. A Fund may
realize capital gains or losses from those sales, which would increase or
decrease
its investment company taxable income and/or net capital gain.
Taxation of a Fund’s
Shareholders
General
- For United States federal income tax purposes, distributions paid out of a
Fund’s current or accumulated earnings and profits will, except in the
case of distributions of qualified dividend income and capital gain dividends
described below, be taxable as ordinary dividend income. Certain income
distributions paid by a Fund (whether paid in cash or reinvested in additional
Fund shares) to individual taxpayers are taxed at rates applicable to
net long-term capital gains (currently 20%, 15% or 0%, depending on an
individual’s tax bracket). This tax treatment applies only if certain holding
period
requirements and other requirements are satisfied by the shareholder and the
dividends are attributable to qualified dividend income received by the
Fund itself. There can be no assurance as to what portion of a Fund’s dividend
distributions will qualify as qualified dividend income.
Distributions
of net capital gain, if any, reported as capital gains dividends are taxable to
a shareholder as long-term capital gains, regardless of how long
the shareholder has held Fund shares. (Net capital gain is the excess (if any)
of net long-term capital gain over net short-term capital loss, and investment
company taxable income is all taxable income and capital gains, other than those
gains and losses included in computing net capital gain, after
reduction by deductible expenses.) A Fund may elect to retain its net capital
gain or a portion thereof for investment and be taxed at corporate rates
on the amount retained. In such case, it may designate the retained amount as
undistributed capital gains in a notice to its shareholders who will
be
treated as if each received a distribution of its pro rata share of such gain,
with the result that each shareholder will: (i) be required to report its pro
rata
share of such gain on its tax return as long-term capital gain; (ii) receive a
refundable tax credit for his pro rata share of tax paid by the Fund on
the
gain; and (iii) increase the tax basis for its shares by an amount equal to the
deemed distribution less the tax credit.
Dividends
and other distributions by a Fund are generally treated under the Internal
Revenue Code as received by the shareholders at the time the dividend
or distribution is made.
Dividends
and other distributions a Fund
declares in the last quarter of any calendar year that are payable to
shareholders of record on a date in that quarter
will be deemed to have been paid by the Fund and received by those shareholders
on December 31 of that year if the Fund pays the distributions
during the following January. Accordingly, those distributions will be
reportable by, and taxed to, those shareholders for the taxable year
in
which that December 31 falls.
If
a Fund makes a “return of capital” distribution to its shareholders – i.e., a
distribution in excess of its current and accumulated earnings and profits –
the
excess will (a) reduce each shareholder’s tax basis in its shares (thus reducing
any loss or increasing any gain on a shareholder’s subsequent taxable
disposition
of the shares) and (b) if for any shareholder the excess is greater than that
basis, be treated as realized capital gain.
Selling
shareholders will generally recognize gain or loss in an amount equal to the
difference between the shareholder’s adjusted tax basis in the shares
sold and the sale proceeds. If the shares are held as a capital asset, the gain
or loss will be a capital gain or loss. The maximum tax rate applicable
to net capital gains recognized by individuals and other non-corporate taxpayers
is: (i) the same as the maximum ordinary income tax rate for
gains recognized on the sale of capital assets held for one year or less; or
(ii) 20% for gains recognized on the sale of capital assets held for more
than
one year (as well as certain capital gain distributions) (15% or 0% for
individuals in certain tax brackets).
If
Fund shares are redeemed at a loss after being held for six months or less, the
loss will be treated as long-term, instead of short-term, capital loss to
the
extent of any capital gain distributions received on those shares. In addition,
any loss a shareholder realizes on a redemption of Fund shares will be
disallowed
to the extent the shares are replaced within a 61-day period beginning 30 days
before and ending 30 days after the redemption; in that case,
the basis in the acquired shares will be adjusted to reflect the disallowed
loss. Investors also should be aware that the price of Fund shares at any
time
may reflect the amount of a forthcoming dividend or other distribution, so if
they purchase Fund shares shortly before the record date for a distribution,
they will pay full price for the shares and receive some part of the price back
as a taxable distribution, even though it represents a partial return
of invested capital.
For
U.S. individuals with income exceeding $200,000 ($250,000 if married and filing
jointly, a 3.8% Medicare contribution tax will apply on all or a portion
of their “net investment income,” including interest, dividends, and capital
gains, which generally includes taxable distributions received from a
Fund
and taxable gains on the disposition of shares of a Fund. This 3.8% tax also
applies to all or a portion of the undistributed net investment income
of
certain shareholders that are estates and trusts.
An
investor also should be aware that the benefits of the reduced tax rate
applicable to long-term capital gains may be impacted by the application of
the
alternative minimum tax to individual shareholders.
Special
tax rules apply to investments through defined contribution plans and other
tax-qualified plans. Shareholders should consult their tax advisor to
determine
the suitability of shares of a Fund as an investment through such
plans.
If
more than 50% of the value of a Fund’s total assets at the close of any
taxable year consists of securities of foreign corporations, it will be eligible
to file
an election for that year with the IRS that would enable its shareholders to
benefit from any foreign tax credit or deduction available with respect to
any
foreign taxes it pays. Pursuant to the election, a Fund would treat those
taxes as dividends paid to its shareholders and each shareholder (1) would
be
required to include in gross income, and treat as paid by the shareholder, the
shareholder’s proportionate share of those taxes, (2) would be required
to treat that share of those taxes and of any dividend a Fund paid that
represents income from foreign or U.S. possessions sources (“foreign-source
income”) as the shareholder’s own income from those sources, and (3) could
either use the foregoing information in calculating the foreign
tax credit against the shareholder’s federal income tax or, alternatively,
deduct the foreign taxes deemed paid by the shareholder in computing
taxable
income. If a Fund makes this election for a taxable year, it will report
to its shareholders shortly after that year their respective shares of the
foreign
taxes it paid and its foreign-source income for that year.
An
individual shareholder of a Fund who, for a taxable year, has no more than
$300 ($600 for married persons filing jointly) of creditable foreign taxes
included
on IRS Forms 1099 and all of whose foreign-source income is “qualified passive
income” may elect for that year to be exempt from the extremely
complicated foreign tax credit limitation for federal income tax purposes (about
which shareholders may wish to consult their tax advisers), in which
event the shareholder would be able to claim a foreign tax credit without having
to file the detailed Form 1116 that otherwise is required. A shareholder
will not be entitled to credit or deduct its portion of foreign taxes
a Fund paid that is allocable to Fund shares the shareholder has not held
for
at least 16 days during the 31-day period beginning 15 days before the
ex-distribution date for those shares. The minimum holding period will be
extended
if the shareholder’s risk of loss with respect to those shares is reduced by
reason of holding an offsetting position. No deduction for foreign taxes
may be claimed by a shareholder who does not itemize deductions. A foreign
shareholder may not deduct or claim a credit for foreign taxes in determining
its federal income tax liability unless the Fund dividends paid to it are
effectively connected with the shareholder’s conduct of a U.S. trade
or
business.
Backup
Withholding
- A Fund is required to withhold and remit to the U.S. Treasury 24% of
dividends, capital gain distributions, and redemption proceeds
(regardless of the extent to which gain or loss may be realized) otherwise
payable to any individual who fails to certify that the taxpayer identification
number furnished to the Fund is correct or who furnishes an incorrect number
(together with the withholding described in the next sentence,
“backup withholding”). Withholding at that rate also is required from each
Fund’s dividends and capital gain distributions otherwise payable to
such a shareholder who (1) is subject to backup withholding for failure to
report the receipt of interest or dividend income properly or (2) fails to
certify
to the Fund that he or she is not subject to backup withholding or that it
is a corporation or other “exempt recipient.” Backup withholding is not
an additional tax; rather, any amounts so withheld may be credited against the
shareholder’s federal income tax liability or refunded if proper documentation
is submitted to the IRS.
Non-U.S.
Shareholders
- Dividends a Fund pays to a shareholder who is a nonresident alien
individual or foreign entity (each a “non-U.S. shareholder”)
- other than (1) dividends paid to a non-U.S. shareholder whose ownership of the
Fund’s shares is effectively connected with a trade or business
within the United States the shareholder conducts and (2) capital gain
distributions paid to a nonresident alien individual who is physically
present
in the United States for no more than 182 days during the taxable year -
generally are subject to 30% federal withholding tax (unless a reduced
rate of withholding or a withholding exemption is provided under an applicable
treaty). However, two categories of dividends a Fund might pay,
“short-term capital gain dividends” and “interest-related dividends,” to
non-U.S. shareholders (with certain exceptions) and reported by it in
writing
to its shareholders are exempt from that tax. “Short-term capital gain
dividends” are dividends that are attributable to net short-term gain,
computed
with certain adjustments. “Interest-related dividends” are dividends that are
attributable to “qualified net interest income” (i.e., “qualified interest
income,” which generally consists of certain OID, interest on obligations “in
registered form,” and interest on deposits, less allocable deductions)
from sources within the United States. Non-U.S. shareholders are urged to
consult their own tax advisers concerning the applicability of that
withholding tax.
Foreign
Account Tax Compliance Act (“FATCA”) -
Under FATCA, “foreign financial institutions” (“FFIs”) and “non-financial
foreign entities” (“NFFEs”)
that are Fund shareholders may be subject to a generally nonrefundable 30%
withholding tax on income dividends a Fund pays. As discussed
more fully below, the FATCA withholding tax generally can be avoided (a) by an
FFI, if it reports certain information regarding direct and indirect
ownership of financial accounts U.S. persons hold with the FFI, and (b) by an
NFFE that certifies its status as such and, in certain circumstances,
information
regarding substantial U.S. owners. Proposed regulations (having current effect)
have been issued to eliminate certain FATCA withholding taxes,
including the withholding tax on investment sale proceeds that was scheduled to
begin in 2019, and to defer the effective date of other taxes.
The
U.S. Treasury has negotiated intergovernmental agreements (“IGAs”) with certain
countries and is in various stages of negotiations with other foreign
countries with respect to alternative approaches to implement FATCA. An entity
in one of those countries may be required to comply with the terms
of the IGA instead of U.S. Treasury regulations. An FFI resident in a country
that has entered into a Model I IGA with the United States must report
to that country’s government (pursuant to the terms of the applicable IGA and
applicable law), which will, in turn, report to the IRS. An FFI resident
in a Model II IGA country generally must comply with U.S. regulatory
requirements, with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with
whichever of the foregoing applies will be exempt from FATCA withholding.
An
FFI can avoid FATCA withholding by becoming a “participating FFI,” which
requires the FFI to enter into a tax compliance agreement with the IRS
under
the Internal Revenue Code. Under such an agreement, a participating FFI agrees
to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the IRS, and (3) meet
certain other specified requirements.
An
NFFE that is the beneficial owner of a payment from a Fund can avoid FATCA
withholding generally by certifying its status as such and, in certain
circumstances,
either that (1) it does not have any substantial U.S. owners or (2) it does have
one or more such owners and reports the name, address, and
taxpayer identification number of each such owner. The NFFE will report to a
Fund or other applicable withholding agent, which may, in turn, report
information to the IRS.
Those
foreign shareholders also may fall into certain exempt, excepted, or deemed
compliant categories established by U.S. Treasury regulations, IGAs,
and
other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need
to provide it with documentation properly certifying the entity’s
status
under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are
different from, and in addition to, the tax certification rules to
avoid backup withholding described above. Foreign investors are urged to consult
their tax advisers regarding the application of these requirements to
their own situation and the impact thereof on their investment in a
Fund.
Income
from Investments in REITs and MLPs -
A Fund may invest in the equity securities of corporations or other entities
that invest in U.S. real property,
including REITs. The sale of a U.S. real property interest by a REIT or “United
States real property holding corporation” (as defined in the Internal
Revenue Code) in which a Fund invests may trigger special tax consequences to
the Fund’s non-U.S. shareholders, who are urged to consult their
tax advisers regarding those consequences.
A
Fund may invest in REITs that (1) hold residual interests in “real estate
mortgage investment conduits” (“REMICs”) or (2) engage in mortgage securitization
transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have
a qualified REIT subsidiary that is a TMP. A part of the net
income allocable to REMIC residual interest holders may be an “excess
inclusion.” The Internal Revenue Code authorizes the issuance of regulations
dealing with the taxation and reporting of excess inclusion income of REITs and
RICs that hold residual REMIC interests and of REITs, or qualified
REIT subsidiaries, that are TMPs. Although those regulations have not yet been
issued, the U.S. Treasury and the IRS issued a notice in 2006 (“Notice”)
announcing that, pending the issuance of further guidance (which has not yet
been issued), the IRS would apply the principles in the following
paragraphs to all excess inclusion income, whether from REMIC residual interests
or TMPs.
The
Notice provides that a REIT must (1) determine whether it or its qualified REIT
subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s
excess
inclusion income under a “reasonable method,” (2) allocate its excess inclusion
income to its shareholders generally in proportion to dividends paid,
(3) inform shareholders that are not “disqualified organizations” (i.e.,
governmental units and tax-exempt entities that are not subject to tax on
their
“unrelated business taxable income” (“UBTI”)) of the amount and character of the
excess inclusion income allocated thereto, (4) pay tax (at the highest
federal income tax rate imposed on corporations, currently 21%) on the excess
inclusion income allocable to its shareholders that are disqualified
organizations, and (5) apply the withholding tax provisions with respect to the
excess inclusion part of dividends paid to foreign persons without
regard to any treaty exception or reduction in tax rate. Excess inclusion income
allocated to certain tax-exempt entities (including qualified retirement
plans, IRAs, and public charities) constitutes UBTI to them.
A
RIC with excess inclusion income is subject to rules identical to those in
clauses (2) through (5) above (substituting “that are nominees” for “that are
not
‘disqualified organizations’” in clause (3) and inserting “record” after “its”
in clause (4)). The Notice further provides that a RIC is not required to
report
the amount and character of the excess inclusion income allocated to its
shareholders that are not nominees, except that (1) a RIC with excess
inclusion
income from all sources that exceeds 1% of its gross income must do so and (2)
any other RIC must do so by taking into account only excess inclusion
income allocated to the RIC from REITs the excess inclusion income of which
exceeded 3% of its dividends. A Fund will not invest directly in REMIC
residual interests and does not intend to invest in REITs that, to its
knowledge, invest in those interests or are TMPs or have a qualified REIT
subsidiary
that is a TMP.
After
calendar year-end, REITs can and often do change the category (e.g., ordinary
income dividend, capital gain distribution, or “return of capital”) of
one
or more of the distributions they have made during that year, which would result
at that time in a Fund, if it held shares in such a REIT during that
year,
also having to re-categorize some of the distributions it made to its
shareholders. These changes would be reflected in annual Forms 1099 sent to
the
Fund’s shareholders, together with other tax information. Those forms generally
will be distributed to shareholders in February of each year, although
the Fund may, in one or more years, request from the IRS an extension of time to
distribute those forms until mid-March to enable it to receive
the latest information it can from the REITs in which it invests and thereby
accurately report that information to shareholders on a single form (rather
than having to send shareholders an amended form).
Effective
for taxable years beginning after December 31, 2017 and before January 1, 2026,
the Internal Revenue Code generally allows individuals and certain
other non-corporate entities a deduction for 20% of (1) “qualified REIT
dividends” and (2) “qualified publicly traded partnership income” (such
as
income from MLPs). Treasury regulations permit a RIC to pass the character of
its qualified REIT dividends through to its shareholders provided certain
holding period requirements are met. As a result, a shareholder in the Fund that
invests in REITs will be eligible to receive the benefit of the same
20% deduction with respect to the Fund’s REIT-based dividends as is available to
an investor who directly invests in REITs. There currently is no similar
pass-through of the 20% deduction with respect to a RIC’s qualified publicly
traded partnership income.
Basis
Election and Reporting
- A Fund shareholder who wants to use an acceptable method for basis
determination with respect to Fund shares that the
shareholder acquired or acquires after 2011 (“Covered Shares”), other than the
average basis method (the Funds’ default method) must elect to do so
in writing, which may be electronic. The basis determination method a Fund
shareholder elects may not be changed with respect to a redemption (including
a redemption that is part of an exchange) of Covered Shares after the settlement
date of the redemption.
In
addition to the requirement to report the gross proceeds from redemptions of
Fund shares, each Fund (or its administrative agent) must report to the
IRS
and furnish to its shareholders the basis information for Fund shares that are
redeemed or exchanged and indicate whether they had a short-term (one
year or less) or long-term (more than one year) holding period. Fund
shareholders should consult with their tax advisers to determine the best
IRS-accepted
basis determination method for their tax situation and to obtain more
information about how the basis reporting law applies to them. Fund
shareholders who acquire and hold Fund shares through a financial intermediary
should contact their financial intermediary for information related
to the basis election and reporting.
Other
Taxes
- Statutory rules and regulations regarding state and local taxation of ordinary
income dividends, QDI dividends and net capital and foreign
currency gain distributions may differ from the federal income taxation rules
described above. Distributions may also be subject to additional state,
local and foreign taxes depending on each
shareholder’s situation.
Investors
should consult their own tax advisors with respect to the tax consequences to
them of an investment in a Fund based on their particular circumstances.
The
Funds do not expect
to receive a ruling from any tax authority or an opinion of tax counsel with
respect to its treatment of any tax positions.
Tax consequences of transactions are not the primary consideration of a Fund in
implementing their
investment strategy.
DESCRIPTION
OF THE TRUST
The
Trust is an entity of the type commonly known as a “Massachusetts business
trust.” Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable for its obligations. However,
the Trust’s Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder
held personally liable for the obligations of the Trust. The Declaration of
Trust also provides that the Trust may maintain appropriate insurance
(e.g., fidelity bonding) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents to cover possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss due to
shareholder liability is limited to circumstances in which both inadequate
insurance
existed and the Trust itself was unable to meet its obligations. The Trust has
not engaged in any other business.
The
Trust was originally created to manage money for large institutional investors.
The following individuals (and members of that individual’s “immediate
family”) are eligible to purchase shares of the R5 Class with an initial
investment of less than $250,000: (i) employees of the Manager, or its
parent company, Resolute Investment Managers, Inc. (“RIM”), (ii) employees of a
sub-advisor for Funds where it serves as sub-advisor, (iii) members of
the Board, and
(iv)
members of the Manager’s Board of Directors. The term “immediate family” refers
to one’s spouse, children, grandchildren, grandparents,
parents, parents-in-law, brothers and sisters, sons- and daughters-in-law, a
sibling’s spouse, a spouse’s sibling, aunts, uncles, nieces and nephews;
relatives by virtue of remarriage (step-children, step-parents, etc.) are
included. Any shareholders that the Manager transfers to the R5 Class
upon
termination of the class of shares in which the shareholders were originally
invested is also eligible for purchasing shares of the R5 Class with an
initial
investment of less than $250,000.
The
Investor Class was created to give individuals and other smaller investors an
opportunity to invest in the American Beacon Funds. The Advisor Class
was
created for individuals and other smaller investors investing in the Funds
through third party intermediaries. The R5 and Y Classes were created to
manage
money for large institutional investors, including pension and 401(k) plans. The
A Class and C Class were created for investors investing in the American
Beacon Funds through their broker-dealers or other financial intermediaries. The
R6 Class was created to provide third party intermediaries an
investment option for the large 401(k) plans that does not charge 12b-1 or
sub-transfer agency fees.
FINANCIAL
STATEMENTS
The
Funds’ independent registered public accounting firm, PricewaterhouseCoopers
LLP, audits and reports on the Funds’ annual financial statements. The
audited financial statements include the schedule of investments, statement of
assets and liabilities, statement of operations, statements of changes
in net assets, financial highlights, notes and report of independent registered
public accounting firm.
The
information in the financial highlights for the fiscal years ended October 31,
2019, October 31, 2020 and October 31, 2021 was audited by the Funds’
prior independent registered public accounting firm.
APPENDIX
A
AMERICAN
BEACON ADVISORS, INC.
SUMMARY
OF PROXY VOTING POLICY AND PROCEDURES
Proxy
voting is an important component of investment management and must be performed
in a dutiful and purposeful fashion in order to secure the best
long-term interests of the advisory clients of American Beacon Advisors, Inc.
(“AmBeacon”). AmBeacon’s proxy voting policies and procedures are designed
to implement AmBeacon’s duty to vote proxies in clients’ best interests. Given
that AmBeacon manages portfolios that invest solely in fixed-income
securities, the only securities for which we expect to receive proxies are money
market mutual funds. As such, the proxy voting policies and
procedures set forth voting guidelines for the proxy issues and proposals common
to money market funds.
For
routine proposals that will not change the structure, bylaws or operations of
the money market fund, AmBeacon’s policy is to support management;
however, each proposal will be considered individually focusing on the financial
interests of the client portfolio. Non-routine proposals, such
as board elections, advisory contract and distribution plan approvals,
investment objective changes, and mergers, will generally be reviewed on a
case-by-case
basis with AmBeacon first and foremost considering the effect of the proposal on
the portfolio.
Items
to be evaluated on a case-by-case basis and proposals not contemplated in the
policies set forth above will be assessed by AmBeacon. In these situations,
AmBeacon will use its judgment to vote in the best interest of the client
portfolio. For all proposals, especially controversial or case-by-case
evaluations,
AmBeacon will be responsible for individually identifying significant issues
that could impact the investment performance of the portfolio.
AmBeacon
manages portfolios for the American Beacon Funds, the American Beacon Select
Funds, and
the
American Beacon Institutional Funds Trust
(collectively,
the “Funds”). AmBeacon may invest a Fund in shares of the American Beacon U.S.
Government Money Market Select Fund. If the American
Beacon U.S. Government Money Market Select Fund solicits a proxy for which
another Fund is entitled to vote, AmBeacon’s interests as manager
of the American Beacon U.S. Government Money Market Select Fund might appear to
conflict with the interests of the shareholders of the other
Fund. In these cases, AmBeacon will vote the Fund’s shares in accordance with
the Select Funds’ Board of Trustees’ recommendations in the proxy
statement.
AMERICAN
BEACON FUNDS
AMERICAN
BEACON SELECT FUNDS
AMERICAN
BEACON INSTITUTIONAL FUNDS TRUST
PROXY VOTING POLICY AND
PROCEDURES
Last
Amended August 28, 2023
Preface
Proxy
voting is an important component of investment management and must be performed
in a dutiful and purposeful fashion to secure the best long-term
interests of shareholders of the American Beacon Funds,
the American Beacon Select Funds (“Select Funds”), and
the
American Beacon Institutional
Funds Trust (collectively,
the “Funds”). Therefore, this Proxy Voting Policy and Procedures (the “Policy”)
have been adopted by the Funds.
The
Funds are managed by American Beacon Advisors, Inc. (the “Manager”). The Manager
may allocate discrete portions of the Funds among sub-advisors,
and the Manager may directly manage all or a portion of the assets of certain
Funds. The Funds’ respective Boards of Trustees have delegated
proxy voting authority to the Manager. The Manager has in turn delegated proxy
voting authority to each sub-advisor with respect to the sub-advisor’s
respective portion of the Fund(s) under management, but the Manager has retained
the authority to override a proposed proxy voting decision
by a sub-advisor. For the securities held in their respective portion of each
Fund, the Manager and the sub-advisors make voting decisions pursuant
to their own proxy voting policies and procedures.
Conflicts of
Interest
The
Board of Trustees seeks to ensure that proxies are voted in the best interests
of Fund shareholders. For certain proxy proposals, the interests of the
Manager,
the sub-advisors and/or their affiliates may differ from Fund shareholders’
interests. To avoid the appearance of impropriety and to fulfill their
fiduciary
responsibility to shareholders in these circumstances, the Manager and the
sub-advisors are required to establish procedures that are reasonably
designed to address material conflicts between their interests and those of the
Funds.
When
a sub-advisor deems that it is conflicted with respect to a voting matter, its
policy may call for it to seek voting instructions from the client. The
Manager
is authorized by the Boards of Trustees to consider any such matters and provide
voting instructions to the sub-advisor, unless the Manager has
determined that its interests are conflicted with Fund shareholders with respect
to the voting matter. In those instances, the Manager will instruct the
sub-advisor to vote in accordance with the recommendation of a third-party proxy
voting advisory service.
Each
Fund can invest in the shares of the American Beacon U.S. Government Money
Market Select Fund. If the American Beacon U.S. Government Money
Market Select Fund issues a proxy for which another Fund is entitled to vote,
the Manager’s interests regarding the American Beacon U.S. Government
Money Market Select Fund might appear to conflict with the interests of the
shareholders of the other Fund. In these cases, the Manager will
vote in accordance with the Select Funds’ Board of Trustees’ recommendations in
the proxy statement.
If
the methods for addressing conflicts of interest, as described above, are deemed
by the Manager to be unreasonable due to cost, timing or other factors,
then the Manager may decline to vote in those instances.
Securities on Loan
With
respect to the Funds that engage in securities lending, the Manager shall engage
a proxy voting service to notify the Manager before the record date
about the occurrence of future shareholder meetings, as feasible. The Manager
will determine whether or not to recall shares of the applicable security
that are on loan with the intent of the Manager or the sub-advisor, as
applicable, voting such shares. The Manager’s determination shall be
based
on factors which may include the nature of the meeting (i.e., annual or
special), the percentage of the proxy issuer’s outstanding securities on
loan,
any other information regarding the proxy proposals of which the Manager may be
aware, and the loss of securities lending income to a Fund as a
result of recalling the shares on loan.
Recordkeeping
The
Manager and the sub-advisors shall maintain records of all votes cast on behalf
of the Funds. Such documentation will include the firm’s proxy voting
policies and procedures, company reports provided by proxy voting advisory
services, additional information gathered by the Manager or sub-advisor
that was material to reaching a voting decision, and communications to the
Manager regarding any identified conflicts. The Manager and the
sub-advisors shall maintain voting records in a manner to facilitate the Funds’
production of the Form N-PX filing on an annual basis.
Disclosure
The
Manager will coordinate the compilation of the Funds’ proxy voting record for
each year ended June 30 and file the required information with the SEC
via Form N-PX by August 31. The Manager will include a summary of the Policy and
the proxy voting policies and procedures of the Manager and the
sub-advisors, as applicable, in each Fund’s Statement of Additional Information
(“SAI”). In each Fund’s annual and semi-annual reports to shareholders,
the Manager will disclose that a description of the Policy and the proxy voting
policies and procedures of the Manager and the sub-advisors,
as applicable, is a) available upon request, without charge, by toll-free
telephone request, b) on the Funds’ website (if applicable), and c) on
the SEC’s website in the SAI. The SAI and shareholder reports will also disclose
that the Funds’ proxy voting record is available by toll-free telephone
request
(or on the Funds’ website) and on the SEC’s website by way of the Form N-PX.
Within three business days of receiving a request, the Manager will
send a copy of the policy description or voting record by first-class
mail.
Manager Oversight
The
Manager shall review a sub-advisor’s proxy voting policies and procedures for
compliance with this Policy and applicable laws and regulations prior
to
initial delegation of proxy voting authority and on at least an annual basis
thereafter.
Board Reporting
On
at least an annual basis, the Manager will present a summary of the voting
records of the Funds to the Boards of Trustees for their review. The
Manager
will notify the Boards of Trustees of any material changes to its proxy voting
policies and procedures.
APPENDIX
B
PROXY
VOTING POLICIES FOR THE SUB-ADVISORS
AMERICAN
CENTURY INVESTMENT MANAGEMENT, INC.
PROXY
VOTING POLICIES AND PROCEDURES
American
Century Investment Management, Inc. (the “Advisor”) is the investment manager
for a variety of advisory clients, including the American Century
family of funds. In such capacity, the Advisor has been delegated the authority
to vote proxies with respect to investments held in the accounts
it manages. The following is a statement of the proxy voting policies that have
been adopted by the Advisor. In the exercise of proxy voting authority
which has been delegated to it by particular clients, the Advisor will apply the
following policies in accordance with, and subject to, any specific
policies that have been adopted by the client and communicated to and accepted
by the Advisor in writing.
A.
General Principles
In
providing the service of voting client proxies, the Advisor is guided by general
fiduciary principles, must act prudently, solely in the interest of its
clients,
and must not subordinate client interests to unrelated objectives. Except as
otherwise indicated in these Policies, the Advisor will vote all proxies
with
respect to investments held in the client accounts it manages. The Advisor will
attempt to consider all factors of its vote that could affect the value
of
the investment. Although in most instances the Advisor will vote proxies
consistently across all client accounts, the votes will be based on the best
interests
of each client. As a result, accounts managed by the Advisor may at times vote
differently on the same proposals. Examples of when an account’s
vote might differ from other accounts managed by the Advisor include, but are
not limited to, proxy contests and proposed mergers. In short,
the Advisor will vote proxies in the manner that it believes will do the most to
maximize shareholder value.
B.
Specific Proxy Matters
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a.
Election of Directors (1)
Generally.
The Advisor will generally support the election of directors that result
in a board made up of a majority of independent directors. In general,
the Advisor will vote in favor of management’s director nominees if they
are running unopposed. The Advisor believes that management is
in the best possible position to evaluate the qualifications of directors
and the needs and dynamics of a particular board. The Advisor of course
maintains
the ability to vote against any candidate whom it feels is not qualified
or if there are specific concerns about the individual, such as
allegations
of criminal wrongdoing or breach of fiduciary responsibilities. Additional
information the Advisor may consider concerning director nominees
include, but is not limited to, whether (1) there is an adequate
explanation for repeated absences at board meetings, (2) the nominee
receives
non-board fee compensation, or (3)
there is a family relationship between the nominee and the company’s chief
executive officer or controlling shareholder. When management’s
nominees
are opposed in a proxy contest, the Advisor will evaluate which nominees’
publicly-announced management policies and goals are most likely
to maximize shareholder value, as well as the past performance of the
incumbents. (2)
Committee Service.
The Advisor will withhold votes for non-independent directors who serve on
the audit, compensation, and/or nominating committees
of the board. (3)
Classification of Boards.
The Advisor will support proposals that seek to declassify boards.
Conversely, the Advisor will oppose efforts to adopt
classified board structures. (4) Majority Independent Board. The Advisor
will support proposals calling for a majority of independent directors
on a board. The Advisor believes that a majority of independent directors
can help to facilitate objective decision making and enhances accountability
to shareholders. (5)
Majority Vote Standard for Director Elections.
The Advisor will vote in favor of proposals calling for directors to be
elected by an affirmative
majority of the votes cast in a board election, provided that the proposal
allows for a plurality voting standard in the case of contested
elections.
The Advisor may consider voting against such shareholder proposals where a
company’s board has adopted an alternative measure, such as
a director resignation policy, that provides a meaningful alternative to
the majority voting standard and appropriately addresses situations
where
an incumbent director fails to receive the support of the majority of the
votes cast in an uncontested election. (6)
Withholding Campaigns.
The Advisor will support proposals calling for shareholders to withhold
votes for directors where such actions will advance
the principles set forth in paragraphs (1) through (5)
above. |
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b.
Ratification of Selection of Auditors The
Advisor will generally rely on the judgment of the issuer’s audit
committee in selecting the independent auditors who will provide the best
service
to the company. The Advisor believes that independence of the auditors is
paramount and will vote against auditors whose independence appears
to be impaired. The Advisor will vote against proposed auditors in those
circumstances where (1) an auditor has a financial interest in or
association
with the company, and is therefore not independent; (2) non-audit fees
comprise more than 50% of the total fees paid by the company
to the audit firm; or (3) there is reason to believe that the independent
auditor has previously rendered an opinion to the issuer that is
either
inaccurate or not indicative of the company’s financial
position. |
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a.
Executive Compensation (1)
Advisory Vote on Compensation.
The Advisor believes there are more effective ways to convey concerns
about compensation than through an
advisory vote on compensation (such as voting against specific excessive
incentive plans or withholding votes from compensation committee
members).
The Advisor will consider and vote on a case-by-case basis on say-on-pay
proposals and will generally support management proposals unless
specific concerns exist, including if the Advisor concludes that executive
compensation is (i) misaligned with shareholder interests, (ii)
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unreasonable
in amount, or (iii) not in the aggregate meaningfully tied to the
company’s performance. (2)
Frequency of Advisory Votes on Compensation.
The Advisor generally supports the triennial option for the frequency of
say-on-pay proposals, but will consider management recommendations
for an alternative approach. |
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b.
Equity Based Compensation Plans The
Advisor believes that equity-based incentive plans are economically
significant issues upon which shareholders are entitled to vote. The
Advisor recognizes
that equity-based compensation plans can be useful in attracting and
maintaining desirable employees. The cost associated with such
plans
must be measured if plans are to be used appropriately to maximize
shareholder value. The Advisor will conduct a case-by-case analysis of
each
stock option, stock bonus or similar plan or amendment, and generally
approve management’s recommendations with respect to adoption of
or
amendments to a company’s equity-based compensation plans, provided that
the total number of shares reserved under all of a company’s plans
is reasonable and not excessively dilutive. The Advisor will review
equity-based compensation plans or amendments thereto on a case-by-case
basis. Factors that will be considered in the determination include the
company’s overall capitalization, the performance of the company
relative to its peers, and the maturity of the company and its industry;
for example, technology companies often use options broadly throughout
its employee base which may justify somewhat greater dilution. Amendments
which are proposed in order to bring a company’s plan within
applicable legal requirements will be reviewed by the Advisor’s legal
counsel; amendments to executive bonus plans to comply with IRS
Section
162(m) disclosure requirements, for example, are generally approved. The
Advisor will generally vote against the adoption of plans or plan
amendments
that: |
■ |
Provide
for immediate vesting of all stock options in the event of a change of
control of the company without reasonable safeguards against abuse
(see “Anti-Takeover Proposals” below); |
■ |
Reset
outstanding stock options at a lower strike price unless accompanied by a
corresponding and proportionate reduction in the number of shares
designated. The Advisor will generally oppose adoption of stock option
plans that explicitly or historically permit repricing of stock
options,
regardless of the number of shares reserved for issuance, since their
effect is impossible to evaluate; |
■ |
Establish
restriction periods shorter than three years for restricted stock
grants; |
■ |
Do
not reasonably associate awards to performance of the company;
or |
■ |
Are
excessively dilutive to the company. |
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3.
Anti-Takeover Proposals |
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In
general, the Advisor will vote against any proposal, whether made by
management or shareholders, which the Advisor believes would materially
discourage
a potential acquisition or takeover. In most cases an acquisition or
takeover of a particular company will increase share value. The
adoption
of anti-takeover measures may prevent or frustrate a bid from being made,
may prevent consummation of the acquisition, and may have a negative
effect on share price when no acquisition proposal is pending. The items
below discuss specific anti-takeover
proposals. |
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a.
Cumulative Voting The
Advisor will vote in favor of any proposal to adopt cumulative voting and
will vote against any proposal to eliminate cumulative voting that is
already
in place, except in cases where a company has a staggered board.
Cumulative voting gives minority shareholders a stronger voice in the
company
and a greater chance for representation on the board. The Advisor believes
that the elimination of cumulative voting constitutes an anti-takeover
measure. |
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b.
Staggered Board If
a company has a “staggered board,” its directors are elected for terms of
more than one year and only a segment of the board stands for election
in any year. Therefore, a potential acquiror cannot replace the entire
board in one year even if it controls a majority of the votes. Although
staggered
boards may provide some degree of continuity and stability of leadership
and direction to the board of directors, the Advisor believes that
staggered boards are primarily an anti-takeover device and will vote
against establishing them and for eliminating them. However, the Advisor
does
not necessarily vote against the re-election of directors serving on
staggered boards. |
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c.
“Blank Check” Preferred Stock Blank
check preferred stock gives the board of directors the ability to issue
preferred stock, without further shareholder approval, with such rights,
preferences,
privileges and restrictions as may be set by the board. In response to a
hostile takeover attempt, the board could issue such stock to a
friendly
party or “white knight” or could establish conversion or other rights in
the preferred stock which would dilute the common stock and make
an acquisition impossible or less attractive. The argument in favor of
blank check preferred stock is that it gives the board flexibility in
pursuing
financing, acquisitions or other proper corporate purposes without
incurring the time or expense of a shareholder vote. Generally, the
Advisor
will vote against blank check preferred stock. However, the Advisor may
vote in favor of blank check preferred if the proxy statement discloses
that such stock is limited to use for a specific, proper corporate
objective as a financing instrument. |
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d.
Elimination of Preemptive Rights When
a company grants preemptive rights, existing shareholders are given an
opportunity to maintain their proportional ownership when new shares
are issued. A proposal to eliminate preemptive rights is a request from
management to revoke that right. While preemptive rights will protect
the shareholder from having its equity diluted, it may also decrease a
company’s ability to raise capital through stock offerings or use stock
for
acquisitions or other proper corporate purposes. Preemptive rights may
therefore result in a lower market value for the company’s stock. In the
long
term, shareholders could be adversely affected by preemptive rights. The
Advisor generally votes against proposals to grant preemptive rights,
and
for proposals to eliminate preemptive
rights. |
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e.
Non-targeted Share Repurchase A
non-targeted share repurchase is generally used by company management to
prevent the value of stock held by existing shareholders from
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deteriorating.
A non-targeted share repurchase may reflect management’s belief in the
favorable business prospects of the company. The Advisor finds
no disadvantageous effects of a non-targeted share repurchase and will
generally vote for the approval of a non-targeted share repurchase
subject
to analysis of the company’s financial
condition. |
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f.
Increase in Authorized Common Stock The
issuance of new common stock can also be viewed as an anti-takeover
measure, although its effect on shareholder value would appear to be
less
significant than the adoption of blank check preferred. The Advisor will
evaluate the amount of the proposed increase and the purpose or
purposes
for which the increase is sought. If the increase is not excessive and is
sought for proper corporate purposes, the increase will be approved.
Proper corporate purposes might include, for example, the creation of
additional stock to accommodate a stock split or stock dividend,
additional
stock required for a proposed acquisition, or additional stock required to
be reserved upon exercise of employee stock option plans or employee
stock purchase plans. Generally, the Advisor will vote in favor of an
increase in authorized common stock of up to 100%; increases in
excess
of 100% are evaluated on a case-by-case basis, and will be voted
affirmatively if management has provided sound justification for the
increase. |
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g.
“Supermajority” Voting Provisions or Super Voting Share
Classes A
“supermajority” voting provision is a provision placed in a company’s
charter documents which would require a “supermajority” (ranging from
66
to 90%) of shareholders and shareholder votes to approve any type of
acquisition of the company. A super voting share class grants one class
of
shareholders a greater per-share vote than those of shareholders of other
voting classes. The Advisor believes that these are standard anti-takeover
measures and will generally vote against them. The supermajority provision
makes an acquisition more time-consuming and expensive
for the acquiror. A super voting share class favors one group of
shareholders disproportionately to economic interest. Both are often
proposed
in conjunction with other anti-takeover
measures. |
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h.
“Fair Price” Amendments This
is another type of charter amendment that would require an offeror to pay
a “fair” and uniform price to all shareholders in an acquisition. In
general,
fair price amendments are designed to protect shareholders from coercive,
two-tier tender offers in which some shareholders may be merged
out on disadvantageous terms. Fair price amendments also have an
anti-takeover impact, although their adoption is generally believed to
have
less of a negative effect on stock price than other anti-takeover
measures. The Advisor will carefully examine all fair price proposals. In
general,
the Advisor will vote against fair price proposals unless the Advisor
concludes that it is likely that the share price will not be negatively
affected
and the proposal will not have the effect of discouraging acquisition
proposals. |
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i.
Limiting the Right to Call Special Shareholder
Meetings. The
corporation statutes of many states allow minority shareholders at a
certain threshold level of ownership (frequently 10%) to call a special
meeting
of shareholders. This right can be eliminated (or the threshold increased)
by amendment to the company’s charter documents. The Advisor
believes that the right to call a special shareholder meeting is
significant for minority shareholders; the elimination of such right will
be viewed
as an anti-takeover measure and the Advisor will generally vote against
proposals attempting to eliminate this right and for proposals
attempting
to restore it. |
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j.
Poison Pills or Shareholder Rights Plans Many
companies have now adopted some version of a poison pill plan (also known
as a shareholder rights plan). Poison pill plans generally provide
for the issuance of additional equity securities or rights to purchase
equity securities upon the occurrence of certain hostile events, such as
the
acquisition of a large block of stock. The basic argument against poison
pills is that they depress share value, discourage offers for the
company
and serve to “entrench” management. The basic argument in favor of poison
pills is that they give management more time and leverage to
deal with a takeover bid and, as a result, shareholders may receive a
better price. The Advisor believes that the potential benefits of a poison
pill plan
are outweighed by the potential detriments. The Advisor will generally
vote against all forms of poison pills. The Advisor will, however,
consider
on a case-by-case basis poison pills that are very limited in time and
preclusive effect. The Advisor will generally vote in favor of such a
poison
pill if it is linked to a business strategy that will – in our view –
likely result in greater value for shareholders, if the term is less than
three years,
and if shareholder approval is required to reinstate the expired plan or
adopt a new plan at the end of this term. |
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k.
Golden Parachutes Golden
parachute arrangements provide substantial compensation to executives who
are terminated as a result of a takeover or change in control of
their company. The existence of such plans in reasonable amounts probably
has only a slight anti-takeover effect. In voting, the Advisor will
evaluate
the specifics of the plan presented. |
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l.
Reincorporation Reincorporation
in a new state is often proposed as one part of a package of anti-takeover
measures. Several states (such as Pennsylvania, Ohio and
Indiana) now provide some type of legislation that greatly discourages
takeovers. Management believes that Delaware in particular is beneficial
as a corporate domicile because of the well-developed body of statutes and
case law dealing with corporate acquisitions. The Advisor will
examine reincorporation proposals on a case-by-case basis. Generally, if
the Advisor believes that the reincorporation will result in greater
protection
from takeovers, the reincorporation proposal will be opposed. The Advisor
will also oppose reincorporation proposals involving jurisdictions
that specify that directors can recognize non-shareholder interests over
those of shareholders. When reincorporation is proposed for a legitimate
business purpose and without the negative effects identified above, the
Advisor will generally vote
affirmatively. |
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m.
Confidential Voting Companies
that have not previously adopted a “confidential voting” policy allow
management to view the results of shareholder votes. This gives
management
the opportunity to contact those shareholders voting against management in
an effort to change their votes. Proponents of secret ballots
argue that confidential voting enables shareholders to vote on all issues
on the basis of merit without pressure from management to influence
their decision. Opponents argue that confidential voting is more expensive
and unnecessary; also, holding shares in a nominee name maintains
shareholders’ confidentiality. The Advisor believes that the only way to
insure anonymity of votes is through confidential voting, and
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that
the benefits of confidential voting outweigh the incremental additional
cost of administering a confidential voting system. Therefore, the
Advisor
will generally vote in favor of any proposal to adopt confidential
voting. |
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n.
Opting In or Out of State Takeover Laws State
takeover laws typically are designed to make it more difficult to acquire
a corporation organized in that state. The Advisor believes that the
decision
of whether or not to accept or reject offers of merger or acquisition
should be made by the shareholders, without unreasonably restrictive
state
laws that may impose ownership thresholds or waiting periods on potential
acquirors. Therefore, the Advisor will generally vote in favor of
opting
out of restrictive state takeover laws. |
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4.
Transaction Related Proposals The Advisor will review transaction related
proposals, such as mergers, acquisitions, and corporate reorganizations,
on
a case-by-case basis, taking into consideration the impact of the
transaction on each client account. In some instances, such as the
approval of a proposed
merger, a transaction may have a differential impact on client accounts
depending on the securities held in each account. For example,
whether
a merger is in the best interest of a client account may be influenced by
whether an account holds, and in what proportion, the stock of
both
the acquirer and the acquiror. In these circumstances, the Advisor may
determine that it is in the best interests of the accounts to vote the
accounts’
shares differently on proposals related to the same
transaction. |
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a.
Proposals Involving Environmental, Social, and Governance (“ESG”)
Matters The
Advisor believes that ESG issues can potentially impact an issuer’s
long-term financial performance and has developed an analytical
framework,
as well as a proprietary assessment tool, to integrate risks and
opportunities stemming from ESG issues into our investment process.
This
ESG integration process extends to our proxy voting practices in that our
ESG Proxy Team analyzes on a case-by-case basis the financial materiality
and potential risks or economic impact of the ESG issues underpinning
proxy proposals and makes voting recommendations based thereon
for the Advisor’s consideration. The ESG Proxy Team will generally
recommend support for well-targeted ESG proposals if it believes that
there
is a rational linkage between a proposal, its economic impact, and its
potential to maximize long-term shareholder value. Where the economic
effect of such proposals is unclear and there is not a specific written
client-mandate, the Advisor believes it is generally impossible to
know
how to vote in a manner that would accurately reflect the views of the
Advisor’s clients, and, therefore, the Advisor will generally rely on
management’s
assessment of the economic effect if the Advisor believes the assessment
is not unreasonable. Shareholders may also introduce proposals
which are the subject of existing law or regulation. Examples of such
proposals would include a proposal to require disclosure of a company’s
contributions to political action committees or a proposal to require a
company to adopt a non-smoking workplace policy. The Advisor believes
that such proposals may be better addressed outside the corporate arena
and, absent a potential economic impact, will generally vote with
management’s recommendation. In addition, the Advisor will generally vote
against any proposal which would require a company to adopt practices
or procedures which go beyond the requirements of existing, directly
applicable law. |
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b.
Anti-Greenmail Proposals “Anti-greenmail”
proposals generally limit the right of a corporation, without a
shareholder vote, to pay a premium or buy out a 5% or greater shareholder.
Management often argues that they should not be restricted from
negotiating a deal to buy out a significant shareholder at a premium
if they believe it is in the best interest of the company. Institutional
shareholders generally believe that all shareholders should be able to
vote
on such a significant use of corporate assets. The Advisor believes that
any repurchase by the company at a premium price of a large block of
stock
should be subject to a shareholder vote. Accordingly, it will generally
vote in favor of anti-greenmail
proposals. |
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c.
Indemnification The
Advisor will generally vote in favor of a corporation’s proposal to
indemnify its officers and directors in accordance with applicable state
law. Indemnification
arrangements are often necessary in order to attract and retain qualified
directors. The adoption of such proposals appears to have little
effect on share value. |
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d.
Non-Stock Incentive Plans Management
may propose a variety of cash-based incentive or bonus plans to stimulate
employee performance. In general, the cash or other corporate
assets required for most incentive plans is not material, and the Advisor
will vote in favor of such proposals, particularly when the proposal
is recommended in order to comply with IRC Section 162(m) regarding salary
disclosure requirements. Case-by-case determinations will be
made of the appropriateness of the amount of shareholder value transferred
by proposed plans. |
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e.
Director Tenure These
proposals ask that age and term restrictions be placed on the board of
directors. The Advisor believes that these types of blanket restrictions
are
not necessarily in the best interests of shareholders and therefore will
vote against such proposals, unless they have been recommended by
management. |
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f.
Directors’ Stock Options Plans The
Advisor believes that stock options are an appropriate form of
compensation for directors, and the Advisor will generally vote for
director stock
option plans which are reasonable and do not result in excessive
shareholder dilution. Analysis of such proposals will be made on a
case-by-case
basis, and will take into account total board compensation and the
company’s total exposure to stock option plan
dilution. |
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g.
Director Share Ownership The
Advisor will generally vote against shareholder proposals which would
require directors to hold a minimum number of the company’s shares
to
serve on the Board of Directors, in the belief that such ownership should
be at the discretion of Board members. |
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h.
Non-U.S. Proxies The
Advisor will generally evaluate non-U.S. proxies in the context of the
voting policies expressed herein but will also, where feasible, take into
consideration
differing laws, regulations, and practices in the relevant foreign market
in determining if and how to vote. There may also be
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circumstances
when practicalities and costs involved with non-U.S. investing make it
disadvantageous to vote shares. For instance, the Advisor generally
does not vote proxies in circumstances where share blocking restrictions
apply, when meeting attendance is required in person, or when current
share ownership disclosure is required. Restrictions apply, when meeting
attendance is required in person, or when current share ownership
disclosure is required. |
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C.
Use of Proxy Advisory Services |
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The
Adviser may retain proxy advisory firms to provide services in connection
with voting proxies, including, without limitation, to provide
information
on shareholder meeting dates and proxy materials, translate proxy
materials printed in a foreign language, provide research on proxy
proposals
and voting recommendations in accordance with the voting policies
expressed herein, provide systems to assist with casting the proxy
votes,
and provide reports and assist with preparation of filings concerning the
proxies voted. Prior to the selection of a proxy advisory firm and
periodically
thereafter, the Advisor will consider whether the proxy advisory firm has
the capacity and competency to adequately analyze proxy issues
and
the ability to make recommendations based on material accurate information
in an impartial manner. Such considerations may include some or
all
of the following (i) periodic sampling of votes cast through the firm’s
systems to determine that votes are in accordance with the Advisor’s
policies and
its clients best interests, (ii) onsite visits to the proxy advisory
firm’s office and/or discussions with the firm to determine whether the
firm continues
to have the resources (e.g. staffing, personnel, technology, etc.)
capacity and competency to carry out its obligations to the Advisor, (iii)
a review
of the firm’s policies and procedures, with a focus on those relating to
identifying and addressing conflicts of interest and monitoring that
current
and accurate information is used in creating recommendations, (iv)
requesting that the firm notify the Advisor if there is a change in the
firm’s
material policies and procedures, particularly with respect to conflicts,
or material business practices (e.g., entering or exiting new lines of
business),
and reviewing any such change, and (v) in case of an error made by the
firm, discussing the error with the firm and determining whether
appropriate
corrective and preventative action is being taken. In the event the
Advisor discovers an error in the research or voting recommendations
provided
by the firm, it will take reasonable steps to investigate the error and
seek to determine whether the firm is taking reasonable steps to
reduce
similar errors in the future. While the Advisor takes into account
information from many different sources, including independent proxy
advisory
services, the decision on how to vote proxies will be made in accordance
with these policies. |
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D.
Monitoring Potential Conflicts of
Interest |
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Corporate
management has a strong interest in the outcome of proposals submitted to
shareholders. As a consequence, management often seeks to
influence large shareholders to vote with their recommendations on
particularly controversial matters. In the vast majority of cases, these
communications
with large shareholders amount to little more than advocacy for
management’s positions and give the Advisor’s staff the opportunity
to ask additional questions about the matter being presented. Companies
with which the Advisor has direct business relationships could
theoretically
use these relationships to attempt to unduly influence the manner in which
the Advisor votes on matters for its clients. To ensure that such
a conflict of interest does not affect proxy votes cast for the Advisor’s
clients, our proxy voting personnel regularly catalog companies with
whom
the Advisor has significant business relationships; all discretionary
(including case-by-case) voting for these companies will be voted by the
client
or an appropriate fiduciary responsible for the client (e.g., a committee
of the independent directors of a fund or the trustee of a retirement
plan).
In addition, to avoid any potential conflict of interest that may arise
when one American Century fund owns shares of another American
Century
fund, the Advisor will “echo vote” such shares, if possible. Echo voting
means the Advisor will vote the shares in the same proportion as the
vote
of all of the other holders of the fund’s shares. So, for example, if
shareholders of a fund cast 80% of their votes in favor of a proposal and
20%
against the proposal, any American Century fund that owns shares of such
fund will cast 80% of its shares in favor of the proposal and 20%
against.
When this is not possible (as in the case of the “NT” funds, where the
other American Century funds are the only shareholders), the shares
of
the underlying fund (e.g. the “NT” fund) will be voted in the same
proportion as the vote of the shareholders of the corresponding American
Century
policy portfolio for proposals common to both funds. For example, NT
Growth Fund shares will be echo voted in accordance with the votes
of
the Growth Fund shareholders. In the case where the policy portfolio does
not have a common proposal, shares will be voted in consultation with
a
committee of the independent directors. |
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The
voting policies expressed above are of course subject to modification in
certain circumstances and will be reexamined from time to time. With
respect
to matters that do not fit in the categories stated above, the Advisor
will exercise its best judgment as a fiduciary to vote in the manner
which
will most enhance shareholder value. Case-by-case determinations will be
made by the Advisor’s staff, which is overseen by the General Counsel
of the Advisor, in consultation with equity managers. Electronic records
will be kept of all votes made. |
BARROW,
HANLEY, MEWHINNEY & STRAUSS, LLC
Proxy
Voting Policy & Guidelines
Barrow
Hanley has accepted authority
to vote proxies for our
clients who have delegated this responsibility to us.
It is
the Firm’s Policy
to vote our clients’
proxies in the best economic interests of our clients, the beneficial owners of
the shares. The
Firm
has adopted this Proxy Voting Policy and procedures
for handling research, voting, reporting,
and disclosing
proxy votes, and this
set of Guidelines (“Guidelines”) that provide a framework for assessing
proxy proposals.
Barrow
Hanley votes
all clients’ proxies the same based on the
Firm’s Policy and
Guidelines. If or when additional costs for
voting proxies are identified, the
Firm
will determine whether such costs exceed the expected economic benefit of voting
the proxy and may abstain
from voting proxies
for ERISA Plan
clients. However, if/when such voting costs are borne by Barrow Hanley and not
by the client, all proxies will be voted for all clients.
Disclosure
information about the Firm’s Proxy Voting Policy & Guidelines is provided in
the Firm’s Form ADV Part 2.
To
assist in the proxy voting process, at its own expense,
Barrow Hanley retains Glass
Lewis & Co. (“Glass Lewis”) as proxy service provider.
Glass Lewis provides:
■ |
Research
on corporate governance, financial statements, business, legal and
accounting risks, |
■ |
Proxy
voting recommendations, including environmental,
social, and governance (“ESG”) voting
Guidelines, |
■ |
Portfolio
accounting and reconciliation of shareholdings for voting
purposes, |
■ |
Proxy
voting execution, record keeping, and reporting services.
|
Proxy
Oversight Committee, Proxy Coordinators, and Proxy Voting
Committee
■ |
Barrow
Hanley’s Proxy Oversight Committee is responsible for implementing and
monitoring this
proxy voting Policy,
procedures, disclosures, and recordkeeping. |
■ |
The
Proxy Oversight Committee conducts periodic reviews of
proxy votes to
ensure that the Policy
is observed, implemented properly, and amended or
updated, as appropriate. |
■ |
The
Proxy Oversight Committee is comprised
of the CCO, the Responsible Investing Committee Lead,
the Head
of Investment Operations,
the ESG Research
Coordinator,
and an At-Large
Portfolio Manager.
|
■ |
Proxy
Coordinators
are responsible for organizing and reviewing
the data and recommendations of
Glass Lewis. |
■ |
Proxy
Coordinators
are responsible for ensuring that the proxy ballots are routed to the
appropriate research analyst based on industry sector coverage. |
■ |
Research
Analysts
are responsible for
review and evaluate proposals
and make recommendations to the Proxy Voting Committee to ensure that
votes are
consistent with the Firm’s analysis. |
■ |
Equity
Portfolio
Managers
are members of the Proxy Voting
Committee. |
■ |
Equity
Portfolio
Managers vote
proposals based on our
Guidelines, internal research recommendations, and the
research
from Glass Lewis. Proxy votes
must be approved by the Proxy Voting Committee before submitting to
Glass
Lewis. |
■ |
Proxies
for the Diversified Small Cap Value accounts are voted in accordance with
the Glass
Lewis’
recommendations for the following
reasons: |
■ |
Investment
selection is
based on a quantitative model, |
■ |
The
holding period is too short to justify the time for analysis necessary
to
vote. |
Conflicts
of Interest
Potential
conflicts may arise when:
■ |
Clients
elect to participate in securities lending arrangements; in such cases,
the votes follow the shares.
Barrow Hanley is not a party to the client’s lending
arrangement and typically does not have information about
shares on loan.
Under these circumstances
the proxies for those shares may not be
voted. |
■ |
If/when
a proxy voting issue is determined to be financially material, the Firm
makes a best-efforts attempt to alert clients and their custodial bank to
recall
shares from loan to be voted. In this context, Barrow Hanley defines a
financially material issue to be issues deemed by our investment team to
have
significant economic impact. The ultimate decision on whether to recall
shares is the responsibility of the
client. |
■ |
Barrow
Hanley invests in equity securities of corporations who are also clients
of the Firm.
In such
cases, the
Firm
seeks to mitigate potential conflicts by: |
■ |
Making
voting decisions for the benefit of the shareholder(s), our
clients, |
■ |
Uniformly
voting every proxy based on Barrow Hanley’s internal research and
consideration of Glass Lewis’ recommendations,
and |
■ |
Documenting
the votes of companies who are also clients of the
Firm. |
■ |
If
a material conflict of interest exists, members from the Proxy Voting and
Oversight Committees will determine if the affected clients should have
an
opportunity to vote their proxies themselves, or whether Barrow Hanley
will address the specific voting issue through other objective means, such
as
voting the proxies in a manner consistent with a predetermined voting
policy or accepting the voting recommendation of Glass Lewis.
|
Other
Policies and Procedures
■ |
A
proxy card or voting instruction form contains a list of voting options,
including For, Against, Abstain, and/or Withhold. A vote to Abstain or
Withhold
is effectively a vote against the proposal. Barrow Hanley assesses each
vote, the intended impact of our vote, and the rule(s) that apply to
the
vote and may select any of these options when casting the vote. Barrow
Hanley
sends a daily electronic transfer of equity positions to Glass
Lewis. |
■ |
Glass
Lewis
identifies accounts eligible to vote for each security and posts the
proposals and research on its secure, proprietary online
system. |
■ |
Barrow
Hanley sends a proxy report to clients at least annually and/or
as requested by client,
listing the number of shares voted and disclosing how proxies
were voted. |
■ |
Barrow
Hanley retains voting records in accordance with the Firm’s Books and
Records Policy. Glass Lewis retains the Firm’s voting records for seven
years.
|
■ |
Proxy
Coordinators are responsible for retaining
the following proxy records: |
■ |
These
policies,
procedures,
and amendments; |
■ |
Proxy
statements regarding
our clients’ securities; |
■ |
A
record of each proxy voted; |
■ |
Proxy
voting reports that are sent to clients
annually; |
■ |
Internal
documents related to voting decisions;
and |
■ |
Records
of clients’
requests
for proxy voting information
and/or correspondence about votes.
|
Voting
Debt and/or Bank Loan Securities
Barrow
Hanley’s proxy voting responsibilities may include voting on proposals,
amendments, consents, or resolutions solicited by or in respect to securities
related to bank loan investments. Exceptions Limited exceptions to this
Policy
may be permitted based on a client’s circumstances, such as,
foreign
regulations that create a conflict with U.S. practices, expenses to facilitate
voting when the costs outweigh the benefit of voting the proxies, or
other
circumstances.
Guidelines
Barrow
Hanley’s set of proxy voting Guidelines is a framework for assessing proposals.
Each proposal is evaluated based on its facts and circumstances. The
Firm reviews and considers ESG issues along with other financially material
factors to assess the financially material impact on the long-term value
of
the shares. Our Guidelines address the following issues:
■ |
Corporate
Structure and Shareholder Rights |
■ |
Shareholder
Proposals and ESG Issues |
■ |
Voting
of Non-U.S./Foreign Shares |
Issues
that do not conform to these Guidelines are evaluated by the Proxy Voting
Committee and voted in the best interest of our clients.
Board
of Directors
Election
of Directors
Barrow
Hanley believes that good corporate governance begins with a board of
majority-independent directors and committees, including independent
directors
who serve on Audit, Compensation, and Nominating committees.
Barrow
Hanley will generally approve:
■ |
A
slate of nominees comprised of a two-thirds majority of independent
directors. |
■ |
Nominees
for Audit, Compensation and/or Nominating committees who are independent
of management. |
■ |
Nominees
who we believe have the required skills and diverse backgrounds to make
informed judgments about the subject matter for which the committee
is responsible. |
■ |
We
attempt to target board diversity of at least
30%. |
Barrow
Hanley will generally not approve:
■ |
A
slate of nominees that results in a majority non-independent
directors. |
■ |
Nominees
for Audit, Compensation and/or Nominating committees who are not
independent of management. |
■ |
Incumbent
board members who failed to attend at least 75% of board and applicable
committee meetings. |
■ |
Nominees
who have served on boards or as executives of companies with records of
poor performance, inadequate risk oversight, excessive compensation,
audit, or accounting-related problems and/or other indicators of
mismanagement or actions against the interests of
shareholders. |
■ |
Nominees
whose actions on other committees demonstrate serious failures of
governance, which may include acting to significantly reduce shareholder
rights, or failure to respond to previous vote requests for directors and
shareholder proposals. |
■ |
An
independent director who has in the past three years, had a material
financial, familial, or other relationship with the company or its
executives. |
■ |
Members
of a Nominating committee where the board has an average tenure of over
ten years and has not appointed a new member to the board in
at least five years |
■ |
Members
of a Nominating committee where the board lacks
diversity. |
Combined
Chairman / CEO Role
When
the roles of a board’s chair and CEO are combined a strong lead independent
director is necessary. If a lead director is not appointed, Barrow Hanley
supports proposals to separate the roles.
Contested
Elections of Directors
Barrow
Hanley evaluates a nominee’s qualifications, the incumbent board’s performance,
and the rationale behind dissident campaigns, and votes based
on maximizing shareholder value.
Classified
Boards
Barrow
Hanley supports proposals to declassify existing boards, whether proposed by
management or shareholders. In most cases we vote against proposals
for classified board structures where only part of the board is elected each
year.
If
a board does not have a committee responsible for governance oversight and the
board has not implement a proposal that received the requisite support,
we vote against the entire board. If a proposal requests the board adopt a
declassified structure, we vote against all directors and nominees up
for election.
Board
Diversity
Barrow
Hanley supports boards with diverse backgrounds and nominees with relevant
experience. Nominating and governance committees should consider
diversity within the context of the company and industry. Shareholders are best
served when boards make an effort to ensure a constituency that
is not only reasonably diverse based on age, race, gender, and ethnicity, but
also based on geographic knowledge, industry experience, board tenure
and culture. Board diversity is one of many factors considered on a case-by-case
basis when reviewing board elections.
Board
Tenure
Barrow
Hanley believes that independent directors are an important part of good
governance. Long term service diminishes a member’s independence. Directors
serving on a board for 10 years or more are not considered to be independent. We
recognize that in some cases, a director’s tenure and experience
on the board is beneficial to shareholders. Nominees’ tenure on the board is
evaluated to determine independence.
Overboarding
Barrow
Hanley reviews a nominee’s board commitments on a case-by-case basis and
generally votes against nominees who are executives of public company
while serving on two or more public boards or a non-executive who sits on four
or more public boards.
Proxy
Access
Shareholders’
participation in electing directors enhances a board’s accountability and
responsiveness. Long-term investors can benefit from shareholder
rights to nominate directors. Such rights should require a minimum percentage
ownership (at least 5%) of outstanding shares held for a minimum
period (at least three years) to nominate a maximum percentage of (up to 20%)
for the board.
Approval
of Independent Auditors
Independent
auditors are a critical element of good governance. A company’s relationship
with its independent auditor should be limited to its audit. Barrow
Hanley votes against auditor ratification proposals when the auditor has changed
for 15 or more years. Auditor’s fees should be limited to the audit
work. Other, closely related activities that do not appear to impair the
auditor’s independence may be approved. Barrow Hanley evaluates the circumstances
of auditors who have a substantial non-auditing relationship with the company on
a case-by-case basis.
Compensation
Issues
Compensation
Plans should align the interests of long-term shareholders with the interests of
management, employees, and directors.
|
Stock-Based
Compensation Plans Stock-based
compensation plans should be administered by an independent committee of
the board and approved by shareholders. Barrow Hanley opposes
compensation plans that substantially dilute a shareholder’s ownership
interest, provides participants with excessive awards, and/or have
other
objectionable features. Compensation proposals are evaluated on a
case-by-case basis using the following
factors: |
■ |
The
company’s industry group, market capitalization, and competitors’
compensation plans. |
■ |
Requirements
for senior executives to hold a minimum amount/percentage of company
stock. |
■ |
Requirements
for minimum holding periods for stock acquired through equity
awards. |
■ |
Performance-vesting
awards, indexed options, and/or other grants linked to the company’s
performance. |
■ |
Requirements
that limit the concentration of equity grants to senior executives and
provide for a broad-based plan. |
■ |
Requirements
for stock-based compensation plans as a substitute for cash compensation
to deliver market-competitive total
compensation. |
|
Bonus
Plans Bonus
based compensation plans should include the following
features: |
■ |
Periodic
shareholder approval to properly qualify for deductions under Internal
Revenue Code Section 162(m). |
■ |
Performance
measures relating to key value drivers of the company’s
business. |
■ |
Maximum
award amounts expressed in dollar
amounts. |
|
Bonus
plans should not include excessive awards in both absolute and relative
terms. |
|
Executive
Compensation Plans (Say on Pay) Say
on Pay type of executive compensation programs can effectively link pay
and performance and provide competitive compensation opportunities.
Say
on Pay type plans should state the amount of compensation at risk and the
amount of equity-based compensation linked to the company’s performance
and include adequate disclosure about the overall compensation structure.
Say on Pay type plans should not include significant compensation
guarantees and/or compensation that is not sufficiently linked to
performance. |
|
Recoupment
Provisions (Clawbacks) Executive
compensation programs should be clearly tied to performance and include
the following: |
■ |
Detailed
bonus recoupment policies to prevent executives from retaining
performance-based awards that were not truly
earned. |
■ |
Clawback
triggers in the event of a restatement of financial results or similar
revision of performance indicators upon which bonuses were
based. |
■ |
Policies
allowing board reviews of performance-related bonuses and awards paid to
senior executives during the period covered by a restatement that
allows the company to recoup such bonuses if performance goals were not
actually achieved. |
■ |
Clawback
policies that limit discretion and ensure the integrity of such
policies. |
|
Executive
Severance Agreement (Golden Parachutes) Executive
compensation should be designed as an incentive for continued employment
and include reasonable severance benefits, and the executive’s
termination should be limited to three times salary and bonus, referred to
as double-trigger plans. |
|
Guaranteed
severance benefits that exceed three times salary and bonus should be
disclosed and should require shareholder
approval. |
|
Barrow
Hanley does not support guaranteed severance benefits without a change in
control or arrangements that does not require the executive’s termination,
referred to as single-trigger plans. |
|
Employee
Stock Purchase Plans Employee
stock purchase plans are effective ways to increase employees’ ownership
in the company’s stock. Such plans should not allow for purchases
below 85% of current market value and should limit shares reserved under
the plan to 5% or less of the outstanding shares of the company. |
Corporate
Structure and Shareholder Rights
Barrow
Hanley supports market-based corporate control functions without undue
interference from artificial barriers. Shareholders’ rights are a fundamental
privilege of equity ownership and should be proportional to economic ownership.
Appropriate limits include a shareholder’s ability to act by
corporate charter, bylaw provisions, or adoption of certain takeover
provisions.
|
Shareholder
Right Plans (Poison Pills) Poison
pill plans can erode shareholder value by limiting a potential acquirer’s
ability to purchase a controlling interest in the company without the
approval
of its board of directors, and/or can serve to entrench incumbent
management and directors. |
|
Shareholder
rights plans should be designed to enables the board to take appropriate
to defensive actions, and should require the
following: |
■ |
Shareholder
approval within a year of its adoption. |
■ |
Timing
limited to 3-5 years. |
■ |
Requirement
for shareholder approval for renewal. |
■ |
Reviews
by a committee of independent directors at least every three years,
referred to as TIDE provisions. |
■ |
Permitted
bid or qualified offer features requiring shareholder votes under specific
conditions referred to as chewable pills. |
■ |
Reasonable
ownership triggers of 15-20%. |
■ |
Highly
independent, non-classified boards. |
|
Shareholder
rights plans should avoid the following: |
■ |
Long-term
defensive features of 5 or more years. |
■ |
Automatic
renewals without shareholder approval. |
■ |
Ownership
triggers of less than 15%. |
■ |
Boards
with limited independence. |
|
Political
Contributions and Lobbying Barrow
Hanley evaluates an issuer’s policy and procedures governing political
spending and lobbying. Proposals demonstrating insufficient or absent
policies
and disclosure are opposed. |
|
An
Increase in Authorized Shares Proposals
for increases in authorized share amounts should not expose shareholders
to excessive dilution and should be limited to increases of up to
20%
of the current share authorization. |
|
Cumulative
Voting Cumulative
voting should be proportional to the shareholders’ economic investment in
the company. |
|
Supermajority
Vote Requirements Shareholders’
rights to approve or reject proposals should be based on a simple
majority. |
|
Confidential
Voting Shareholder
voting should be conducted in a confidential
manner. |
|
Dual
Classes of Stock Barrow
Hanley opposes dual-class capitalization structures that provide disparate
voting rights to shareholders with similar economic interests.
Proposals
to create separate share classes with different voting rights are opposed.
Proposals to dissolve separate share classes are
approved. |
Shareholder
Proposals and ESG Issues
Proposals
relating to ESG issues are usually initiated by shareholders seeking disclosure
about certain business practices or amendments to certain policies.
Barrow Hanley’s Policy and Guidelines are designed to provide a framework for
assessing the financial materiality of corporate governance, environmental,
and social issues. Barrow Hanley supports proposals that improve transparency on
issues that can be clearly tied to sustainable resource development,
environmental compliance, and workplace safety.
Barrow
Hanley subscribes to third party ESG research and scoring databases, including
MSCI, Sustainalytics, and IFRS as a tool for rating the financial materiality
of ESG factors to support our internal research. Some investments may have a low
corporate ranking based on a third party’s profile. Investment
in low ranked companies is based on our belief that shareholder engagement is
the best way to engage with management and use our influence
toward sustainable improvements. Our fundamental analysis identifies areas and
issues for engagement with management to improve policies
and disclosure.
Barrow
Hanley evaluates climate risk and disclosure standards for the companies and
industries most exposed to climate change and engages with management
and boards to understand the company’s risks and opportunities and where
necessary, seeks additional disclosure.
Barrow
Hanley considers issues related to human capital to be a company’s most
significant risks and opportunities. Boards should disclose and communicate
plans to instill inclusive, attractive, and high-retention environments in the
company. Barrow Hanley supports inclusive working environments
and diversity among employees and supports shareholder proposals that contain
comprehensive equal opportunity and anti-discrimination
provisions, and reporting on gender-based discrepancies in
compensation.
Voting
of Non-U.S./Foreign Shares
Although
corporate governance standards, disclosure requirements, and voting mechanisms
vary greatly among the markets outside the U.S., proposals
are evaluated under these Guidelines and consideration of the local market’s
standards and best practices.
Exceptions
Reasonable
and limited exceptions to these Guidelines are permitted based on the facts,
circumstances, and best economic interests of our clients. Exceptions
are documented and retained in the Firm’s proxy voting
records.
BRANDYWINE
GLOBAL INVESTMENT MANAGEMENT, LLC
PROXY
VOTING
I.
Client Accounts for which Brandywine Global Votes Proxies
Brandywine
Global shall vote proxies for each client account for which the
client:
|
A.
has specifically authorized Brandywine Global to vote proxies in the
applicable investment management agreement or other written instrument;
or |
|
B.
without specifically authorizing Brandywine Global to vote proxies, has
granted general investment discretion to Brandywine Global in the
applicable
investment management agreement. |
Also,
Brandywine Global shall vote proxies for any employee benefit plan client
subject to the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”), unless the investment management agreement specifically reserves the
responsibility for voting proxies to the plan trustees or other
named fiduciary.
At
or prior to inception of each client account, Brandywine Global shall determine
whether it has proxy voting authority over such account.
II.
General Principles
In
exercising discretion to vote proxies for securities held in client accounts,
Brandywine Global is guided by general fiduciary principles. Brandywine
Global’s
goal in voting proxies is to act prudently and solely in the best economic
interest of its clients for which it is voting proxies. In furtherance of
such
goal, Brandywine Global will vote proxies in a manner that Brandywine Global
believes will be consistent with efforts to maximize shareholder values.
Brandywine
Global does not exercise its proxy voting discretion to further policy,
political or other issues that have no connection to enhancing the economic
value of the client’s investment. As part of our fiduciary duty, we do consider
environmental, social, and governance (“ESG”) issues that may impact
the value of an investment, through introducing opportunity or by creating risk
to the value, or both.
III.
How Brandywine Global Votes Proxies
Appendix
A sets forth general guidelines considered by Brandywine Global and its
portfolio management teams in voting common proxy items.
In
the case of a proxy issue for which there is a stated position set forth in
Appendix A, Brandywine Global generally votes in accordance with the
stated
position. In the case of a proxy issue for which there is a list of factors set
forth in Appendix A that Brandywine Global considers in voting on such
issue, Brandywine Global considers those factors and votes on a case-by-case
basis in accordance with the general principles described in Section
II.
In the case of a proxy issue for which there is no stated position or list of
factors set forth in Appendix A that Brandywine Global considers in voting
on
such issue, Brandywine Global votes on a case-by-case basis in accordance with
the general principles described in Section II.
The
general guidelines set forth in Appendix A are not binding on Brandywine Global
and its portfolio management teams, but rather are intended to provide
an analytical framework for the review and assessment of common proxy issues.
Such guidelines can always be superseded by a portfolio management
team based on the team’s assessment of the proxy issue and determination that a
vote that is contrary to such general guidelines is in the best
economic interests of the client accounts for which the team is responsible.
Different portfolio management teams may vote differently on the same
issue based on their respective assessments of the proxy issue and
determinations as to what is in the best economic interests of client accounts
for
which they are responsible.
In
the case of Taft-Hartley clients, Brandywine Global will comply with a client
direction to vote proxies in accordance with Institutional Shareholder
Services’
(“ISS”) Proxy Voting Guidelines, which ISS represents to be fully consistent
with AFL-CIO guidelines.
IV.
Use of an Independent Proxy Service Firm
Brandywine
Global may contract with an independent proxy service firm to provide Brandywine
Global with information and/or recommendations with regard
to proxy votes. Any such information and/or recommendations will be made
available to Brandywine Global’s portfolio management teams, but Brandywine
Global and its portfolio management teams are not required to follow any
recommendation furnished by such service provider. The use of an
independent proxy service firm to provide proxy voting information and/or
recommendations does not relieve Brandywine Global of its responsibility
for
any proxy votes.
With
respect to any independent proxy service firm engaged by Brandywine Global to
provide Brandywine Global with information and/or recommendations
with regard to proxy votes, Brandywine Global’s Proxy Administrator shall
periodically review and assess such firm’s policies, procedures
and practices including those with respect to the disclosure and handling of
conflicts of interest.
V.
Conflict of Interest Procedures
In
furtherance of Brandywine Global’s goal to vote proxies in the best interests of
clients, Brandywine Global follows procedures designed to identify and
address material conflicts that may arise between the interests of Brandywine
Global and its employees and those of its clients before voting proxies
on behalf of such clients. Conflicts of interest may arise both at the firm
level and as a result of an employee’s personal relationships or circumstances.
|
A.
Procedures for Identifying Conflicts of
Interest |
|
Brandywine
Global relies on the procedures set forth below to seek to identify
conflicts of interest with respect to proxy
voting. |
|
|
1.
Brandywine Global’s Compliance Department annually requires each
Brandywine Global employee to complete a questionnaire designed to
elicit
information that may reveal potential conflicts between the employee’s
interests and those of Brandywine Global
clients. |
|
|
2.
Brandywine Global treats client and wrap sponsor relationships as creating
a material conflict of interest for Brandywine Global in voting proxies
with
respect to securities issued by such client or its known
affiliates. |
|
|
3.
As a general matter, Brandywine Global takes the position that
relationships between a non-Brandywine Global Franklin Resources business
unit and
an issuer (e.g., investment management relationship between an issuer and
a non-Brandywine Global Franklin Resources-owned asset manager)
do not present a conflict of interest for Brandywine Global in voting
proxies with respect to such issuer because Brandywine Global operates
as an independent business unit from other Franklin Resources business
units and because of the existence of informational barriers between
Brandywine Global and certain other Franklin Resources business
units. |
|
B.
Procedures for Assessing Materiality of Conflicts of
Interest |
|
|
1.
All potential conflicts of interest identified pursuant to the procedures
outlined in Section V.A.1. must be brought to the attention of the
Investment
Committee for resolution. |
|
|
2.
The Investment Committee shall determine whether a conflict of interest is
material. A conflict of interest shall be considered material to the
extent
that it is determined that such conflict is likely to influence, or appear
to influence, Brandywine Global’s decision-making in voting the
proxy.
All materiality determinations will be based on an assessment of the
particular facts and circumstances. A written record of all materiality
determinations
made by the Investment Committee shall be
maintained. |
|
|
3.
If it is determined by the Investment Committee that a conflict of
interest is not material, Brandywine Global may vote proxies following
normal processes
notwithstanding the existence of the
conflict. |
|
C.
Procedures for Addressing Material Conflicts of
Interest |
|
|
1.
With the exception of those material conflicts identified in A.2. which
will be voted in accordance with paragraph C.1.b., if it is determined by
the
Investment Committee that a conflict of interest is material, the
Investment Committee shall determine an appropriate method or combination
of
methods to resolve such conflict of interest before the proxy affected by
the conflict of interest is voted by Brandywine Global. Such determination
shall be based on the particular facts and circumstances, including the
importance of the proxy issue, the nature of the conflict of interest,
etc. Such methods may include: |
|
|
|
|
a.
confirming that the proxy will be voted in accordance with a stated
position or positions set forth in Appendix
A; |
|
|
|
|
b.
confirming that the proxy will be voted in accordance with the
recommendations of an independent proxy service firm retained by
Brandywine
Global; |
|
|
|
|
c.
in the case of a conflict of interest resulting from a particular
employee’s personal relationships or circumstances, removing such employee
from
the decision-making process with respect to such proxy
vote; |
|
|
|
|
d.
disclosing the conflict to clients and obtaining their consent before
voting; |
|
|
|
|
e.
suggesting to clients that they engage another party to vote the proxy on
their behalf; or |
|
|
|
|
f.
such other method as is deemed appropriate given the particular facts and
circumstances, including the importance of the proxy issue, the
nature
of the conflict of interest, etc. |
|
|
2.
A written record of the method used to resolve a material conflict of
interest shall be maintained. |
VI.
Other Considerations
In
certain situations, Brandywine Global may decide not to vote proxies on behalf
of a client account for which it has discretionary voting authority because
Brandywine Global believes that the expected benefit to the client account of
voting shares is outweighed by countervailing considerations (excluding
the existence of a potential conflict of interest). Examples of situations in
which Brandywine Global may determine not to vote proxies are set
forth below.
|
Proxy
voting in certain countries requires “share blocking.” This means that
shareholders wishing to vote their proxies must deposit their shares
shortly
before the date of the meeting (e.g. one week) with a designated
depositary. During the blocking period, shares that will be voted at the
meeting
cannot be sold until the meeting has taken place and the shares have been
returned to client accounts by the designated depositary. In deciding
whether to vote shares subject to share blocking, Brandywine Global will
consider and weigh, based on the particular facts and circumstances,
the expected benefit to client accounts of voting in relation to the
potential detriment to clients of not being able to sell such shares
during
the applicable period. |
|
Certain
clients of Brandywine Global, such as an institutional client or a
registered investment company for which Brandywine Global acts as a
sub-adviser,
may engage in securities lending with respect to the securities in their
accounts. Brandywine Global typically does not direct or oversee
such
securities lending activities. To the extent feasible and practical under
the circumstances, Brandywine Global may request that the client recall
shares
that are on loan so that such shares can be voted if Brandywine Global
believes that the expected benefit to the client of voting such shares
outweighs
the detriment to the client of recalling such shares (e.g., foregone
income). The ability to timely recall shares for proxy voting purposes
typically
is not entirely within the control of Brandywine Global and requires the
cooperation of the client and its other service providers. Under
certain
circumstances, the recall of shares in time for such shares to be voted
may not be possible due to applicable proxy voting record dates and
administrative
considerations. |
VII.
Proxy Voting-Related Disclosures
|
A.
Proxy Voting Independence and Intent |
|
Brandywine
Global exercises its proxy voting authority independently of other
Franklin Resources-owned asset managers. Brandywine Global and its
employees
shall not consult with or enter into any formal or informal agreements
with Brandywine Global’s ultimate parent, Franklin Resources, Inc.,
any
other Franklin Resources business unit, or any of their respective
officers, directors or employees, regarding the voting of any securities
by Brandywine
Global on behalf of its clients. |
|
Brandywine
Global and its employees must not disclose to any person outside of
Brandywine Global, including without limitation another investment
management firm (affiliated or unaffiliated) or the issuer of securities
that are the subject of the proxy vote, how Brandywine Global intends
to vote a proxy without prior approval from Brandywine Global’s Chief
Compliance Officer. |
|
If
a Brandywine Global employee receives a request to disclose Brandywine
Global’s proxy voting intentions to, or is otherwise contacted by, another
person
outside of Brandywine Global (including an employee of another Franklin
Resources business unit) in connection with an upcoming proxy voting
matter, the employee should immediately notify Brandywine Global’s Chief
Compliance Officer. |
|
If
a Brandywine Global portfolio manager wants to take a public stance with
regards to a proxy, the portfolio manager must consult with and obtain
the
approval of Brandywine Global’s Chief Compliance Officer before making or
issuing a public statement. |
|
B.
Disclosure of Proxy Votes and Policy and
Procedures |
|
Upon
Brandywine Global’s receipt of any oral or written client request for
information on how Brandywine Global voted proxies for that client’s
account,
Brandywine Global must promptly provide the client with such requested
information in writing. |
|
Brandywine
Global must deliver to each client, for which it has proxy voting
authority, no later than the time it accepts such authority, a written
summary
of this Proxy Voting policy and procedures. This summary must include
information on how clients may obtain information about how Brandywine
Global has voted proxies for their accounts and must also state that a
copy of Brandywine Global’s Proxy Voting policy and procedures is
available
upon request. |
|
Brandywine
Global must create and maintain a record of each written client request
for proxy voting information. Such record must be created promptly
after receipt of the request and must include the date the request was
received, the content of the request, and the date of Brandywine
Global’s
response. Brandywine Global must also maintain copies of written client
requests and copies of all responses to such
requests. |
|
Brandywine
Global may delegate to non-investment personnel the responsibility to vote
proxies in accordance with the guidelines set forth in Appendix
A. Such delegation of duties will only be made to employees deemed to be
reasonably capable of performing this function in a satisfactory
manner. |
VIII.
Shareholder Activism and Certain Non-Proxy Voting Matters
In
no event shall Brandywine Global’s possession of proxy voting authority obligate
it to undertake any shareholder activism on behalf of a client. Brandywine
Global may undertake such activism in connection with a proxy or otherwise if
and to the extent that Brandywine Global determines that doing
so is consistent with applicable general fiduciary principles, provided
Brandywine Global has first obtained its Chief Compliance Officer’s approval
of
the proposed activism.
Absent
a specific contrary written agreement with a client, Brandywine Global does not
(1) render any advice to, or take any action on behalf of, clients with
respect to any legal proceedings, including bankruptcies and shareholder
litigation, to which any securities or other investments held in client
account,
or the issuers thereof, become subject, or (2) initiate or pursue legal
proceedings, including without limitation shareholder litigation, on behalf
of
clients with respect to transactions or securities or other investments held in
client accounts, or the issuers thereof. Except as otherwise agreed to in
writing
with a particular client, the right to take any action with respect to any legal
proceeding, including without limitation bankruptcies and shareholder
litigation, and the right to initiate or pursue any legal proceedings, including
without limitation shareholder litigation, with respect to transactions
or securities or other investments held in a client account is expressly
reserved to the client.
IX.
Recordkeeping
In
addition to all other records required by this Policy and Procedures, Brandywine
Global shall maintain the following records relating to proxy
voting:
|
A.
a copy of this Policy and Procedures, including any and all amendments
that may be adopted; |
|
B.
a copy of each proxy statement that Brandywine Global receives regarding
client securities; |
|
C.
a record of each vote cast by Brandywine Global on behalf of a
client; |
|
D.
documentation relating to the identification and resolution of conflicts
of interest; |
|
E.
any documents created by Brandywine Global that were material to a proxy
voting decision or that memorialized the basis for that
decision; |
|
F.
a copy of each written client request for information on how Brandywine
Global voted proxies on behalf of the client, and a copy of any written
response
by Brandywine Global to any (written or oral) client request for
information on how Brandywine Global voted proxies on behalf of the
requesting
client; and |
|
G.
records showing whether or not Brandywine Global has proxy voting
authority for each client account. |
All
required records shall be maintained and preserved in an easily accessible place
for a period of not less than six years from the end of the fiscal year
during
which the last entry was made on such record, the first two years in an
appropriate office of Brandywine Global. Brandywine Global also shall
maintain
a copy of any proxy voting policies and procedures that were in effect at any
time within the last five years.
To
the extent that Brandywine Global is authorized to vote proxies for a United
States registered investment company, Brandywine Global shall maintain
such records as are necessary to allow such fund to comply with its
recordkeeping, reporting and disclosure obligations under applicable laws,
rules
and regulations.
In
lieu of keeping copies of proxy statements, Brandywine Global may rely on proxy
statements filed on the EDGAR system as well as on third party records
of proxy statements if the third party provides an undertaking to provide copies
of such proxy statements promptly upon request. Brandywine Global
may rely on a third party to make and retain, on Brandywine Global’s behalf,
records of votes cast by Brandywine Global on behalf of clients if the
third party provides an undertaking to provide a copy of such records promptly
upon request.
Appendix
A
Proxy Voting
Guidelines
Brandywine
Global Diversified Portfolio Management Team
Proxy
Voting Guidelines
Below
are proxy voting guidelines that Brandywine Global’s Diversified Portfolio
Management Team generally follows when voting proxies for securities
held
in client accounts. The Team may decide to deviate from these guidelines with
respect to any one or more particular proxy votes, subject in all cases
to the Team’s duty to act solely in the best interest of their client accounts
holding the applicable security.
I.
Compensation
|
A.
We vote for non-employee director stock options, unless we consider the
number of shares available for issue excessive. We may consider current
and
past stock option grants in determining whether the cumulative dilution is
excessive. |
|
B.
We vote for employee stock purchase programs. Normally, these programs
allow all employees to purchase company stock at a price equal to
85%
of current market price. Usually, we will still vote for these employee
programs even if we vote against a non-employee or executive-only stock
purchase
program because of excessive dilution. |
|
C.
We vote for compensation plans that are tied to the company achieving set
profitability hurdles. Plans are structured this way to comply with IRS
laws
allowing for deductibility of management compensation exceeding $1
million. |
|
D.
We vote against attempts to re-price options. Also, we vote against the
re-election of incumbent Directors in the event of such a re-pricing
proposal. |
|
E.
We vote against attempts to increase incentive stock options available for
issuance when the shares underlying such options would exceed 10%
of
the company’s outstanding shares. |
|
F.
We vote against stock option plans allowing for stock options with
exercise prices less than 100% of the stock’s price at the time of the
option grant. |
|
G.
We vote against stock option plans allowing for very large allocations to
a single individual because we generally believe that stock option plans
should
provide for widespread employee
participation. |
|
H.
We vote against proposals to authorize or approve loans to company
executives or Board members for personal reasons or for the purpose of
enabling
such persons to purchase company shares. |
II.
Governance
|
A.
We vote for proposals to separate the Chief Executive Officer and Chairman
of the Board positions. |
|
B.
We vote against “catch-all” authorizations permitting proxy holders to
conduct unspecified business that arises during shareholder
meetings. |
III.
Anti-Takeover
We
vote against anti-takeover measures, including without limitation:
|
A.
Staggered Boards of Directors (for example, where 1/3 of a company’s Board
is elected each year rather than the entire Board each
year). |
|
B.
Super-Majority Voting Measures (for example, requiring a greater than 50%
vote to approve takeovers or make certain
changes). |
|
C.
Poison Pills, which are special stock rights that go into effect upon a
takeover offer or an outsider acquiring more than a specified percentage
of a company’s
outstanding shares. |
IV.
Capital Structure
We
vote against attempts to increase authorized shares by more than twice the
number of outstanding shares unless there is a specific purpose for such
increase given, such as a pending stock split or a corporate purchase using
shares, and we determine that increasing authorized shares for such purpose
is appropriate. Generally, we believe it is better to use shares to pay for
acquisitions when they are trading at higher values than when they are
trading
at or near historical lows. The dilution effect is less.
Brandywine
Global Fundamental Equities Portfolio Management Team
Proxy
Voting Guidelines
Below
are proxy voting guidelines that Brandywine Global’s Fundamental Equities
Portfolio Management Team generally follows when voting proxies for
securities held in client accounts. The Team may decide to deviate from these
guidelines with respect to any one or more particular proxy votes, subject
in all cases to the Team’s duty to act solely in the best interest of their
client accounts holding the applicable security.
I.
Compensation
|
A.
We vote for non-employee director stock options, unless we consider the
number of shares available for issue
excessive. |
|
B.
We vote for employee stock purchase programs. Normally, these programs
allow all employees to purchase company stock at a price equal to
85%
of current market price. Usually, we will still vote for these employee
programs even if we vote against a non-employee or executive-only stock
purchase
program because of excessive dilution. |
|
C.
We vote for measures that give shareholders a vote on executive
compensation. |
|
D.
We vote for compensation plans that are tied to the company achieving set
profitability hurdles. We
vote against compensation metrics that are not
easily measurable and where long-term incentives are not tied to operating
performance metrics. This
is to comply with IRS laws to allow for deductibility
of management compensation exceeding $1
million. |
|
E.
We vote against any attempt to re-price options. Also, we vote against the
re- election of incumbent Directors in the event of such a re-pricing
proposal. |
|
F.
We vote against attempts to increase incentive stock options when we
determine they are excessive, either in total or for one
individual. |
|
G.
We vote against stock option plans allowing for stock options with
exercise prices less than 100% of the stock’s price at the time of the
option grant. |
II.
Governance
|
A.
We vote for cumulative shareholder
voting. |
|
B.
We vote against “catch-all” authorizations permitting proxy holders to
conduct unspecified business that arises during shareholder
meetings. |
|
C.
We vote against related-party transactions involving directors, senior
members of company management or other company
insiders. |
|
D.
We vote for proposals to separate the Chief Executive Officer and Chairman
of the Board positions. |
III.
Anti-Takeover
We
vote against anti-takeover measures:
|
A.
Staggered Boards of Directors (for example, where 1/3 of a company’s Board
is elected each year rather than the entire Board each
year). |
|
B.
Super-Majority Voting Measures (for example, requiring a greater than 50%
vote to approve takeovers or make certain
changes). |
|
C.
Poison Pills, which are special stock rights that go into effect upon a
takeover offer or an outsider acquiring more
|
|
a
specified percentage of a company’s outstanding
shares. |
|
D.
Change-of-Control Contracts, which grant benefits to company personnel
(typically members of senior company management) in the event the
company
is acquired or is otherwise subject to a change of
control. |
IV.
Capital Structure
We
vote against attempts to increase authorized shares by more than twice the
number of outstanding shares unless there is a specific purpose for such
increase given, such as a pending stock split or a corporate purchase using
shares, and we determine that increasing authorized shares for such purpose
is appropriate. Generally, we believe it is better to use shares to pay for
acquisitions when they are trading at higher values than when they are
trading
at or near historical lows. The dilution effect is less.
Brandywine
Global Fixed Income Portfolio Management Team
Proxy
Voting Guidelines
Below
are proxy voting guidelines that Brandywine Global Fixed Income Portfolio
Management Team generally follows when voting proxies for securities
held in client accounts. The Team may decide to deviate from these guidelines
with respect to any one or more particular proxy votes, subject in
all cases to the Team’s duty to act solely in the best interest of their client
accounts holding the applicable security.
I.
Compensation
|
A.
We vote for non-employee director stock options, unless we consider the
number of shares available for issue
excessive. |
|
B.
We vote for employee stock purchase programs. Normally, these programs
allow all employees to purchase company stock at a price equal to
85%
of current market price. Usually, we will still vote for these employee
programs even if we vote against a non-employee or executive-only stock
purchase
program because of excessive dilution. |
|
C.
We vote for measures that give shareholders a vote on executive
compensation. |
|
D.
We vote for compensation plans that are tied to the company achieving set
profitability hurdles. This is to comply with IRS laws to allow for
deductibility
of management compensation exceeding $1
million. |
|
E.
We vote against any attempt to re-price options. Also, we vote against the
re- election of incumbent Directors in the event of such a re-pricing
proposal. |
|
F.
We vote against attempts to increase incentive stock options when we
determine they are excessive, either in total or for one
individual. |
|
G.
We vote against stock option plans allowing for stock options with
exercise prices less than 100% of the stock’s price at the time of the
option grant. |
II.
Governance
|
A.
We vote for cumulative shareholder
voting. |
|
B.
We vote against “catch-all” authorizations permitting proxy holders to
conduct unspecified business that arises during shareholder
meetings. |
III.
Anti-Takeover
We
vote against anti-takeover measures, including without limitation:
|
A.
Staggered Boards of Directors (for example, where 1/3 of a company’s Board
is elected each year rather than the entire Board each
year). |
|
B.
Super-Majority Voting Measures (for example, requiring a greater than 50%
vote to approve takeovers or make certain
changes). |
|
C.
Poison Pills, which are special stock rights that go into effect upon a
takeover offer or an outsider acquiring more than a specified percentage
of a company’s
outstanding shares. |
IV.
Capital Structure
We
vote against attempts to increase authorized shares by more than twice the
number of outstanding shares unless there is a specific purpose for such
increase given, such as a pending stock split or a corporate purchase using
shares, and we determine that increasing authorized shares for such purpose
is appropriate. Generally, we believe it is better to use shares to pay for
acquisitions when they are trading at higher values than when they are
trading
at or near historical lows. The dilution effect is less.
CAUSEWAY
CAPITAL MANAGEMENT LLC
SUMMARY
OF PROXY VOTING POLICIES AND PROCEDURES
Overview
As
an investment adviser with fiduciary responsibilities to its clients, Causeway
Capital Management LLC (“Causeway”) votes the proxies of companies owned
by investment vehicles managed and sponsored by Causeway, and institutional and
private clients who have granted Causeway such voting authority.
Causeway has adopted these Proxy Voting Policies and Procedures to govern how it
performs and documents its fiduciary duty regarding the voting
of proxies.
Proxies
are voted solely in what Causeway believes is the best interests of the client,
a fund’s shareholders or, where employee benefit assets are involved,
plan participants and beneficiaries (collectively “clients”). Causeway’s intent
is to vote proxies, wherever possible to do so, in a manner consistent
with its fiduciary obligations. Practicalities involved in international
investing may make it impossible at times, and at other times disadvantageous,
to vote proxies in every instance.
The
Chief Operating Officer of Causeway supervises the proxy voting process. Proxy
voting staff monitor upcoming proxy votes, review proxy research, identify
potential conflicts of interest and escalate such issues to the Chief Operating
Officer, receive input from portfolio managers, and ultimately submit
proxy votes in accordance with these Proxy Voting Policies and Procedures. The
Chief Operating Officer and President have final decision-making
authority over case-by-case votes. To assist in fulfilling its responsibility
for voting proxies, Causeway currently uses Institutional Shareholder
Services Inc. (“ISS”) for proxy research, which assists the decision-making
process, and for proxy voting services, which include organizing and
tracking pending proxies, communicating voting decisions to custodian banks, and
maintaining records. Causeway will conduct periodic due diligence
on ISS and its capacity and competency to provide proxy research and the proxy
voting services provided to Causeway.
Proxy Voting
Guidelines
Causeway
generally votes on specific matters in accordance with the proxy voting
guidelines set forth below. However, Causeway reserves the right to vote
proxies on behalf of clients on a case-by-case basis if the facts and
circumstances so warrant.
Causeway’s
proxy voting guidelines are designed to cast votes consistent with certain basic
principles: (i) increasing shareholder value; (ii) maintaining or
increasing shareholder influence over the board of directors and management;
(iii) establishing and enhancing strong and independent boards of directors;
(iv) maintaining or increasing the rights of shareholders; and (v) aligning the
interests of management and employees with those of shareholders
with a view toward the reasonableness of executive compensation and shareholder
dilution. Causeway’s guidelines also recognize that a company’s
management is charged with day-to-day operations and, therefore, Causeway
generally votes on routine business matters in favor of management’s
proposals or positions.
Causeway
generally votes for:
■ |
distributions
of income |
■ |
appointment
of auditors |
■ |
director
compensation, unless deemed excessive |
■ |
boards
of directors – Causeway generally votes for management’s slate of director
nominees. However, it votes against incumbent nominees with poor
attendance records, or who have otherwise acted in a manner Causeway
believes is not in the best interests of shareholders. Causeway
recognizes
that, in certain jurisdictions, local law or regulation may influence
Board composition. |
■ |
financial
results/director and auditor reports |
■ |
changing
corporate names and other similar matters |
Causeway
generally votes the following matters on a case-by-case
basis:
■ |
amendments
to articles of association or other governing
documents |
■ |
changes
in board or corporate governance
structure |
■ |
changes
in authorized capital including proposals to issue
shares |
■ |
compensation
– Causeway believes that it is important that a company’s equity-based
compensation plans, including stock option or restricted stock
plans,
are aligned with the interests of shareholders, including Causeway’s
clients, and focus on observable long-term returns. Causeway evaluates
compensation
plans on a case-by-case basis, with due consideration of potential
consequences of a particular compensation plan. Causeway generally
opposes packages that it believes provide excessive awards or create
excessive shareholder dilution. Causeway generally opposes proposals
to
reprice options because the underlying stock has fallen in
value. |
■ |
social
and environmental issues – Causeway believes that it is generally
management’s responsibility to address such issues within the context of
increasing
long-term shareholder value. To the extent that management’s position on a
social or environmental issue is inconsistent with increasing long-term
shareholder value, Causeway may vote against management or abstain.
Causeway may also seek to engage in longer-term dialogue with management
on these issues, either separately or in connection with proxy votes on
the issue. |
■ |
mergers,
acquisitions and other corporate reorganizations or
restructurings |
■ |
changes
in state or country of incorporation |
■ |
•
related party transactions |
Causeway
generally votes against:
■ |
anti-takeover
mechanisms – Causeway generally opposes anti-takeover mechanisms including
poison pills, unequal voting rights plans, staggered boards,
provisions requiring supermajority approval of a merger and other matters
that are designed to limit the ability of shareholders to approve
merger
transactions. |
Conflicts of Interest
Causeway’s
interests may, in certain proxy voting situations, be in conflict with the
interests of clients. Causeway may have a conflict if a company that
is
soliciting a proxy is a client of Causeway or is a major business partner or
vendor for Causeway. Causeway may also have a conflict if Causeway personnel
have significant business or personal relationships with participants in proxy
contests, corporate directors or director candidates.
The
Chief Operating Officer determines the issuers with which Causeway may have a
significant business relationship. For this purpose, a “significant business
relationship” is one that: (1) represents 1.5% or more of Causeway’s prior
calendar year gross revenues; (2) represents $2,000,000 or more in payments
from a sponsored vehicle during the prior calendar year; or (3) may not directly
involve revenue to Causeway or payments from its sponsored vehicles,
but is otherwise determined by the Chief Operating Officer to be significant to
Causeway or its affiliates or sponsored vehicles, such as a primary
service provider of a fund or vehicle managed and sponsored by Causeway, or a
significant relationship with the company that might create an incentive
for Causeway to vote in favor of management.
The
Chief Operating Officer will identify issuers with which Causeway’s employees
who are involved in the proxy voting process may have a significant personal
or family relationship. For this purpose, a “significant personal or family
relationship” is one that would be reasonably likely to influence how
Causeway
votes proxies.
Proxy
voting staff will seek to identify potential conflicts of interest in the first
instance and escalate relevant information to the Chief Operating Officer.
The
Chief Operating Officer will reasonably investigate information relating to
conflicts of interest. For purposes of identifying conflicts under this
policy,
the Chief Operating Officer will rely on publicly available information about
Causeway and its affiliates, information about Causeway and its affiliates
that is generally known by Causeway’s employees, and other information actually
known by the Chief Operating Officer. Absent actual knowledge,
the Chief Operating Officer is not required to investigate possible conflicts
involving Causeway where the information is (i) non-public, (ii) subject
to information blocking procedures, or (iii) otherwise not readily available to
the Chief Operating Officer.
Proxy
voting staff will maintain a list of issuers with which there may be a conflict
and will monitor for potential conflicts of interest on an ongoing basis.
Proxy
proposals that are “routine,” such as uncontested elections of directors or
those not subject to a vote withholding campaign, meeting formalities,
and approvals of annual reports/financial statements are presumed not to involve
material conflicts of interest. For non-routine proposals, the
Chief Operating Officer in consultation with Causeway’s General Counsel/Chief
Compliance Officer decides if they involve a material conflict of interest.
If
a proposal is determined to involve a material conflict of interest, Causeway
may, but is not required to, obtain instructions from the client on how to
vote
the proxy or obtain the client’s consent for Causeway’s vote. If Causeway does
not seek the client’s instructions or consent, Causeway will vote as
follows:
■ |
If
a “for” or “against” or “with management” guideline applies to the
proposal, Causeway will vote in accordance with that
guideline. |
■ |
If
a “for” or “against” or “with management” guideline does not apply to the
proposal, Causeway will follow the recommendation of an independent
third party such as ISS. If Causeway seeks to follow the recommendation of
a third party, the Chief Operating Officer will assess the third
party’s capacity and competency to analyze the issue, as well as the third
party’s ability to identify and address conflicts of interest it may have
with
respect to the recommendation. |
To
monitor potential conflicts of interest regarding the research and
recommendations of independent third parties, such as ISS, proxy voting staff
will review
the third party’s disclosures of significant relationships. The Chief Operating
Officer will review proxy votes involving issuers where a significant
relationship
has been identified by the proxy research provider.
Practical Limitations Relating to Proxy
Voting
While
the proxy voting process is well established in the United States and other
developed markets with numerous tools and services available to assist
an
investment manager, voting proxies of non-US companies located in certain
jurisdictions may involve a number of problems that may restrict or prevent
Causeway’s ability to vote such proxies. These problems include, but are not
limited to: (i) proxy statements and ballots being written in a language
other than English; (ii) untimely and/or inadequate notice of shareholder
meetings relative to deadlines required to submit votes; (iii) restrictions
on the ability of holders outside the issuer’s jurisdiction of organization to
exercise votes; (iv) requirements to vote proxies in person; (v) restrictions
on the sale of the securities for a period of time prior to the shareholder
meeting; and (vi) requirements to provide local agents with powers of
attorney (which Causeway will typically rely on clients to maintain) to
facilitate Causeway’s voting instructions. As a result, Causeway will only use
its best
efforts to vote clients’ non-US proxies and Causeway may decide not to vote a
proxy if it determines that it would be impractical or disadvantageous
to do so.
In
addition, regarding US and non-US companies, Causeway will not vote proxies if
it does not receive adequate information from the client’s custodian
in
sufficient time to cast the vote.
For
clients with securities lending programs, Causeway may not be able to vote
proxies for securities that a client has loaned to a third party. Causeway
recognizes
that clients manage their own securities lending programs. Causeway may, but is
not obligated to, notify a client that Causeway is being prevented
from voting a proxy due to the securities being on loan. There can be no
assurance that such notice will be received in time for the client, if
it
so chooses, to recall the security.
DEPRINCE,
RACE & ZOLLO, INC.
PROXY
VOTING POLICY
I.
Introduction
DePrince,
Race & Zollo, Inc. (“DRZ”) votes proxies for a majority of its clients, and
therefore has adopted and implemented this Proxy Voting Policy and Procedures.
to comply with Rule 206(4)-6 (the “Rule”). DRZ has elected to retain an
independent third party proxy administrator (“Proxy Administrator”)
to assist in the proxy gathering, voting, and record keeping process. Any
questions about this document should be directed to our Chief
Compliance Officer (“CCO”) or Compliance Associate (“CA”).
II.
Regulatory Background
(A)
The Need to Implement a Proxy Voting Policy and Procedures
The
SEC has determined that the rule applies to all registered investment advisers
that exercise proxy voting authority over client securities. The SEC has
also
indicated that advisers with implicit as well as explicit voting authority must
comply with the rule. In particular, the rule applies when the advisory
contract
is silent but the adviser’s voting authority is implied by an overall delegation
of discretionary authority.
(B)
Voting Client Proxies
The
SEC has interpreted the duty of care to require an adviser with voting authority
to monitor shareholder meeting dates and to vote client proxies. However,
the scope of an adviser’s responsibilities with respect to voting proxies would
ordinarily be determined by the adviser’s contracts with its clients,
the disclosures it has made to its clients, and the investment policies and
objectives of its clients. The rule does not necessitate an adviser to
become
a “shareholder activist,” but more practically, allows an adviser to determine
whether the costs and expected benefits to clients warrant such activism.
Additionally, the failure to vote every proxy should not necessarily be
construed as a violation of an adviser’s fiduciary obligations. The SEC has
noted
times when refraining from voting a proxy may be in the client’s best interest,
such as when the analysis noted above yields results that indicate the
cost of voting the proxy exceeds the expected benefit to the client.
Nevertheless, an adviser must be aware that it may not ignore or be negligent
in
fulfilling the obligation it has assumed to vote client proxies.
(C)
Implementing Policies and Procedures to Resolve Conflicts of
Interest
A
challenging aspect to Rule 206(4)-6 has been an adviser’s identification of
material conflicts of interest that may influence the manner in which it
votes
proxies. Although the SEC has not listed all conflicts of interest that an
adviser may encounter when voting clients’ proxies, it has provided guidance
with respect to ways in which the policies and procedures may mitigate any
existing conflicts of interest. An adviser could also suggest that the
client engage another party to determine how the proxies should be voted, which
would relieve the adviser of the responsibility to vote the
proxies.
(D)
Disclosure Requirements
■ |
An
investment adviser must disclose to clients how they can obtain
information on how client proxies were
voted. |
■ |
A
concise summation of the proxy voting process, rather than a reiteration
of the adviser’s proxy voting policy and procedures must also be disclosed
and
that upon client request, the adviser will provide a copy of the policies
and procedures. |
(E)
Recordkeeping Requirements
Amended
Rule 204-2 under the Advisers Act requires investments advisers to retain the
following documents:
■ |
Proxy
Voting Policies and Procedures; |
■ |
Proxy
Statements Received Regarding Client
Securities; |
■ |
Records
of Votes Cast on Behalf of Clients; |
■ |
Records
of Client Requests for Proxy Voting Information;
and |
■ |
Any
Documents Prepared by the Adviser that were Material to Making a Decision
how to Vote, or that were Prepared by the Adviser to Memorialize
the
Basis for the Decision. |
III.
Risks
In
developing this policy and procedures, DRZ considered numerous risks associated
with its voting of client proxies. This analysis includes risks such
as:
■ |
DRZ
does not maintain a written proxy voting policy as required by Rule
206(4)-6. |
■ |
Proxies
are not voted in clients’ best interests. |
■ |
Proxies
are not identified and voted in a timely
manner. |
■ |
Conflicts
between DRZ’s interests and the client are not identified; therefore,
proxies are not voted appropriately. |
■ |
Proxy
voting records and client requests to review proxy votes are not
maintained. DRZ has established the following guidelines as an attempt to
mitigate
these risks. |
IV.
Policy
It
is DRZ’s policy to vote client proxies in the interest of maximizing shareholder
value. To that end, DRZ will vote in a way that it believes is consistent
with
its fiduciary duty and will cause the value of the issue to increase the most or
decline the least. Consideration will be given to both the short and
long
term implications of the proposal to be voted on when considering the optimal
vote.
Any
general or specific proxy voting guidelines provided by an advisory client or
its designated agent in writ-ing will supersede this policy. Clients may
wish
to have their proxies voted by an independent third party or other named
fiduciary or agent that is not part of the services provided by DRZ.
Clients
must notify DRZ of their specific proxy voting instructions, if any. Generally,
all such client instructions must be in writing. DRZ’s client service
staff
will generally be the responsible for ensuring that all client mandates are
initially communicated to the firm’s compliance and operations
staff.
V.
Procedures for Identification and Voting of Proxies
These
proxy voting procedures are designed to enable DRZ to resolve material conflicts
of interest with clients before voting their proxies in the interest
of
shareholder value.
1 |
DRZ
shall maintain a list of all clients for which it votes proxies. The list
will be maintained electronically and will be updated by the Compliance
department
who will obtain proxy voting information from client agreements. Notice of
new accounts to be added to the proxy service must be sent
to the Proxy Administrator no later than ten (10) days from the date a new
account starts trading. Alternatively, DRZ’s Operations Department,
as
part of the account opening procedure, will inform the Proxy Administrator
that DRZ will vote proxies for the new client. |
2 |
DRZ
shall work with the client to ensure that the Proxy Administrator is the
designated party to receive proxy voting materials from companies or
intermediaries.
To that end, new account forms of broker- dealers/custodians will state
that the Proxy Administrator should receive this documentation.
The designation may also be made by telephoning contacts and/or Client
Service Representatives at broker- dealers/custodians. These
intermediaries will be informed to direct all proxy materials to DRZ’s
designated Proxy Administrator. |
3 |
DRZ
shall work with the Proxy Administrator to ensure that the Proxy
Administrator is properly instructed on the manner and direction to vote
each client’s
account based upon the type of client and specific voting instructions
received from the client, if any. DRZ has established proxy voting
policies
with the Proxy Administrator in the interest of maximizing shareholder
value. However, DRZ has instructed the Proxy Administrator to alert
DRZ
to certain issues that DRZ believes require an additional level of
consideration. |
4 |
The
Proxy Administrator shall receive all proxy voting materials and will be
responsible for ensuring that proxies are voted and submitted in a timely
manner.
DRZ’s Compliance Department shall receive and review current proxy
information from the Proxy Administrator on a routine basis to ensure
that
all proxies are being received and voted. |
5 |
The
Proxy Administrator will review the list of clients and compare the record
date of the proxies with a security holdings list for the security or
company
soliciting the proxy vote. For any client who has provided specific voting
instructions, the Proxy Administrator shall vote that client’s proxy
in
accordance with the client’s written instructions. Proxies received for
client’s who have elected to have their proxies voted by a third party
outside of
the proxy voting services DRZ provides, and whose proxies were received by
DRZ, shall be forwarded back to the client for voting and submission.
Proxies received after the termination date of a client relationship will
not be voted. Such proxies should be delivered to the last known
address
of the former client or to the intermediary who distributed the proxy with
a written or oral statement indicating that the advisory relationship
has been terminated and that the proxies should be forwarded to the last
known address of the former client. The statement should further
indicate that future proxies for the named former client should not be
delivered to DRZ or to the Proxy Administrator, but directly to the
former
client. |
6 |
Proxy
issues not covered by DRZ’s guidelines will be forwarded to the
appropriate DRZ investment team for consideration and submission of a
vote. |
7 |
It
is DRZ’s policy to abstain from voting proxy ballots over which the issuer
has implemented a share blocking policy. Share blocking policies are
generally
implemented by issuers whose securities are traded in limited markets
outside the United States. Under a “share blocking policy” voting
any
proxies on the ballot would prohibit trading shares of the issuer for a
pre-determined period of time. DRZ typically invests in securities that
have unrestricted
liquidity and therefore DRZ will generally choose to avoid circumstances
that would hinder DRZ’s ability to manage portfolio positions.
DRZ
will document exceptions or deviations from this
policy. |
8 |
DRZ
shall compare the cost of voting the proxy to the benefit to the client.
In the event that the costs of voting appear to outweigh the benefits,
DRZ
shall document such rationale and maintain the documentation in the
permanent file (for example, voting a foreign security may require
additional
costs that overshadow the benefits) in accordance with DRZ’s record
retention policy. |
9 |
The
Proxy Administrator and/or the CCO or CA will reasonably try to assess any
material conflicts between DRZ’s interests and those of its clients
with
respect to proxy voting by considering the situations identified in the
Conflicts of Interest section of this document. |
10 |
So
long as there is no material conflicts of interest identified, the Proxy
Administrator will vote proxies according to the guidelines set forth
above. DRZ
may also elect to abstain from voting if it deems such abstinence in its
clients’ best interests. The rationale for the occurrence of voting that
deviates
from the guidelines will be documented and the documentation will be
maintained in the permanent file in accordance with DRZ’s record
retention
policy. |
11 |
If
the Proxy Administrator, the CCO or the CA (interchangeably referred to as
the “Compliance Officer”) detects a conflict of interest, the following
process
will be followed: |
|
a.
In cases where the Proxy Administrator is the party identifying the
conflict, they have been instructed to contact DRZ’s CCO or ACO as soon as
reasonably
practicable. |
|
b.
The CCO and a member of the DRZ Proxy Voting Committee (the “Committee”)
will determine the appropriate method of resolution considering
the
nature of the conflict of interest, the proxy voting deadline, the number
of clients involved, and other material information related to the
matter. |
|
c.
The CCO will either (i) with the assistance of the appropriate investment
personnel, contact the client(s) directly for discussion of the matter and
determine
if the client(s) desire to vote the proxy directly or provide its vote to
DRZ to vote on their behalf, or (ii) will convene the Committee, as
appropriate. |
|
d.
If the CCO elects to contact the client(s) directly and the client(s)
desire to vote the proxy or provide DRZ with their vote, the CCO and the
Proxy Administrator
will provide the client(s) with the proxy and related information to
enable the client(s) to make an informed
decision. |
|
e.
Alternatively, if the CCO concludes the matter should go before the
Committee, they will immediately convene the Committee. Members of the
Committee
include the persons listed on Attachment A. A majority of the Committee
members shall constitute a quorum at a meeting of the Committee,
but in no event shall a quorum consist of less than one-third of the
Committee. The CCO will serve as chairperson. The CCO, at inception
of the Committee meeting, will appoint a Secretary, whose role it will be
to keep careful and detailed minutes. |
|
f.
The CCO will identify for the Committee the issuer and proposal to be
considered. The CCO will also identify the conflict of interest that has
been detected. |
|
g.
The members of the Committee will then consider the proposal by reviewing
the proxy voting materials and any additional documentation a member(s)
feels necessary in determining the appropriate vote. Members of the
Committee may wish to consider the following
questions: |
■ |
Whether
adoption of the proposal would have a positive or negative impact on the
issuer’s short term or long-term value. |
■ |
Whether
the issuer has already responded in some appropriate manner to the request
embodied in a proposal. |
■ |
Whether
the proposal itself is well framed and
reasonable. |
■ |
Whether
implementation of the proposal would achieve the objectives sought in the
proposal. |
■ |
Whether
the issues presented would best be handled through government or
issuer-specific action. |
|
h.
Upon the provision of a reasonable amount of time to consider the
proposal, each member of the Committee will in turn announce to the
Committee
their decision on whether DRZ will vote for or against the proposal.
Attending members of the Committee are prohibited from abstaining
from the Committee vote and are prohibited from recommending that DRZ
refrain from voting on the proposal, although “abstain” votes are
permitted. The Secretary of the Committee will record each member’s vote
and the rationale for their decision. |
|
i.
After each member of the Committee has announced their vote, the Secretary
will tally the votes. The tally will result in one of the following two
outcomes: |
■ |
If
all members of the Committee have voted in the same direction on the
proposal, all of DRZ’s proxies for that proposal will be voted in such
direction.
The CCO will document the unanimous vote and all notes of the meeting, if
created, will be maintained in the permanent file in accordance
with the DRZ’s proxy recordkeeping policy described
herein. |
■ |
If
a unanimous decision cannot be reached by the Committee, DRZ will, at its
expense, engage the services of an outside proxy voting service or
consultant
who will provide an independent recommendation on the direction in which
DRZ should vote on the proposal. The proxy voting service’s
or consultant’s determination will be binding on
DRZ. |
12.
The Proxy Administrator shall be informed of the results and shall collect and
submit the proxy votes in a timely manner.
13.
All proxy votes will be recorded by the Proxy Administrator. The following
information will be maintained:
|
a.
The name of the issuer of the portfolio
security; |
|
b.
The exchange ticker symbol of the portfolio
security; |
|
c.
The Council on Uniform Securities Identification Procedures (“CUSIP”)
number for the portfolio security; |
|
d.
The shareholder meeting date; |
|
e.
The number of shares DRZ is voting on
firm-wide; |
|
f.
A brief identification of the matter voted
on; |
|
g.
Whether the matter was proposed by the issuer or by a security
holder; |
|
h.
Whether or not DRZ cast its vote on the
matter; |
|
i.
How DRZ cast its vote (e.g., for or against proposal, or abstain; for or
withhold regarding election of
directors); |
|
j.
Whether DRZ cast its vote with or against management;
and |
|
k.
Whether any client requested an alternative vote of its
proxy. |
There
may be instances where DRZ votes the same proxy in different directions for
different clients if a client requires DRZ to vote a certain way on an
issue,
while DRZ deems it beneficial to vote in the opposite direction for its other
clients.
VI.
Conflicts of Interest
The
following is a non-exhaustive list of potential conflicts. DRZ continually
monitors these potential conflicts to determine if they exist:
■ |
Conflict:
DRZ retains an institutional client, or is in the process of retaining an
institutional client, that is affiliated with an issuer that is held in
DRZ’s client
portfolios. For example, DRZ may be retained to manage XYZ’s pension fund.
XYZ is a public company and DRZ client accounts hold shares of
XYZ.
This type of relationship may influence DRZ to vote with management on
proxies to gain favor with management. Such favor may influence
XYZ’s
decision to continue its advisory relationship with
DRZ. |
■ |
Conflict:
DRZ retains a client, or is in the process of retaining a client, that is
an officer or director of an issuer that is held in DRZ’s client
portfolios. The
similar conflicts of interest exist in this relationship as discussed
above. |
■ |
Conflict:
DRZ’s employees maintain a personal and/or business relationship (not an
advisory relationship) with issuers or individuals that serve as
officers
or directors of issuers. For example, the spouse of a DRZ employee may be
a high-level executive of an issuer that is held in DRZ’s client
portfolios.
The spouse could attempt to influence DRZ to vote in favor of
management. |
■ |
Conflict:
DRZ or an employee(s) personally owns a significant number of an issuer’s
securities that are also held in DRZ’s client portfolios. For any
number
of reasons, an employee(s) may seek to vote proxies in a different
direction for his/her personal holdings than would otherwise be warranted
by
the proxy voting policy. The employee(s) could oppose voting the proxies
according to the policy and successfully influence the Proxy Administrator
to vote proxies in contradiction to the
policy. |
■ |
Conflict:
DRZ or its affiliates has a financial interest in the outcome of a vote,
such as when DRZ receives distribution fees (i.e., Rule 12b-1 fees) from
mutual
funds that are maintained in client ac- counts and the proxy relates to an
increase in 12b-1 fees. |
Resolution:
Upon the detection of a material conflict of interest, the procedure described
above in the Procedures for Identification and Voting of Proxies
section will be followed.
DRZ
realizes that due to the difficulty of predicting and identifying all material
conflicts, DRZ must rely on its employees to notify the CCO of any material
conflict that may impair DRZ’s ability to vote proxies in an objective
manner.
In
addition, the CCO will document any attempts by others within DRZ to influence
the voting of client proxies in a manner that is inconsistent with the
proxy voting policy. The CCO should report the attempt to DRZ’s Board of
Directors or outside counsel.
VII.
Recordkeeping
DRZ
must maintain the documentation described in the following section for a period
of not less than five (5) years from the date of the vote, the first
two
(2) years at its principal place of business. The CCO will be responsible for
the following procedures and for ensuring that the required documentation
is retained.
Client request to review proxy
votes:
■ |
Any
request, whether written (including e-mail) or oral, received by any
employee of DRZ, must be promptly reported to the CCO. All written
requests
must be retained in the permanent file in accordance with DRZ’s record
retention policy. |
■ |
The
CCO will record the identity of the client, the date of the request, and
the disposition (e.g., pro-vided a written or oral response to client’s
request,
referred to third party, not a proxy voting client, other dispositions,
etc.). |
■ |
DRZ
will make every effort to fulfill each individual client request for Proxy
Voting information in the client’s prescribed
format. |
■ |
Furnish
the information requested, free of charge, to the client within a
reasonable time period (with-in 10 business days). Maintain a copy of the
written
record provided in response to client’s written or oral request. The
written response should be attached and maintained with the client’s
written
re-quest, if applicable, and maintained in the permanent file in
accordance with the recordkeeping policy. |
■ |
Clients
are permitted to request any and all proxy voting records that have been
retained in accordance with DRZ’s record retention
policy. |
Proxy Voting Policy and
Procedures:
■ |
This
Proxy Voting Policy and Procedures and previous versions of DRZ’s adopted
Proxy Voting Policy and Procedures, if any, in accordance with DRZ’s
record
retention policies. |
■ |
DRZ’s
annual Form ADV Part 2A containing a concise summary of Proxy Policy and
Procedures and offer of the record to
clients. |
Proxy statements received regarding client
securities:
■ |
DRZ’s
Proxy Administrator receives proxies directly from the clients’
custodians. In the event DRZ receives a proxy that is not reflected on the
Proxy Administrator’s
system, DRZ will copy or print a sample of the proxy statement or card and
maintain the copy in a central file along. DRZ will vote the proxy
in accordance with these policies. Documentation of the process will be
maintained in accordance with DRZ’s proxy recordkeeping
policies. |
|
Note:
DRZ is permitted to rely on proxy statements filed on the SEC’s EDGAR
system instead of keeping its own copies. Proxy voting
records: |
Proxy voting
records:
■ |
DRZ
Proxy Voting Record. The proxy ballot, date, issuer, and vote cast, if
applicable. |
■ |
Documentation
or notes or any communications received from third parties, other industry
analysts, third party service providers, company’s management
discussions, etc., that were material in the basis for the
decision. |
VIII.
Disclosure
■ |
DRZ
will ensure that Form ADV, Part 2A is updated as necessary to reflect: (i)
all material changes to DRZ’s Proxy Voting Policy and Procedures; and (ii)
regulatory
requirements. |
X.
Proxy Solicitation
As
a matter of practice, it is DRZ’s policy to not reveal or disclose to any client
how DRZ may have voted (or intends to vote) on a particular proxy until
after
such proxies have been counted at a shareholder’s meeting. DRZ will never
disclose such information to unrelated third parties, except as required
by
law. The CCO is to be promptly informed of the receipt of any solicitation from
any person to vote proxies on behalf of clients. At no time may any employee
accept any remuneration in the solicitation of proxies. The CCO shall handle all
responses to such solicitations.
XI.
Class Actions
As
a matter of policy DRZ does not instruct, recommend, or assist clients with
decisions of whether or not to participate in class actions regarding
securities
of issuers currently or previously held in the clients’ portfolios. DRZ
employees are prohibited from making legal elections or determinations
on
behalf of clients. If request-ed, DRZ shall assist clients with account
information required for their analysis of the class action notice; however, it
is each
client’s responsibility to respond to the class action notice. DRZ’s policy with
regards to Class Actions shall be included in Form ADV Part 2A which
is
annually distributed to all clients.
ATTACHMENT
A
DEPRINCE,
RACE & ZOLLO, INC.
LIST
OF PROXY VOTING COMMITTEE MEMBERS
The
following is a current list of the members of DRZ’s proxy voting
committee:
Chairperson
Adelbert R. Sanchez
Member
1
John D. Race
Member
2
Victor A. Zollo, Jr.
Member
3
Jill S. Lynch
Member
4
Gregory T. Ramsby
GARCIA
HAMILTON & ASSOCIATES, L.P.
PROXY
VOTING POLICY
Overview
Rule
206(4)-6 under the Investment Advisers Act of 1940, as amended, imposes a number
of requirements on investment advisers that have proxy voting
authority with respect to securities held in clients’ portfolios. GH&A has
written policies and procedures that it believes are reasonably designed
to
ensure that proxies are voted in the best interests of its clients for whom it
has voting authority; GH&A must never put its own interests above those
of
its clients. GH&A defines the best interests of a client to mean the best
economic interest of the holders of the same or similar securities of the issuer
held
in the client’s account. These policies and procedures describe how GH&A
addresses material conflicts between its interests and those of its clients
with
respect to proxy voting.
Policy
As
a matter of policy, GH&A:
■ |
Takes
responsibility for voting client proxies in accounts comprised solely of
fixed income and cash equivalent holdings, which holdings are very, very
rarely
associated with proxies, only in instances when the client has
specifically assigned voting authority to GH&A for securities held in
the account. |
■ |
Votes
all proxies in the best interests of its clients as shareholders, i.e., to
maximize economic value. |
■ |
Evaluates
all factors it deems relevant when reviewing a proxy received for an
account. |
■ |
Provides
all clients, upon request, with copies of this Proxy Policy and related
reports, with such frequency as required to fulfill obligations under
applicable
law or as reasonably requested by
clients. |
■ |
Reviews
regularly the voting record to ensure that proxies are voted in accordance
with this Proxy Policy; and ensures that procedures, documentation,
and reports relating to the voting of proxies are promptly and properly
prepared and disseminated. |
Procedures
When
a new portfolio which holds or is expected to hold only fixed income securities
is opened, a letter is sent to the custodian instructing them to forward
all proxy material pertaining to the portfolio to Garcia Hamilton for execution.
Responsibility and Oversight GH&A is responsible for the review and
approval of the Firm’s Proxy Policy for securities held in client portfolios for
which GH&A has voting discretion.
HOTCHKIS
& WILEY CAPITAL MANAGEMENT
PROXY
VOTING POLICIES AND PROCEDURES
OUR
MANDATE
Our
primary responsibility is to act as a fiduciary for our clients when voting
proxies. We evaluate and vote each proposed proxy in a manner that encourages
sustainable business practices which in turn maximizes long-term shareholder
value. There are instances such as unique client guidelines, regulatory
requirements, share blocking, securities lending, or other technical limitations
where we are unable to vote a particular proxy. In those instances
where we do not have voting responsibility, we will generally forward our
recommendation to such person our client designates.
OUR
PROCESS
Analyst
Role
To
the extent we are asked to vote a client’s proxy, our investment analysts are
given the final authority on how to vote a particular proposal as these
analysts’
understanding of the company makes them the best person to apply our policy to a
particular company’s proxy ballot.
Voting
Resources
To
assist our analysts in their voting, we provide them with a report that compares
the company’s board of directors’ recommendation against H&W’s proxy
policy guideline recommendation and with third-party proxy research
(Institutional Shareholder Services “ISS” sustainability and climate
benchmarks)
and third-party ESG analysis (Morgan Stanley Capital International
“MSCI”).
Engagement
As
part of our normal due diligence and monitoring of investments, we engage
management, board members, or their representatives on material business
issues including environmental, social, and governance (“ESG”) matters. Each
proxy to be voted is an opportunity to give company management
and board members formal feedback on these important matters.
If
our policy recommendation is contrary to management’s recommendation, our
analyst is expected, but not required, to engage management. If the ballot
issue is a materially important issue (i.e., the issue impacts the intrinsic
value of the company), the analyst is required to engage with the company.
Based on the engagement and the analyst’s investment judgment, the analyst will
submit a vote instruction to the Managing Director of Portfolio
Services via email.
Collaboration
We
are not “activists” and we do not form “groups” as defined by the SEC. However,
we do engage with other institutional shareholders on important
ESG proxy matters.
Exceptions
To Policy
Any
deviation from the H&W policy recommendation requires a written statement
from the analyst that summarizes their decision to deviate from policy.
Typical rationales include the issue raised is not material, the proposal is
moot (e.g., the company already complies with proposal), the company
has
a credible plan to improve, policy does not fit unique circumstances of company,
analyst’s assessment of the issue is in-line with intent of policy, or
the
proposal usurps management’s role in managing the company.
Exceptions
to policy are reviewed annually by the ESG Investment Oversight
Group.
Administration
The
Managing Director of Portfolio Services coordinates the solicitation of
analysts’ votes, the collection of exception rationales, and the implementation
of those votes by our third-party proxy advisor, ISS.
CONFLICTS
OF INTEREST
All
conflicts of interest are adjudicated based on what is deemed to be in the best
interest of our clients and their beneficiaries. Our Proxy Oversight
Committee
(“POC”) is responsible for reviewing proxies voted by the firm to determine that
the vote was consistent with established guidelines in situations
where potential conflicts of interests may exist when voting proxies. In
general, when a conflict presents itself, we will follow the recommendation
of our third-party proxy advisor, ISS.
OVERSIGHT
AND ROLES
ESG
Investment Oversight Group
The
ESG Investment Oversight Group is responsible for overseeing all ESG investment
related issues. This mandate includes oversight of proxy voting policies
and procedures as they relate to investment activity including the monitoring of
proxy engagements, review of proxy voting exceptions and rationales,
assessment of proxy voting issues, determination of ESG proxy goals, and
education of investment staff on proxy matters. The group is staffed
by members of the investment team and reports to the firm’s Chief Executive
Officer.
Proxy
Oversight Committee
The
Proxy Oversight Committee is
responsible for overseeing proxy administration and conflicts of interest
issues. The committee is comprised of
the Chief
Operating Officer, Chief Compliance Officer, the
chair of the ESG Investment Oversight Group, and
Managing Director of
Portfolio Services.
This group
oversees H&W’s proxy voting policies and procedures by providing an
administrative framework to facilitate and monitor the exercise of such
proxy
voting and to fulfill the obligations of reporting and recordkeeping under the
federal securities laws.
This committee manages our third-party proxy
advisory relationship.
Investment
Analyst
The
investment analyst is responsible for analyzing and voting all proxies. The
investment analyst has the final authority on individual proxy votes. The
ESG
Investment Oversight Group has final authority on creating and amending the
proxy policy.
VOTING
GUIDELINES
This
section summarizes our stance on important issues that are commonly found on
proxy ballots, though each vote is unique and there will be
occasional
exceptions to these guidelines. The purpose of our proxy guidelines is to ensure
decision making is consistent with our responsibilities as a fiduciary.
These guidelines are divided into seven categories based on issues that
frequently appear on proxy ballots.
■ |
Environmental
and Social Matters |
■ |
Auditors
and Related Matters |
■ |
Capital
and Restructuring |
■ |
Executive
and Board Compensation |
■ |
Routine
and Miscellaneous Matters |
Boards
and Directors
Board
Independence
We
believe an independent board is crucial to protecting and serving the interests
of public shareholders. We will generally withhold from or vote against
any insiders when such insider sits on the audit, compensation, or nominating
committees; or if independent directors comprise less than 50% of
the board. Insiders are non- independent directors who may have inherent
conflicts of interest that could prevent them from acting in the best
interest
of shareholders. Examples of non-independent directors include current and
former company executives, persons with personal or professional relationships
with the company and or its executives, and shareholders with large ownership
positions.
Board
Composition
We
believe directors should attend meetings, be focused on the company, be
responsive to shareholders, and be accountable for their decisions.
We
will generally withhold from or vote against directors who attend less than 75%
of meetings held during their tenure without just cause, sit on more
than 5 public company boards (for CEOs only 2 outside boards), support measures
that limit shareholder rights, or fail to act on shareholder proposals
that passed with a majority of votes.
Board
Diversity
Boards
should consider diversity when nominating new candidates, including gender,
race, ethnicity, age, and professional experience. We encourage companies
to have at least one female and one diverse (e.g., race, ethnicity) director or
have a plan to do so.
Board Size
We
do not see a standard number of directors that is ideal for all companies. In
general, we do not want to see board sizes changed without shareholder
approval as changing board size can be abused in the context of a takeover
battle.
Board
Tenure
In
general, we will evaluate on a case-by-case basis whether the board is
adequately refreshed with new talent and the proposed changes are not
designed
to reduce board independence.
Classified
Boards
We
oppose classified boards because, among other things, it can make change in
control more difficult to achieve and limit shareholder rights by reducing
board accountability.
Cumulative
Voting
Generally,
we oppose cumulative voting because we believe that economic interests and
voting interests should be aligned in most circumstances.
Independent Board
Chair
Generally,
we favor a separate independent chair that is not filled by an insider. If the
CEO is also the board chair, we require 2/3 of the board to be independent,
a strong independent director (i.e., has formal input on board agendas and can
call/preside over meetings of independent directors), and the
CEO cannot serve on the nominating or compensation committees.
Proxy
Contests
Proxy
contests are unusual events that require a case-by-case assessment of the unique
facts and circumstances of each contested proxy campaign. Our policy
is to defer to the judgement of our analysts on what best serves our clients’
interests. Our analysts will evaluate the validity of the dissident’s
concerns,
the likelihood that the dissident plan will improve shareholder value, the
qualifications of the dissident’s candidates, and management’s historical
record of creating or destroying shareholder value.
Risk
Oversight
Generally,
companies should have established processes for managing material threats to
their businesses, including ESG risks. We encourage transparency
and vote to improve transparency to help facilitate appropriate risk
oversight.
Environmental
and Social Matters
We
believe the oversight of ESG risks is an important responsibility of the board
of directors and is a prerequisite for a well-managed company. Transparent
disclosures are necessary to identify and evaluate environmental and social
risks and opportunities. A lack of transparency will increase the likelihood
that environmental and social risks are not being sufficiently
managed/limited/mitigated. In general, we will engage companies with
substandard
disclosure to encourage them to provide adequate disclosure on E&S risks
that typically align with Sustainability Accounting Standards Board
(“SASB”) recommendations. In general, we support proposals that encourage
disclosure of risks provided they are not overly burdensome or disclose
sensitive competitive information balanced against the materiality of the risk.
We also consider whether the proposal is more effectively addressed
through other means, like legislation or regulation.
Environmental
Issues
Climate Change and Green House Gas
Emissions
Climate
change has become an important factor in companies’ long-term sustainability.
Understanding a company’s strategy in managing these risks and
opportunities is necessary in evaluating an investment’s prospects. We support
disclosures related to the risks and/or opportunities a company faces
related to climate change, including information on how the company identifies
and manages such risks/opportunities.
Energy
Efficiency
We
generally support proposals requesting that a company report on its energy
efficiency policies. Exceptions may include a request that is overly
burdensome
or provides unrealistic deadlines.
Renewable
Energy
We
support requests for reports on renewable energy accomplishments and future
plans. Exceptions may include duplicative, irrelevant, or otherwise unreasonable
requests.
Social
Issues
Equal
Opportunity
We
support proposals requesting disclosures of companies’ policies and/or future
initiatives related to diversity, including current data regarding the
diversity
of its workforce.
Gender Identity and Sexual
Orientation
We
support proposals to revise diversity policies to prohibit discrimination based
on sexual orientation and/or gender identity.
Human Rights
Proposals
We
support proposals requesting disclosure related to labor and/or human rights
policies.
Political
Activities
We
support the disclosure of a company’s policies and procedures related to
political contributions and lobbying activities.
Sexual
Harassment
We
vote on a case-by-case basis regarding proposals seeking reports on company
actions related to sexual harassment. We evaluate the company’s current
policies, oversight, and disclosures. We also consider the company’s history and
any related litigation or regulatory actions related to sexual harassment,
and support proposals we believe will prevent such behavior when systemic issues
are suspected.
Auditors
and Related Matters
Generally,
we will support the board’s recommendation of auditors provided that the
auditors are independent, non-audit fees are less than the sum of all
audit and tax related fees, and there are no indications of fraud or misleading
audit opinions. Shareholder Rights We do not support proposals that limit
shareholder rights. When a company chronically underperforms minimal
expectations due to poor execution, poor strategic decisions, or poor
capital
allocation, there may arise the need for shareholders to effect change at the
board level. Proposals that have the effect of entrenching boards or
managements,
thwarting the will of the majority of shareholders, or advantaging one class of
shareholders at the expense of other shareholders will not
be supported.
Amendment to
Charter/Articles/Bylaws
We
do not support proposals that give the board exclusive authority to amend the
bylaws. We believe amendments to charter/articles/bylaws should be approved
by a vote of the majority of shareholders.
One Share, One
Vote
Generally,
we do not support proposals to create dual class voting structures that give one
set of shareholders super voting rights that are disproportionate
from their economic interest in the company. Generally, we will support
proposals to eliminate dual class structures.
Poison
Pills
In
general, we do not support anti-takeover measures such as poison pills. Such
actions can lead to outcomes that are not in shareholders’ bests interests
and impede maximum shareholder returns. It can also lead to management
entrenchment. We may support poison pills intended to protect NOL
assets.
Proxy
Access
Generally,
we support proposals that enable shareholders with an ownership level of 3% for
a period of three years or more, or an ownership level of 10%
and a holding period of one year or more.
Right to Act by Written
Consent
We
believe that shareholders should have the right to solicit votes by written
consent in certain circumstances. These circumstances generally include
but
are not limited to situations where more than a narrow group of shareholders
support the cause to avoid unnecessary resource waste, the proposal does
not exclude minority shareholders to the benefit of a large/majority
shareholder, and shareholders receive more than 50% support to set up
action
by written consent.
Special
Meetings
Generally,
we support proposals that enable shareholders to call a special meeting provided
shareholders own at least 15% of the outstanding shares.
Virtual
Meetings
We
believe shareholders should have the opportunity to participate in the annual
and special meetings, as current communications technology such as video
conferencing is broadly available to facilitate such interactions. This improves
shareholders’ ability to hear directly from management and the board
of the directors, and to provide feedback as needed.
Capital
and Restructuring Events
such
as takeover offers, buyouts, mergers, asset purchases and sales, corporate
restructuring, recapitalizations, dilutive equity issuance, or other major
corporate
events are considered by our analysts on a case-by-case basis. Our policy is to
vote for transactions that maximize the long-term risk adjusted return
to shareholders considering management’s historical record of creating
shareholder value, the likelihood of success, and the risk of not supporting
the proposal.
Dual Class
Shares
We
do not support dual class shares unless the economic and voting interests are
equal.
Issuance of Common
Stock
In
general, we will consider the issuance of additional shares in light of the
stated purpose, the magnitude of the increase, the company’s historical
shareholder
value creation, and historical use of shares. We are less likely to support
issuance when discounts or re-pricing of options has been an issue in
the past.
Executive
and Board Compensation
We
expect the board of directors to design, implement, and monitor pay practices
that promote pay-for-performance, alignment of interest with long-term
shareholder value creation, retention and attraction of key employees. In
general, we will evaluate executive compensation in light of historical
value creation, peer group pay practices, and our view on management’s
stewardship of the company.
We
expect the board of directors to maintain an independent and effective
compensation committee that has members with the appropriate skills,
knowledge,
experience, and ability to access third-party advice.
We
expect the board of directors to provide shareholders with clear and
understandable compensation disclosures that enable shareholders to evaluate
the
effectiveness and fairness of executive pay packages.
And
finally, we expect the board of directors’ own compensation to be reasonable and
not set at a level that undermines their independence from management.
Golden
Parachutes
Golden
parachutes can serve as encouragement to management to consider transactions
that benefit shareholders; however, substantial payouts may present
a conflict of interest where management is incentivized to support a suboptimal
deal. We view cash severance greater than 3x base salary and bonus
to be excessive unless approved by a majority of shareholders in a say-on-pay
advisory vote.
Incentive Options and
Repricing
We
generally support long-term incentive programs tied to pay-for-performance. In
general, we believe 50% or more of top executive pay should be tied
to long-term performance goals and that those goals should be tied to
shareholder value creation metrics. We do not support plans that reset
when
management fails to attain goals or require more than 10% of outstanding shares
to be issued. In general, we do not support the exchange or repricing
of options.
Say-on-Pay
We
believe annual say-on-pay votes are an effective mechanism to provide feedback
to the board on executive pay and performance. We support non-binding
proposals that are worded in a manner such that the actual implementation of the
plan is not restricted. In general, we will vote against plans
where there is a serious misalignment of CEO pay and performance or the company
maintains problematic pay practices. In general, we will withhold
votes from members of the compensation committee if there is no say-on-pay on
the ballot, the board fails to respond to a previous say-on-pay
proposal that received less than 70% support, the company has implemented
problematic pay practices such as repricing options or its pay plans
are egregious.
Routine
and Miscellaneous Matters
We
generally support routine board proposals such as updating bylaws (provided they
are of a housekeeping nature), change of the corporate name or change
of the time or location of the annual meeting.
Adjournment of
Meeting
We
do not support proposals that give management the authority to adjourn a special
meeting absent compelling reasons to support the proposal.
Amend Quorum
Requirements
We
do not support proposals to reduce quorum requirements for shareholder meetings
without support from a majority of the shares outstanding without
compelling justification.
Other
Business
We
do not support proposals on matters where we have not been provided sufficient
opportunity to review the matters at hand.
March
2023
LAZARD
ASSET MANAGEMENT LLC
PROXY
VOTING POLICY
A.
Introduction
Lazard
Asset Management LLC and its investment advisory subsidiaries (“Lazard” or the
“firm”) provide investment management services for client accounts,
including proxy voting services. As a fiduciary, Lazard is obligated to vote
proxies in the best interests of its clients over the long-term. Lazard
has
developed a structure that is designed to ensure that proxy voting is conducted
in an appropriate manner, consistent with clients’ best interests, and
within the framework of this Proxy Voting Policy (the “Policy”).
Lazard
manages assets for a variety of clients worldwide, including institutions,
financial intermediaries, sovereign wealth funds, and private clients. To
the
extent that proxy voting authority is delegated to Lazard, Lazard’s general
policy is to vote proxies on a given issue in the same manner for all of its
clients.
This Policy is based on the view that Lazard, in its role as investment adviser,
must vote proxies based on what it believes (i) will maximize sustainable
shareholder value as a long-term investor; (ii) is in the best interest of its
clients; and (iii) the votes that it casts are intended in good faith to
accomplish
those objectives.
This
Policy recognizes that there may be times when meeting agendas or proposals may
create the appearance of a material conflict of interest for Lazard.
Lazard will look to alleviate the potential conflict by voting according to
pre-approved guidelines. In conflict situations where a pre-approved
guideline
is to vote case-by-case, Lazard will vote according to the recommendation of one
of the proxy voting services Lazard retains to provide independent
analysis. More information on how Lazard handles material conflicts of interest
in proxy voting is provided in Section F of this Policy.
B.
Responsibility to Vote Proxies
Generally,
Lazard is willing to accept delegation from its clients to vote proxies. Lazard
does not delegate that authority to any other person or entity, but
retains complete authority for voting all proxies on behalf of its clients. Not
all clients delegate proxy-voting authority to Lazard, however, and Lazard
will not vote proxies, or provide advice to clients on how to vote proxies, in
the absence of a specific delegation of authority or an obligation under
applicable law. For example, securities that are held in an investment advisory
account for which Lazard exercises no investment discretion are not
voted by Lazard, nor are shares that a client has authorized their custodian
bank to use in a stock loan program which passes voting rights to the
party
with possession of the shares.
C.
General Administration
|
1.
Overview and Governance |
|
Lazard’s
proxy voting process is administered by members of its Operations
Department (“the Proxy Administration Team”). Oversight of the process
is
provided by Lazard’s Legal & Compliance Department and by a Proxy
Committee comprised of senior investment professionals, members of the
Legal
& Compliance Department, the firm’s Co-Heads of Sustainable Investment
& Environmental, Social and Corporate Governance (“ESG”) and
other
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 agenda or proposal) as needed. A representative
of Lazard’s Legal & Compliance Department will participate in all
Proxy Committee meetings. |
|
A
quorum for the conduct of any meeting will be met if a majority of the
Proxy Committee’s members are in attendance by phone or in person.
Decisions
of the Proxy Committee will be made by consensus and minutes of each
meeting will be taken and maintained by the Legal & Compliance
Department.
The Proxy Committee may, upon consultation with Lazard’s Chief Compliance
Officer,
General Counsel
or his/her
designee, take any action
that it believes to be necessary or appropriate to carry out the purposes
of the Policy. The Chief Compliance Officer,
General Counsel
or his/her
designee, is responsible for updating this Policy, interpreting this
Policy, and may act on behalf of the Proxy Committee in circumstances
where a meeting
of the members is not feasible. |
|
Lazard
currently subscribes to advisory and other proxy voting services provided
by Institutional Shareholder Services Inc. (“ISS”) and Glass, Lewis &
Co.
(“Glass Lewis”). These proxy advisory services provide independent
analysis and recommendations regarding various companies’ proxy proposals.
While
this research serves to help improve our understanding of the issues
surrounding a company’s proxy proposals, Lazard’s Portfolio
Manager/Analysts
and Research Analysts (collectively, “Portfolio Management”) are
responsible for providing the vote recommendation for a given proposal
except
when the Conflicts of Interest policy applies (see Section
F). |
|
ISS
provides additional proxy-related administrative services to Lazard. ISS
receives on Lazard’s behalf all proxy information sent by custodians that
hold
securities on behalf of Lazard’s clients and sponsored funds. ISS posts
all relevant information regarding the proxy on its password-protected
website
for Lazard to review, including meeting dates, all agendas and ISS’
analysis. The Proxy Administration Team reviews this information on a
daily
basis and regularly communicates with representatives of ISS to ensure
that all agendas are considered and proxies are voted on a timely basis.
ISS
also provides Lazard with vote execution, recordkeeping and reporting
support services. Members of the Proxy Committee, along with members
of
the Legal & Compliance Team, conducts periodic due diligence of ISS
and Glass Lewis consisting of an annual questionnaire and, as appropriate,
on
site visits. |
|
The
Proxy Committee believes that the Policy is consistent with the firm’s
Corporate Governance Principals and ESG and Climate Change Policies at
https://www.lazardassetmanagement.com/about/esg. |
|
The
Proxy Committee has approved proxy voting guidelines applicable to
specific types of common proxy proposals (the “Approved Guidelines”). As
discussed
more fully below in Section D of this Policy, depending on the proposal,
an Approved Guideline may provide that Lazard should vote for or
against
the proposal, or that the proposal should be considered on a case-by-case
basis. |
|
For
each shareholder meeting the Proxy Administration Team provides Portfolio
Management with the agenda and proposals, the Approved Guidelines,
independent vote recommendations from Glass Lewis and ISS and supporting
analyses for each proposal. Unless Portfolio Management disagrees
with the Approved Guideline for a specific proposal, or where a potential
material conflict of interest exists, the Proxy Administration Team
will
generally vote the proposal according to the Approved Guideline. In cases
where Portfolio Management recommends a vote contrary to the Approved
Guideline, a member of the Proxy Administration Team will contact a member
of the Legal & Compliance Department advising the Proxy Committee.
Such communication, which may be in the form of an e-mail, shall include:
the name of the issuer, a description of the proposal, the Approved
Guideline, any potential conflict of interest presented and the reason(s)
Portfolio Management believes a proxy vote in this manner is in
the
best interest of clients In such cases, the Proxy Committee and the Legal
& Compliance Department will review the proposal and make a
determination. |
|
Where
the Approved Guideline for a particular type of proxy proposal is to vote
on a case-by-case basis, Lazard believes that Portfolio Management
is
best able to evaluate the potential impact to shareholders resulting from
a particular proposal. Similarly, with respect to certain Lazard
strategies, as
discussed more fully in Sections F and G below, the Proxy Administration
Team will consult with Portfolio Management to determine when it
would
be appropriate to abstain from voting. The Proxy Administration Team seeks
Portfolio Management’s recommendation on how to vote all such proposals.
The Proxy Administration Team may also consult with Lazard’s Chief
Compliance Officer,
General Counsel or
his/her
designee,
and may seek
the final approval of the Proxy Committee regarding a recommendation by
Portfolio Management. |
|
As
a global firm, we recognize that there are differing governance models
adopted in various countries and that local laws and practices vary
widely. Although
the Approved Guidelines are intended to be applied uniformly world-wide,
where appropriate, Lazard will consider regional/local law and
guidance
in applying the Policy. |
|
Shareholders
receive proxies involving many different proposals. Many proposals are
routine in nature, such as a change in a company’s name. Others
are more complicated, such as items regarding corporate governance and
shareholder rights, changes to capital structure, stock option plans
and
other executive compensation/ issues, election of directors, mergers and
other significant transactions and social or political issues. Lazard’s
Approved
Guidelines for certain common agenda items are outlined below. The Proxy
Committee will also consider any other proposals presented and
determine whether to implement a new Approved
Guideline. |
|
Certain
strategy-specific considerations may result in Lazard voting proxies other
than according to the Approved Guidelines, not voting shares at all,
issuing
standing instructions to ISS on how to vote certain proxy matters on
behalf of Lazard, or taking other action where unique circumstances
require
special voting efforts or considerations. These considerations are
discussed in more detail in Section G,
below. |
|
|
Lazard
generally votes routine items as recommended by the issuer’s management
and board of directors, based on the view that management is generally
in a better position to assess these matters. Lazard considers routine
items to be those that do not change the structure, charter, bylaws,
or
operations of an issuer in any way that is material to long-term
shareholder value. Routine items generally
include: |
■ |
issues
relating to the timing or conduct of annual
meetings; |
■ |
provisionary
financial budgets and strategy for the current
year; |
■ |
proposals
that allow votes submitted for the first call of the shareholder meeting
to be considered in the event of a second
call; |
■ |
proposals
to receive or approve of variety of routine reports (Lazard will generally
vote FOR the approval of financial statements and director and
auditor
reports unless there are concerns about the accounts presented or audit
procedures used or the company is not responsive to shareholder
questions about specific items that should be publicly disclosed);
and |
■ |
changes
to a company’s name. |
|
|
2.
Amendments to Board
Policy/Charter/Regulation: |
|
|
Proposals
to amend a company’s Articles of Association and other bylaws are commonly
seen at shareholder meetings. Companies usually disclose what
is being amended, or the amended bylaws, or both in their meeting
circulars. Amendments are nearly always bundled together as a single
voting
resolution, and Lazard’s general approach is to review these amendments on
a case-by-case basis and to oppose article amendments as a whole
when they include changes Lazard opposes. Lazard has Approved Guidelines
generally to vote FOR bylaw amendments that are driven by regulatory
changes and are technical in nature or meant to update company-specific
information such as address and/or business scope. Lazard has
Approved Guidelines generally to vote AGAINST bylaw amendments
if |
■ |
there
is no disclosure on the proposed amendments or full text of the amended
bylaw; or |
■ |
the
amendments include increase in the decision authority of what is
considered “excessive” and the company fails to provide a compelling
justification. |
|
|
3.
Corporate Governance and Shareholder
Rights |
|
|
Many
proposals address issues related to corporate governance and shareholder
rights. These items often relate to a board of directors and its
committees,
anti-takeover measures, and the conduct of the company’s shareholder
meetings. |
|
|
a.
Board of Directors and its Committees |
|
|
Lazard
votes in favor of provisions that it believes will increase the
effectiveness of an issuer’s board of
directors. |
|
|
Lazard
has Approved Guidelines generally to vote FOR the
following: |
■ |
the
establishment of an independent nominating committee, audit committee or
compensation committee of a board of directors; |
■ |
a
requirement that a substantial majority (e.g., 2/3) of a company’s
directors be independent; |
■ |
a
proposal that a majority of the entirety of the board’s committees be
comprised of independent directors; |
■ |
proposals
seeking to de-classify a board; |
■ |
the
implementation of director stock retention/holding
periods; |
■ |
proposals
relating to the establishment of directors’ mandatory retirement age and
age restrictions for directors especially where such proposals
seek
to facilitate the improvement of the diversity of the board;
and |
■ |
changes
to the articles of association and other relevant documents which are in
the long-term interests of shareholders; |
■ |
the
appointment or (re)election of internal statutory auditors/fiscal council
members unless (a) the name of the management nominees are not
disclosed
in a timely manner prior to the meeting, (b) there are serious concerns
about statutory reports presented or the audit procedures used,
(c)
questions exist concerning any of the auditors, (d) the auditors have
previously served the company in an executive capacity (or are otherwise
considered
affiliated) or (e) minority shareholders have presented timely disclosure
of minority fiscal council nominee(s) to be elected under separate
elections. |
|
|
Lazard
has Approved Guidelines generally to vote on a CASE by CASE Basis for the
following: |
■ |
proposals
to require an independent board chair or the separation of chairman and
CEO; and |
■ |
establishment
of shareholder advisory committees. |
|
|
Lazard
has Approved Guidelines generally to vote AGAINST the
following: |
■ |
proposals
seeking to classify a board |
■ |
the
election of directors where the board does not have independent “key
committees” or sufficient board
independence; |
■ |
non-independent
directors who serve on key committees that are not sufficiently
independent; |
■ |
proposals
relating to cumulative voting; |
■ |
proposals
where the names of the candidates (in the case of an election) or the
principles for the establishment of a committee (where a new committee
is being created) have not been disclosed in a timely
manner; |
■ |
release
of restrictions on competitive activities of directors2 if (a) there is a
lack of disclosure on the key information including identities of
directors
in question, current position in the company and outside boards they are
serving on or (b) the non-nomination system is employed by the
company for the director election; and |
■ |
the
discharge of directors, including members of the management board and/or
supervisory board and auditors, unless there is reliable information
about significant and compelling concerns that the board is not fulfilling
its fiduciary duties; and |
■ |
the
chair of the board’s nominating committee, or all incumbent nominating
committee members in the absence of the chair, if there is not at
least
one female on the board of directors. |
|
|
Given
the governance practices unique to the United States market, Lazard has
adopted the following principles-based approach to proxy voting
that
is designed to address: |
■ |
Board
effectiveness – supporting board structure, diversity of cognitive
thought, independence and avoiding over-
boarding. |
■ |
Accountability
– in conjunction with the immediately preceding bullet point, emphasizing
individual account- ability, for example holding the Chair
of the Nomination Committee accountable where weaknesses and conflicts
have been identified. |
|
|
b.
Anti-takeover Measures |
|
|
Certain
proposals are intended to deter outside parties from taking control of a
company. Such proposals could entrench management and adversely
affect shareholder rights and the value of the company’s
shares. |
|
|
Consequently,
Lazard has adopted Approved Guidelines to vote
AGAINST: |
■ |
proposals
to adopt supermajority vote requirements or increase vote
requirements; |
■ |
proposals
seeking to adopt fair price provisions and on a case-by-case basis
regarding proposals seeking to rescind them;
and |
■ |
“blank
check” preferred stock. |
|
|
Lazard
has adopted Approved Guidelines to vote on a CASE by CASE basis regarding
other provisions seeking to amend a company’s by-laws or charter
regarding anti-takeover provisions or shareholder rights plans (also known
as “poison pill plans”). |
|
|
Lazard
has adopted an Approved Guideline to vote FOR proposals that ask
management to submit any new poison pill plan to shareholder
vote. |
|
|
c.
Conduct of Shareholder Meetings |
|
|
Lazard
generally opposes any effort by management to restrict or limit
shareholder participation in shareholder meetings, and is in favor of
efforts to
enhance shareholder participation. |
|
|
Lazard
has therefore adopted Approved Guidelines to vote
AGAINST: |
■ |
proposals
to adjourn US meetings; |
■ |
proposals
seeking to eliminate or restrict shareholders’ right to call a special
meeting; |
■ |
efforts
to eliminate or restrict right of shareholders to act by written consent;
and |
■ |
proposals
to adopt supermajority vote requirements, or increase vote
requirements. |
|
|
Lazard
has adopted Approved Guidelines to vote on a CASE by CASE
basis
on changes to quorum requirements and FOR
proposals providing
for confidential voting. |
|
4.
Changes to Capital Structure |
|
Lazard
receives many proxies that include proposals relating to a company’s
capital structure. These proposals vary greatly, as each one is unique to
the
circumstances of the company involved, as well as the general economic and
market conditions existing at the time of the proposal. A board and
management
may have many legitimate business reasons in seeking to effect changes to
the issuer’s capital structure, including investing in financial
products
and raising additional capital for appropriate business reasons, cash flow
and market conditions. Lazard generally believes that these decisions
are best left to management but will monitor these proposals closely to
ensure that they are aligned with the long-term interests of shareholders. |
|
|
Lazard
has adopted Approved Guidelines to vote
FOR: |
■ |
management
proposals to increase or decrease authorized common or preferred stock
(unless it is believed that doing so is intended to serve as an
anti-takeover measure); |
■ |
stock
splits and reverse stock splits; |
■ |
investments
in financial products unless the company fails to provide meaningful
shareholder vote or there are significant concerns with the company’s
previous similar investments;4 |
■ |
requests
to reissue any repurchased shares unless there is clear evidence of abuse
of authority in the past; |
■ |
management
proposals to adopt or amend dividend reinvestment plans;
and |
■ |
dividend
distribution policies unless (a) the dividend payout ratio has been
consistently below 30% without adequate explanation or (b) the
payout
is excessive given the company’s financial
position. |
|
|
Lazard
has adopted Approved Guidelines to vote on a CASE by CASE basis
for: |
■ |
matters
affecting shareholder rights, such as amending
votes-per-share; |
■ |
management
proposals to issue a new class of common or preferred shares (unless
covered by an Approved Guideline relating to the disapplication
of pre-emption rights); • the use of proceeds and the company’s past share
issuances5; |
■ |
proposals
seeking to approve or amend stock ownership limitations or transfer
restrictions; and • loan and financing proposals. In assessing
requests
for loan financing provided by a related party the following factors will
be considered: (a) use of proceeds, size or specific amount of
loan
requested, interest rate and relation of the party providing the
loan. |
■ |
Lazard
has adopted Approved Guidelines to vote
AGAINST: |
■ |
changes
in capital structure designed to be used in poison pill plans or which
seeks to disregard pre-emption rights in a way that does not follow
guidance set by the UK Pre-Emption Group’s Statement of
Principles; |
■ |
the
provision of loans to clients, controlling shareholders and actual
controlling persons of the company; and |
■ |
the
provision of loans to an entity in which the company’s ownership stake is
less than 75% and the financing provision is not proportionate to
the
company’s equity stake. |
5.
Executive Compensation Issues
Lazard
supports efforts by companies to adopt compensation and incentive programs to
attract and retain the highest caliber management possible, and
to align the interests of a board, management and employees with those of
long-term shareholders. Lazard generally favors programs intended to
reward
management and employees for positive and sustained, long-term performance but
will take into account various considerations such as whether
compensation appears to be appropriate for the company after an analysis of the
totality of the circumstances (including the company’s time in
history and evolution).
|
|
Lazard
has Approved Guidelines generally to vote
FOR: |
■ |
employee
stock purchase plans, deferred compensation plans, stock option plans and
stock appreciation rights plans that are in the long-term interests
of shareholders; |
■ |
proposals
to submit severance agreements to shareholders for
approval; |
■ |
annual
advisory votes on compensation outcomes where the outcomes are considered
to be aligned with the interest of shareholders;
and |
■ |
annual
compensation policy votes where the policy structures are considered to be
aligned with the interest of
shareholders. |
|
|
Lazard
has Approved Guidelines generally to vote on a CASE by CASE basis
regarding: |
■ |
restricted
stock plans that do not define performance criteria;
and |
■ |
proposals
to approve executive loans to exercise
options. |
|
|
Lazard
has Approved Guidelines generally to vote
AGAINST: |
■ |
proposals
to re-price underwater options; |
■ |
annual
advisory votes on remuneration outcomes where the outcomes are considered
not to be in the interests of shareholders;
and |
■ |
annual
remuneration policy vote where the policy structures are considered not to
be in the interests of shareholders. |
|
|
|
|
US
Listed Corporates Given
the governance practices unique to the United States market, Lazard
maintains the view that votes regarding Say on Pay should in principle,
support fair and transparent remuneration. In addition, we also
consider: |
■ |
the
level of dissent on previous Say on Pay votes;
and |
■ |
individual
accountability, for example holding the Chair of the Compensation
Committee accountable where weaknesses have been identified.
|
6.
Mergers and Other Significant Transactions
Shareholders
are asked to consider a number of different types of significant transactions,
including mergers, acquisitions, sales of all or substantially all of
a company’s assets, reorganizations involving business combinations and
liquidations. Each of these transactions is unique. Therefore, Lazard’s
Approved
Guideline is to vote on a CASE by CASE basis for these proposals.
7.
Environmental, Social, and Corporate Governance
Proposals
involving environmental, social, and corporate governance issues take many forms
and cover a wide array of issues. Some examples may include:
proposals to have a company increase its environmental disclosure; adoption of
principles to limit or eliminate certain business activities; adoption
of certain conservation efforts; adoption of proposals to improve the diversity
of the board, the senior management team and the workforce in
general; adoption of proposals to improve human capital management or the
adoption of certain principles regarding employment practices or discrimination
policies. These items are often presented by shareholders and are often opposed
by the company’s management and its board of directors.
As
set out in Lazard’s separate ESG Policy, Lazard is committed to an investment
approach that incorporates ESG considerations in a comprehensive manner
in order to safeguard the long-term interests of our clients and to manage more
effectively long-term investment risks and opportunities related
to ESG matters. Lazard generally supports the notion that corporations should be
expected to act as good citizens. Lazard generally votes on environmental,
social and corporate governance proposals in a way that it believes will most
increase long-term shareholder value.
|
|
Lazard’s
Approved Guidelines are structured to evaluate many environmental, social
and corporate governance proposals on a case-by-case
basis. |
|
|
However,
as a guide, Lazard
will generally vote FOR proposals: |
■ |
asking
for a company to increase its environmental/social disclosures (e.g., to
provide a corporate sustainability
report); |
■ |
seeking
the approval of anti-discrimination
policies; |
■ |
which
are considered socially responsible agenda
items; |
■ |
which
improve an investee company’s ESG risk management and related disclosures;
and |
■ |
deemed
to be in the long-term interests of shareholders.
|
8.
Shareholder Proposals
Lazard
believes in the ability of shareholders to leverage their rights related to the
use of shareholder proposals to address deficits in best practices and
related
disclosures by companies. Many ESG issues are improved through such use of
shareholder proposals. For example, some companies are collaborating
with shareholders on such proposals by voicing their support and recommending
that shareholders vote in-line with such proposals.
|
|
Lazard
has Approved Guidelines generally to vote FOR shareholder proposals
which: |
■ |
seek
improved disclosure of an investee company’s ESG practices over an
appropriate timeframe; |
■ |
seek
improved transparency over how the investee company is supporting the
transition to a low carbon economy; |
■ |
seek
to improve the diversity of the board; |
■ |
seek
improved disclosures on the diversity of the board and the wider
workforce; |
■ |
seek
to establish minimum stock-ownership requirements for directors over an
appropriate time frame; |
■ |
seek
to eliminate or restrict severance agreements,
or |
■ |
are
deemed to be in the long-term interests of shareholders including Lazard’s
clients. |
|
|
Lazard
has Approved Guidelines generally to vote AGAINST shareholder proposals
which: |
■ |
seek
to infringe excessively on management’s decision-making
flexibility; |
■ |
seek
to establish additional board committees (absent demonstrable
need); |
■ |
seek
to establish term limits for directors if this is
unnecessary; |
■ |
seek
to change the size of a board (unless this facilitates improved board
diversity); |
■ |
seek
to require two candidates for each board seat;
or |
■ |
are
considered not to be in the long-terms interests of
shareholders. |
E.
Voting Securities in Different Countries
Laws
and regulations regarding shareholder rights and voting procedures differ
dramatically across the world. In certain countries, the requirements or
restrictions
imposed before proxies may be voted may outweigh any benefit that could be
realized by voting the proxies involved. For example, certain countries
restrict a shareholder’s ability to sell shares for a certain period of time if
the shareholder votes proxies at a meeting (a practice known as “share
blocking”). In other instances, the costs of voting a proxy (i.e., by being
routinely required to send a representative to the meeting) may simply
outweigh
any benefit to the client if the proxy is voted. Generally, the Proxy
Administration Team will consult with Portfolio Management in determining
whether to vote these proxies.
There
may be other instances where Portfolio Management may wish to refrain from
voting proxies (See Section G.1. below).
F.
Conflicts of Interest
1.
Overview
This
Policy and related procedures implemented by Lazard are designed to address
potential conflicts of interest posed by Lazard’s business and organizational
structure. Examples of such potential conflicts of interest are:
■ |
Lazard
Frßres & Co. LLC (“LF&Co.”), Lazard’s parent company and a
registered broker- dealer, or a financial advisory affiliate, has a
relationship with a
company the shares of which are held in accounts of Lazard clients, and
has provided financial advisory or related services to the company with
respect
to an upcoming significant proxy proposal (i.e., a merger or other
significant transaction); |
■ |
Lazard
serves as an investment adviser for a company the management of which
supports a particular proposal; |
■ |
Lazard
serves as an investment adviser for the pension plan of an organization
that sponsors a proposal; or |
■ |
A
Lazard employee who would otherwise be involved in the decision-making
process regarding a particular proposal has a material relationship with
the
issuer or owns shares of the issuer. |
2.
General Policy
All
proxies must be voted in the best long-term interest of each Lazard client,
without consideration of the interests of Lazard, LF&Co. or any of their
employees
or affiliates. The Proxy Administration Team is responsible for all proxy voting
in accordance with this Policy after consulting with the appropriate
member or members of Portfolio Management, the Proxy Committee and/or the Legal
& Compliance Department. No other employees of Lazard,
LF&Co. or their affiliates may influence or attempt to influence the vote on
any proposal. Violations of this Policy could result in disciplinary
action,
including letter of censure, fine or suspension, or termination of employment.
Any such conduct may also violate state and Federal securities and
other laws, as well as Lazard’s client agreements, which could result in severe
civil and criminal penalties being imposed, including the violator being
prohibited from ever working for any organization engaged in a securities
business. Every officer and employee of Lazard who participates in any
way
in the decision-making process regarding proxy voting is responsible for
considering whether they have a conflicting interest or the appearance of
a
conflicting interest on any proposal. A conflict could arise, for example, if an
officer or employee has a family member who is an officer of the issuer
or
owns securities of the issuer. If an officer or employee believes such a
conflict exists or may appear to exist, he or she should notify the Chief
Compliance
Officer immediately and, unless determined otherwise, should not continue to
participate in the decision-making process.
3.
Monitoring for Conflicts and Voting When a Material Conflict
Exists
The
Proxy Administration Team monitors for potential conflicts of interest that
could be viewed as influencing the outcome of Lazard’s voting decision.
Consequently,
the steps that Lazard takes to monitor conflicts, and voting proposals when the
appearance of a material conflict exists, differ depending
on whether the Approved Guideline for the specific item is clearly defined to
vote for or against, or is to vote on a case-by-case basis. Any questions
regarding application of these conflict procedures, including whether a conflict
exists, should be addressed to Lazard’s Chief Compliance Officer
or General Counsel.
|
a.
Where Approved Guideline Is For or
Against |
|
Lazard
has an Approved Guideline to vote for or against regarding most proxy
agenda/proposals. Generally, unless Portfolio Management disagrees
with
the Approved Guideline for a specific proposal, the Proxy Administration
Team votes according to the Approved Guideline. It is therefore
necessary
to consider whether an apparent conflict of interest exists when Portfolio
Management disagrees with the Approved Guideline. The Proxy Administration
Team will use its best efforts to determine whether a conflict of interest
or potential conflict of interest exists. If conflict appears to
exist,
then the proposal will be voted according to the Approved Guideline.
Lazard also reserves its right to
Abstain. |
|
In
addition, in the event of a conflict that arises in connection with a
proposal for Lazard to vote shares held by Lazard clients in a Lazard
mutual fund,
Lazard will typically vote each proposal for or against proportion to the
shares voted by other shareholders. |
|
b.
Where Approved Guideline Is Case-by-Case |
|
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. Lazard also reserves the right to
Abstain. |
G.
Other Matters
|
1.
Issues Relating to Management of Specific Lazard
Strategies |
|
Due
to the nature of certain strategies managed by Lazard, there may be times
when Lazard believes that it may not be in the best interests of its
clients
to vote in accordance with the Approved Guidelines, or to vote proxies at
all. In certain markets, the fact that Lazard is voting proxies may
become
public information, and, given the nature of those markets, may impact the
price of the securities involved. Lazard may simply require more
time
to fully understand and address a situation prior to determining what
would be in the best interests of shareholders. In these cases the Proxy
Administration
Team will look to Portfolio Management to provide guidance on proxy voting
rather than vote in accordance with the Approved Guidelines,
and will obtain the Proxy Committee’s confirmation
accordingly. |
|
Additionally,
Lazard may not receive notice of a shareholder meeting in time to vote
proxies for or may simply be prevented from voting proxies in connection
with a particular meeting. Due to the compressed time frame for
notification of shareholder meetings and Lazard’s obligation to vote
proxies
on behalf of its clients, Lazard may issue standing instructions to ISS on
how to vote on certain matters. |
|
Different
strategies managed by Lazard may hold the same securities. However, due to
the differences between the strategies and their related investment
objectives, one Portfolio Management team may desire to vote differently
than the other, or one team may desire to abstain from voting proxies
while the other may desire to vote proxies. In this event, Lazard would
generally defer to the recommendation of the Portfolio Management
|
|
teams
to determine what action would be in the best interests of its clients.
The Chief Compliance Officer or
General Counsel, in consultation with members
of the Proxy Committee will determine whether it is appropriate to approve
a request to split votes among one or more Portfolio Management
teams. |
|
As
noted in Section B above, Lazard does not generally vote proxies for
securities that a client has authorized their custodian bank to use in a
stock loan
program, which passes voting rights to the party with possession of the
shares. Under certain circumstances, Lazard may determine to recall
loaned
stocks in order to vote the proxies associated with those securities. For
example, if Lazard determines that the entity in possession of the
stock
has borrowed the stock solely to be able to obtain control over the issuer
of the stock by voting proxies, or if the client should specifically
request
Lazard to vote the shares on loan, Lazard may determine to recall the
stock and vote the proxies itself. However, it is expected that this will
be
done only in exceptional circumstances. In such event, Portfolio
Management will make this determination and the Proxy Administration Team
will
vote the proxies in accordance with the Approved
Guidelines. |
H.
Reporting
Separately
managed account clients of Lazard who have authorized Lazard to vote proxies on
their behalf will receive information on proxy voting with respect
to that account. Additionally, the US mutual funds managed by Lazard will
disclose proxy voting information on an annual basis on Form N-PX which
is filed with the SEC.
I.
Recordkeeping
Lazard
will maintain records relating to the implementation of the Approved Guidelines
and this Policy, including a copy of the Approved Guidelines and
this Policy, proxy statements received regarding client securities, a record of
votes cast and any other document created by Lazard that was material
to a determination regarding the voting of proxies on behalf of clients or that
memorializes the basis for that decision. Such proxy voting books
and records shall be maintained in the manner and for the length of time
required in accordance with applicable regulations.
J.
Review of Policy and Approved Guidelines
The
Proxy Committee will review this Policy at least annually to consider whether
any changes should be made to it or to any of the Approved Guidelines.
The Proxy Committee will make revisions to its Approved Guidelines when it
determines it is appropriate or when it sees an opportunity to materially
improve outcomes for clients. Questions or concerns regarding the Policy should
be raised with Lazard’s General Counsel and Chief Compliance
Officer.
MASSACHUSETTS
FINANCIAL SERVICES COMPANY
PROXY
VOTING POLICIES AND PROCEDURES
January
1, 2023
At
MFS Investment Management, our core purpose is to create value responsibly. In
serving the long-term economic interests of our clients, we rely on deep
fundamental research, risk awareness, engagement, and effective stewardship to
generate long-term risk-adjusted returns for our clients. A core component
of this approach is our proxy voting activity. We believe that robust ownership
practices can help protect and enhance long-term shareholder
value. Such ownership practices include diligently exercising our voting rights
as well as engaging with our issuers on a variety of proxy voting
topics. We recognize that environmental, social and governance (“ESG”) issues
may impact the long-term value of an investment, and, therefore,
we consider ESG issues in light of our fiduciary obligation to vote proxies in
what we believe to be in the best long- term economic interest of
our clients.
MFS
Investment Management and its subsidiaries that perform discretionary investment
activities (collectively, “MFS”) have adopted these proxy voting policies
and procedures (“MFS Proxy Voting Policies and Procedures”) with respect to
securities owned by the clients for which MFS serves as investment
adviser and has been delegated the power to vote proxies on behalf of such
clients. These clients include pooled investment vehicles sponsored
by MFS (an “MFS Fund” or collectively, the “MFS Funds”).
Our
approach to proxy voting is guided by the overall principle that proxy voting
decisions are made in what MFS believes to be the best
long-term economic interests of our clients, and not in the interests of any
other party, including company management, or in MFS’ corporate
interests, including interests such as the distribution of MFS Fund shares and
institutional client relationships. These Proxy Voting
Policies and Procedures include voting guidelines that govern how MFS generally
will vote on specific matters as well as how we monitor
potential material conflicts of interest on the part of MFS that could arise in
connection with the voting of proxies on behalf of MFS’
clients.
Our
approach to proxy voting is guided by the following additional
principles:
1.
Consistency in application of the policy across multiple client
portfolios:
While MFS generally votes consistently on the same matter when securities
of an issuer are held by multiple client portfolios, MFS may vote differently on
the matter for different client portfolios under certain circumstances.
For example, we may vote differently for a client portfolio if we have received
explicit voting instructions to vote differently from such client
for its own account. Likewise, MFS may vote differently if the portfolio
management team responsible for a particular client account believes that
a
different voting instruction is in the best long-term economic interest of such
account.
2.
Consistency in application of policy across shareholder meetings in most
instances:
As a general matter, MFS seeks to vote consistently on similar
proxy proposals across all shareholder meetings. However, as many proxy
proposals (e.g., mergers, acquisitions, and environmental,
social and governance shareholder proposals) are analyzed on a case-by- case
basis in light of all the relevant facts and circumstances of the
issuer and proposal MFS may vote similar proposals differently at different
shareholder meetings. In addition, MFS also reserves the right to override
the
guidelines with respect to a particular proxy proposal when such an override is,
in MFS’ best judgment, consistent with the overall principle of voting
proxies in the best long-term economic interests of MFS’ clients.
3.
Consideration of company specific context and informed by
engagement:
As noted above MFS will seek to consider a company’s specific context
in determining its voting decision. Where there are significant, complex or
unusual voting items we may seek to engage with a company before
making the vote to further inform our decision. Where sufficient progress has
not been made on a particular issue of engagement, MFS may determine
a vote against management may be warranted to reflect our concerns and influence
for change in the best long-term economic interests of our
clients.
4.
Clear decisions to best support issuer processes and decision
making:
To best support improved issuer decision making we strive to generally
provide
clear decisions by voting either For or Against each item. We may however vote
to Abstain in certain situations if we believe a vote either For or
Against may produce a result not in the best long-term economic interests of our
clients.
5.
Transparency in approach and implementation:
In addition to the publication of the MFS Proxy Voting Policies and Procedures
on our website, we
are open to communicating our vote intention with companies, including ahead of
the annual meeting. We may do this proactively where we wish to
make our view or corresponding rationale clearly known to the company. Our
voting data is reported to clients upon request and publicly on a quarterly
and annual basis on our website (under Proxy Voting Records & Reports). For
more information about reporting on our proxy voting activities, please
refer to Section F below.
A.
VOTING GUIDELINES
The
following guidelines govern how MFS will generally vote on specific matters
presented for shareholder vote. These guidelines are not exhaustive,
and
MFS may vote on matters not identified below. In such circumstances, MFS will be
governed by its general policy to vote in what MFS believes to be
in the best long-term economic interest of its clients.
These
guidelines are written to apply to the markets and companies where MFS has
significant assets invested. There will be markets and companies, such
as controlled companies and smaller markets, where local governance practices
are taken into consideration and exceptions may need to be applied
that are not explicitly stated below. There are also markets and companies where
transparency and related data limit the ability to apply these guidelines.
Board
structure and performance
MFS
generally supports the election
and/or discharge of directors
proposed by the board in uncontested or non-contentious elections, unless
concerns
have been identified, such as in relation to:
Director
independence
MFS
believes that good governance is enabled by a board with at least a simple
majority of directors who are “independent” (as determined by MFS in
its
sole discretion)1 of management, the company and each other. MFS may not support
the non-independent nominees, or other relevant director (e.g.,
chair of the board or the chair of the nominations committee), where
insufficient independence is identified and determined to be a risk to the
board’s
and/or company’s effectiveness.
As
a general matter we will not support a nominee to a board if, as a result of
such nominee being elected to the board, the board will consist of less
than
a simple majority of members who are “independent.” However, there are also
governance structures and markets where we may accept lower levels
of independence, such as companies required to have non- shareholder
representatives on the board, controlled companies, and companies in
certain
Asian or emerging markets. In these circumstances we generally expect the board
to be at least one-third independent or at least half of shareholder
representatives to be independent, and as a general matter we will not support
the nominee to the board if as a result of such nominee’s elections
these expectations are not met. In certain circumstances, we may not support
another relevant director’s election. For example, in Japan, we will
generally not support the most senior director where the board is not comprised
of at least one-third independent directors.
MFS
also believes good governance is enabled by a board whose key committees, in
particular audit, nominating and compensation/remuneration, consist
entirely of “independent” directors. For US and Canadian companies, MFS
generally votes against any non-independent nominee that would cause
any of the audit, compensation, nominating committee to not be fully
independent. For Switzerland and UK issuers MFS generally votes against
any
non-independent nominee which would cause the audit or compensation/remuneration
committee to not be fully independent.
In
other markets MFS generally votes against non-independent nominees or other
relevant director if a majority of committee members or the chair of
the
audit committee are not independent. However, there are also governance
structures (e.g., controlled companies or boards with non-shareholder
representatives)
and markets where we may accept lower levels of independence for these key
committees.
Tenure
in leadership roles
For
a board with a lead independent director whose overall tenure on the board
equals or exceeds twenty (20) years, we will generally engage with the
company
to encourage
_____________
1
MFS’ determination of “independence” may be different than that of the company,
the exchange on which the company is listed, or of third party (e.g., proxy
advisory firm).
refreshment
of that role, and we may vote against the long tenured lead director if progress
on refreshment is not made or being considered by the company’s
board.
Overboarding
All
directors on a board should have sufficient time and attention to fulfil their
duties and play their part in achieving effective oversight, both in normal
and
exceptional circumstances. As a general matter, we vote against a director’s
election if they:
•
Are not a CEO of a public company, but serve on more than four (4) public
company boards in total at US companies and more than five (5) in other
markets.
•
Are a CEO of a public company, and serve on more than two (2) public company
boards in total at US companies and two (2) outside companies in other
markets. In these cases, MFS would only apply a vote against at the meetings of
the companies where the director is non-executive.
MFS
may also vote against any director if we deem such nominee to have board roles
or outside time commitments that we believe would impair their ability
to dedicate sufficient time and attention to their director role. MFS may
consider exceptions to this policy if: (i) the company has disclosed the
director’s
plans to step down from the number of public company boards exceeding the above
limits, as applicable, within a reasonable time; or (ii) the director
exceeds the permitted number of public company board seats solely due to either
his/her board service on an affiliated company (e.g., a subsidiary),
or service on more than one investment company within the same investment
company complex (as defined by applicable law).
Diversity
MFS
believes that a well-balanced board with diverse perspectives is a foundation
for sound corporate governance, and this is best spread across the board
rather than concentrated in one or a few individuals. We take a holistic view on
the dimensions of diversity that can lead to diversity of perspectives
and stronger oversight and governance.
Gender
diversity is one such dimension and where good disclosure and data enables a
specific expectation and voting policy.
On
gender representation specifically MFS wishes to see companies in all markets
achieve a consistent minimum representation of women of at least a third
of the board, and we are likely to increase our voting policy towards this over
time.
Currently,
MFS will generally vote against the chair of the nominating and governance
committee or other most relevant position at any company whose
board is comprised of an insufficient representation of directors who are women
for example:
• At US, Canadian, European, Australian companies: less than
22%.
• At Japanese companies: less than 10%.
As
a general matter, MFS will vote against the chair of the nominating committee of
US S&P 500 companies and UK FTSE 100 companies that have failed
to appoint at least one director who identifies as either an underrepresented
ethnic/racial minority or a member of the LGBTQ+ community.
MFS
may consider exceptions to these guidelines if we believe that the company is
transitioning towards these goals or has provided clear and compelling
reasons for why they have been unable to comply with these goals.
For
other markets, we will engage on board diversity and may vote against the
election of directors where we fail to see progress.
Board
size
MFS
believes that the size of the board can have an effect on the board’s ability to
function efficiently and effectively. While MFS may evaluate board size
on a case-by-case basis, we will typically vote against the chair of the
nominating and governance committee in instances where the size of the
board
is greater than sixteen (16) members. An exception to this is companies with
requirements to have equal representation of employees on the board
where we expect a maximum of twenty (20) members.
Other
concerns related to director election:
MFS
may also not support some or all nominees standing for election to a board if we
determine:
•
There are concerns with a director or board regarding performance, governance or
oversight, which may include:
o Clear failures in oversight or execution of duties, including the
identification, management and reporting of material risks and information, at
the company
or any other at which the nominee has served. This may include climate-related
risks;
o A failure by the director or board of the issuer to take action to eliminate
shareholder unfriendly provisions in the issuer’s charter
documents;
o Allowing the hedging and/or significant pledging of company shares by
executives.
•
A director attended less than 75% of the board and/or relevant committee
meetings in the previous year without a valid reason stated in the proxy
materials
or other annual governance reporting;
•
The board or relevant committee has not adequately responded to an issue that
received majority support or significant dissent from
shareholders;
•
The board has implemented a poison pill without shareholder approval since the
last annual meeting and such poison pill is not on the subsequent shareholder
meeting’s agenda (including those related to net-operating loss carry-forwards);
or
•
In Japan, the company allocates a significant portion of its net assets to
cross- shareholdings.
Unless
the concern is commonly accepted market practice, MFS may also not support some
or all nominees standing for election to a nominations committee
if we determine the chair is not independent and there is no strong lead
independent director role in place or an executive director is a member
of a key board committee.
Where
individual directors are not presented for election in the year MFS may apply
the same vote position to votes on the discharge of the director. Where
the election of directors is bundled MFS may vote against the whole group if
there is concern with an individual director and no other vote related
to that director.
Proxy
contests
From
time to time, a shareholder may express alternative points of view in terms of a
company’s strategy, capital allocation, or other issues. Such a shareholder
may also propose a slate of director nominees different than the slate of
director nominees proposed by the company (a “Proxy Contest”). MFS
will analyze Proxy Contests on a case-by-case basis, taking into consideration
the track record and current recommended initiatives of both company
management and the dissident shareholder(s). MFS will support the slate of
director nominees that we believe is in the best, long-term economic
interest of our clients.
Other
items related to board accountability:
Majority
voting for the election of directors: MFS generally supports reasonably crafted
proposals calling for directors to be elected with an affirmative majority
of votes cast and/or the elimination of the plurality standard for electing
directors (including binding resolutions requesting that the board amend
the company’s bylaws), provided the proposal includes a carve-out for a
plurality voting standard when there are more director nominees than
board
seats (e.g., contested elections).
Declassified
boards:
MFS generally supports proposals to declassify a board (i.e., a board in which
only a sub-set of board members is elected each year)
for all issuers other than for certain closed-end investment companies. MFS
generally opposes proposals to classify a board for issuers other than
for
certain closed-end investment companies.
The
right to call a special meeting or act by written consent:
MFS will generally support management proposals to establish these rights. We
will also
support shareholder proposals to establish the right for shareholders to call a
special meeting.
If
a company already provides shareholders the right to call a special meeting at a
threshold of 15% or below, MFS will generally vote against shareholder
proposals to establish or amend the threshold at a lower level.
MFS
will support shareholder proposals to establish the right to act by majority
written consent if shareholders do not have the right to call a special
meeting
at a 15% or lower threshold.
Independent
chairs:
MFS believes boards should include some form of independent leadership
responsible for amplifying the views of independent directors
and setting meeting agendas, and this is often best positioned as an independent
chair of the board. We review the merits of a change in leadership
structure on a case-by-case basis.
Proxy
access:
MFS believes that the ability of qualifying shareholders to nominate a certain
number of directors on the company’s proxy statement (“Proxy
Access”) may have corporate governance benefits. However, such potential
benefits must be balanced by its potential misuse by shareholders. Therefore,
MFS generally supports Proxy Access proposals at U.S. issuers that establish
ownership criteria of 3% of the company held continuously for a
period of 3 years. In our view, such qualifying shareholders should have the
ability to nominate at least 2 directors. We also believe companies should
be
mindful of imposing any undue impediments within their bylaws that may render
Proxy Access impractical, including re-submission thresholds for director
nominees via Proxy Access.
Items
related to shareholder rights:
Anti-takeover
measures:
In general, MFS votes against any measure that inhibits capital appreciation in
a stock, including proposals that protect management
from action by shareholders. These types of proposals take many forms, ranging
from “poison pills” and “shark repellents” to super-majority
requirements. While MFS may consider the adoption of a prospective “poison pill”
or the continuation of an existing “poison pill” on a case-by-
case basis, MFS generally votes against such anti-takeover devices.
MFS
will consider any poison pills designed to protect a company’s net-operating
loss carryforwards on a case-by-case basis, weighing the accounting and
tax benefits of such a pill against the risk of deterring future acquisition
candidates. MFS will also consider, on a case-by-case basis, proposals
designed
to prevent tenders which are disadvantageous to shareholders such as tenders at
below market prices and tenders for substantially less than all
shares of an issuer.
MFS
generally supports proposals that seek to remove governance structures that
insulate management from shareholders. MFS generally votes for proposals
to rescind existing “poison pills” and proposals that would require shareholder
approval to adopt prospective “poison pills.”
Cumulative
voting:
MFS generally opposes proposals that seek to introduce cumulative voting and
supports proposals that seek to eliminate cumulative
voting. In either case, MFS will consider whether cumulative voting is likely to
enhance the interests of MFS’ clients as minority shareholders.
One-share
one-vote:
As a general matter, MFS supports proportional alignment of voting rights with
economic interest, and may not support a proposal
that deviates from this approach. Where multiple share classes or other forms of
disproportionate control are in place, we expect these to have
sunset provisions of generally no longer than seven years after which the
structure becomes single class one-share one-vote.
Reincorporation
and reorganization proposals:
When presented with a proposal to reincorporate a company under the laws of a
different state, or to
effect some other type of corporate reorganization, MFS considers the underlying
purpose and ultimate effect of such a proposal in determining whether
or not to support such a measure. MFS generally
votes
with management in regards to these types of proposals, however, if MFS believes
the proposal is not in the best long-term economic interests of its
clients, then MFS may vote against management (e.g., the intent or effect would
be to create additional inappropriate impediments to possible acquisitions
or takeovers).
Other
business:
MFS generally votes against “other business” proposals as the content of any
such matter is not known at the time of our vote.
Items
related to capitalization proposals, capital allocation and corporate
actions:
Issuance
of stock:
There are many legitimate reasons for the issuance of stock. Nevertheless, as
noted above under “Stock Plans,” when a stock option
plan (either individually or when aggregated with other plans of the same
company) would substantially dilute the existing equity (e.g., by more
than
approximately 10-15%), MFS generally votes against the plan.
MFS
typically votes against proposals where management is asking for authorization
to issue common or preferred stock with no reason stated (a “blank
check”) because the unexplained authorization could work as a potential
anti-takeover device. MFS may also vote against the authorization or
issuance
of common or preferred stock if MFS determines that the requested authorization
is excessive or not warranted. MFS will consider the duration
of the authority and the company’s history in using such authorities in making
its decision.
Repurchase
programs:
MFS generally supports proposals to institute share repurchase plans in which
all shareholders have the opportunity to participate
on an equal basis. Such plans may include a company acquiring its own shares on
the open market, or a company making a tender offer to its
own shareholders.
Mergers,
acquisitions & other special transactions:
MFS considers proposals with respect to mergers, acquisitions, sale of company
assets, share and
debt issuances and other transactions that have the potential to affect
ownership interests on a case-by-case basis.
Independent
Auditors
MFS
generally supports the election of auditors but may determine to vote against
the election of a statutory auditor and/or members of the audit committee
in certain markets if MFS reasonably believes that the statutory auditor is not
truly independent, sufficiently competent or there are concerns
related to the auditor’s work or opinion. To inform this view, MFS may evaluate
the use of non-audit services in voting decisions when the percentage
of non-audit fees to total auditor fees exceeds 40%, in particular if
recurring.
Executive
Compensation
MFS
believes that competitive compensation packages are necessary to attract,
motivate and retain executives. We seek compensation plans that are geared
towards durable long- term value creation and aligned with shareholder interests
and experience, such as where:
•
The plan is aligned with the company’s strategic priorities with clear, suitably
challenging and measurable performance conditions such that future pay
is likely to reflect performance;
•
Substantial portions of awards paid in deferred shares and based on long
performance periods (e.g., at least three years);
•
Potential awards, and any increases to this, reflect the role and business;
and
•
Awards reflect the policies approved by shareholders at previous meetings with
appropriate use of discretion (positive and negative).
MFS
will analyze votes on executive compensation on a case-by-case basis. MFS will
vote against an issuer’s executive compensation practices if MFS determines
that such practices are misaligned with shareholders or include incentive
metrics or structures that are poorly aligned with the best, long-term
economic interest of its clients. When analyzing whether an issuer’s
compensation practices are geared towards durable long-term value creation,
we use a variety of materials and information, including our own internal
research and engagement with issuers as well as the research of third-party
service providers. We also have identified the following practices in
compensation plans that we believe may be problematic and we review any
plan that contains four (4) or more of these practices with extra
scrutiny:
•
Relative total shareholder return (TSR) performance thresholds requiring less
than median performance.
•
Qualitative (i.e., strategic or individual) goals that account for 30% or more
of a given short- or long-term award.
•
Performance-based long-term incentives that have less than a 3-year performance
period.
•
CEO perks of more than $100,000.
•
A long-term performance plan that has no financial performance
requirements.
•
Executive or director pledging of shares.
•
CEO pay that is four times the average pay of the company’s next named executive
officers (NEO).
MFS
may also vote against an issuer’s executive compensation practices if there is
insufficient disclosure about the issuer’s practices.
MFS
generally supports proposals to include an advisory shareholder vote on an
issuer’s executive compensation practices on an annual
basis.
MFS
does not have formal voting guideline in regards to the inclusion of ESG
incentives in a company’s compensation plan; however, where such incentives
are included, we believe:
•
The incentives should be tied to quantitative or other externally verifiable
outcomes rather than qualitative measures.
•
The weighting of incentives should be appropriately balanced with other
strategic priorities.
We
believe non-executive directors may be compensated in cash or stock but these
should not be performance-based.
Stock
Plans
MFS
may oppose stock option programs and restricted stock plans if
they:
•
Provide unduly generous compensation for officers, directors or employees, or
could result in excessive dilution to other shareholders. As a general
guideline,
MFS votes against restricted stock, stock option, non-employee director, omnibus
stock plans and any other stock plan if all such plans for a particular
company involve potential excessive dilution (which we typically consider to be,
in the aggregate, of more than 15%). MFS will generally vote against
stock plans that involve potential dilution, in aggregate, of more than 10% at
U.S. issuers that are listed in the Standard and Poor’s 100 index as
of December 31 of the previous year.
•
Allow the board or the compensation committee to re-price underwater options or
to automatically replenish shares without shareholder approval.
•
Do not require an investment by the optionee, give “free rides” on the stock
price, or permit grants of stock options with an exercise price below fair
market
value on the date the options are granted.
In
the cases where a stock plan amendment is seeking qualitative changes and not
additional shares, MFS will vote on a case-by-case basis.
MFS
will consider proposals to exchange existing options for newly issued options,
restricted stock or cash on a case-by-case basis, taking into account
certain
factors, including, but not limited to, whether there is a reasonable
value-for-value exchange and whether senior executives are excluded from
participating
in the exchange.
From
time to time, MFS may evaluate a separate, advisory vote on severance packages
or “golden parachutes” to certain executives at the same time as
a vote on a proposed merger or acquisition. MFS will vote on a severance package
on a case- by-case basis, and MFS may vote against the severance package
regardless of whether MFS supports the proposed merger or
acquisition.
MFS
supports the use of a broad-based employee stock purchase plans to increase
company stock ownership by employees, provided that shares purchased
under the plan are acquired for no less than 85% of their market value and do
not result in excessive dilution.
MFS
may also not support some or all nominees standing for election to a
compensation/remuneration committee if:
•
MFS votes against consecutive pay votes;
•
MFS determines that a particularly egregious executive compensation practice has
occurred. This may include use of discretion to award excessive payouts.
MFS believes compensation committees should have flexibility to apply discretion
to ensure final payments reflect long-term performance as long
as this is used responsibly; or
•
An advisory pay vote is not presented to shareholders, or the company has not
implemented the advisory vote frequency supported by a plurality/majority
of shareholders.
Shareholder
Proposals on Executive Compensation
MFS
generally opposes shareholder proposals that seek to set rigid restrictions on
executive compensation as MFS believes that compensation committees
should retain flexibility to determine the appropriate pay package for
executives.
MFS
may support reasonably crafted shareholder proposals that:
•
Require shareholder approval of any severance package for an executive officer
that exceeds a certain multiple of such officer’s annual compensation
that
is not determined in MFS’ judgment to be excessive;
•
Require the issuer to adopt a policy to recover the portion of performance-based
bonuses and awards paid to senior executives that were not earned based
upon a significant negative restatement of earnings, or other significant
misconduct or corporate failure, unless the company already has adopted
a satisfactory policy on the matter;
•
Expressly prohibit the backdating of stock options; or,
•
Prohibit the acceleration of vesting of equity awards upon a broad definition of
a “change-in-control” (e.g., single or modified single-trigger).
Environmental
and Social Proposals
Where
management presents climate action/transition plans to shareholder vote, we will
evaluate the level of ambition over time, scope, credibility and transparency
of the plan in determining our support. Where companies present climate action
progress reports to shareholder vote we will evaluate evidence
of implementation of and progress against the plan and level of transparency in
determining our support.
Most
vote items related to environmental and social topics are presented by
shareholders. As these proposals, even on the same topic, can vary significantly
in scope and action requested, many must be assessed on a case-by-case
basis.
For
example, MFS may support proposals reasonably crafted
proposals:
•
On climate change: that seek disclosure consistent with the recommendations of a
generally accepted global framework (e.g., Task Force on Climate-related
Financial Disclosures) that is appropriately audited and that is presented in a
way that enables shareholders to assess and analyze the company’s
data; or request appropriately robust and ambitious plans or
targets.
•
Other environmental: that request the setting of targets for reduction of
environmental impact or disclosure of key performance indicators or risks
related
to the impact, where materially relevant to the business. An example of such a
proposal could be reporting on the impact of plastic use or waste
stemming from company products or packaging.
•
On diversity: that seek to amend a company’s equal employment opportunity policy
to prohibit discrimination; that request good practice employee-related
DEI disclosure; or that seek external input and reviews on specific related
areas of performance.
•
On lobbying: that request good practice disclosure regarding a company’s
political contributions and lobbying payments and policy (including trade
organizations
and lobbying activity).
•
On tax: that request reporting in line with the GRI 207 Standard on
Tax.
•
On corporate culture and/or human/worker rights: that request additional
disclosure on corporate culture factors like employee turnover and/or
management
of human and labor rights.
MFS
is unlikely to support a proposal if we believe that the proposal is unduly
costly, restrictive, unclear, burdensome, has potential unintended consequences,
is unlikely to lead to tangible outcomes or we don’t believe the issue is
material or the action a priority for the business. MFS is also unlikely
to support a proposal where the company already provides publicly available
information that we believe is sufficient to enable shareholders to evaluate
the potential opportunities and risks on the subject of the proposal, if the
request of the proposal has already been substantially implemented, or
if through engagement we gain assurances that it will be substantially
implemented.
The
laws of various states or countries may regulate how the interests of certain
clients subject to those laws (e.g., state pension plans) are voted with
respect
to environmental, social and governance issues. Thus, it may be necessary to
cast ballots differently for certain clients than MFS might normally
do
for other clients.
B.
GOVERNANCE OF PROXY VOTING ACTIVITIES
From
time to time, MFS may receive comments on the MFS Proxy Voting Policies and
Procedures from its clients. These comments are carefully considered
by MFS when it reviews these MFS Proxy Voting Policies and Procedures and
revises them as appropriate, in MFS’ sole judgment.
1.
MFS Proxy Voting Committee
The
administration of these MFS Proxy Voting Policies and Procedures is overseen by
the MFS Proxy Voting Committee, which includes senior personnel from
the MFS Legal and Global Investment and Client Support Departments as well as
members of the investment team. The Proxy Voting Committee does
not include individuals whose primary duties relate to client relationship
management, marketing, or sales. The MFS Proxy Voting Committee:
a.
Reviews these MFS Proxy Voting Policies and Procedures at least annually and
recommends any amendments considered to be necessary or advisable;
b.
Determines whether any potential material conflict of interest exists with
respect to instances in which MFS (i) seeks to override these MFS Proxy
Voting
Policies and Procedures; (ii) votes on ballot items not governed by these MFS
Proxy Voting Policies and Procedures; (iii) evaluates an excessive executive
compensation issue in relation to the election of directors; or (iv) requests a
vote recommendation from an MFS portfolio manager or investment
analyst (e.g., mergers and acquisitions);
c.
Considers special proxy issues as they may arise from time to time;
and
d.
Determines engagement priorities and strategies with respect to MFS’ proxy
voting activities
The
day-to-day application of the MFS Proxy Voting Policies and Procedures are
conducted by the MFS stewardship team led by MFS’ Director of Global
Stewardship.
The stewardship team are members of MFS’ investment team.
2.
Potential Conflicts of Interest
These
policies and procedures are intended to address any potential material conflicts
of interest on the part of MFS or its subsidiaries that are likely to
arise
in connection with the voting of proxies on behalf of MFS’ clients. If such
potential material conflicts of interest do arise, MFS will analyze,
document
and report on such potential material conflicts of interest (see below) and
shall ultimately vote the relevant ballot items in what MFS believes
to
be the best long-term economic interests of its clients. The MFS Proxy Voting
Committee is responsible for monitoring and reporting with respect to
such
potential material conflicts of interest.
The
MFS Proxy Voting Committee is responsible for monitoring potential material
conflicts of interest on the part of MFS or its subsidiaries that could
arise
in connection with the voting of proxies on behalf of MFS’ clients. Due to the
client focus of our investment management business, we believe that
the potential for actual material conflict of interest issues is small.
Nonetheless, we have developed precautions to assure that
all
votes
are cast in the best long-term economic interest of its clients.2 Other MFS
internal policies require all MFS employees to avoid actual and potential
conflicts of interests between personal activities and MFS’ client activities.
If an employee (including investment professionals) identifies an actual
or potential conflict of interest with respect to any voting decision (including
the ownership of securities in their individual portfolio), then that
employee
must recuse himself/herself from participating in the voting process. Any
significant attempt by an employee of MFS or its subsidiaries to unduly
influence MFS’ voting on a particular proxy matter should also be reported to
the MFS Proxy Voting Committee.
In
cases where ballots are voted in accordance with these MFS Proxy Voting Policies
and Procedures, no material conflict of interest will be deemed to exist.
In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies
and Procedures, (ii) matters presented for vote are not governed by
these MFS Proxy Voting Policies and Procedures,
(iii)
MFS evaluates a potentially excessive executive compensation issue in relation
to the election of directors or advisory pay or severance package vote,
or (iv) a vote recommendation is requested from an MFS portfolio manager or
investment analyst (e.g., mergers and acquisitions); (collectively, “Non-Standard
Votes”); the MFS Proxy Voting Committee will follow these
procedures:
a.
Compare the name of the issuer of such ballot or the name of the shareholder
making such proposal against a list of significant current (i) distributors
of MFS Fund shares, and (ii) MFS institutional clients (the “MFS Significant
Distributor and Client List”);
b.
If the name of the issuer does not appear on the MFS Significant Distributor and
Client List, then no material conflict of interest will be deemed to
exist,
and the proxy will be voted as otherwise determined by the MFS Proxy Voting
Committee;
c.
If the name of the issuer appears on the MFS Significant Distributor and Client
List, then the MFS Proxy Voting Committee will be apprised of that fact
and each member of the MFS Proxy Voting Committee (with the participation of
MFS’ Conflicts Officer) will carefully evaluate the proposed vote in
order
to ensure that the proxy ultimately is voted in what MFS believes to be the best
long-term economic interests of MFS’ clients, and not in MFS’ corporate
interests; and
d.
For all potential material conflicts of interest identified under clause (c)
above, the MFS Proxy Voting Committee will document: the name of the
issuer,
the issuer’s relationship to MFS, the analysis of the matters submitted for
proxy vote, the votes as to be cast and the reasons why the MFS Proxy
Voting
Committee determined that the votes were cast in the best long-term economic
interests of MFS’ clients, and not in MFS’ corporate interests. A copy
of the foregoing documentation will be provided to MFS’ Conflicts
Officer.
___________________
2
For clarification purposes, note that MFS votes in what we believe to be the
best, long-term economic interest of our clients entitled to vote at the
shareholder meeting, regardless of whether other MFS clients hold “short”
positions in the same issuer or whether other
MFS
clients hold an interest in the company that is not entitled to vote at the
shareholder meeting (e.g., bond holder).
The
members of the MFS Proxy Voting Committee are responsible for creating and
maintaining the MFS Significant Distributor and Client List, in consultation
with MFS’ distribution and institutional business units. The MFS Significant
Distributor and Client List will be reviewed and updated periodically,
as appropriate.
For
instances where MFS is evaluating a director nominee who also serves as a
director/trustee of the MFS Funds, then the MFS Proxy Voting Committee
will adhere to the procedures described in section (c) above regardless of
whether the portfolio company appears on our Significant Distributor
and Client List. In doing so, the MFS Proxy Voting Committee will adhere to such
procedures for all Non-Standard Votes at the company’s shareholder
meeting at which the director nominee is standing for election.
If
an MFS client has the right to vote on a matter submitted to shareholders by Sun
Life Financial, Inc. or any of its affiliates (collectively “Sun Life”),
MFS
will cast a vote on behalf of such MFS client as such client instructs or in the
event that a client instruction is unavailable pursuant to the recommendations
of Institutional Shareholder Services, Inc.’s (“ISS”) benchmark policy, or as
required by law. Likewise, if an MFS client has the right to vote
on a matter submitted to shareholders by a public company for which an MFS Fund
director/trustee serves as an executive officer, MFS will cast a vote
on behalf of such MFS client as such client instructs or in the event that
client instruction is unavailable pursuant to the recommendations of ISS or
as
required by law.
Except
as described in the MFS Fund’s Prospectus, from time to time, certain MFS Funds
(the “top tier fund”) may own shares of other MFS Funds (the “underlying
fund”). If an underlying fund submits a matter to a shareholder vote, the top
tier fund will generally vote its shares in the same proportion as
the other shareholders of the underlying fund. If there are no other
shareholders in the underlying fund, the top tier fund will vote in what MFS
believes
to be in the top tier fund’s best long-term economic interest. If an MFS client
has the right to vote on a matter submitted to shareholders by a pooled
investment vehicle advised by MFS (excluding those vehicles for which MFS’ role
is primarily portfolio management and is overseen by another investment
adviser), MFS will cast a vote on behalf of such MFS client in the same
proportion as the other shareholders of the pooled investment vehicle.
3.
Review of Policy
The
MFS Proxy Voting Policies and Procedures are available on www.mfs.com and may be
accessed by both MFS’ clients and the companies in which MFS’
clients invest. The MFS Proxy Voting Policies and Procedures are reviewed by the
Proxy Voting Committee annually. From time to time, MFS may receive
comments on the MFS Proxy Voting Policies and Procedures from its clients. These
comments are carefully considered by MFS when it reviews these
MFS Proxy Voting Policies and Procedures and revises them as appropriate, in
MFS’ sole judgment.
C. OTHER ADMINISTRATIVE MATTERS & USE OF
PROXY ADVISORY FIRMS
1.
Use of Proxy Advisory Firms
MFS,
on behalf of itself and certain of its clients (including the MFS Funds) has
entered into an agreement with an independent proxy administration firm
pursuant to which the proxy administration firm performs various proxy vote
related administrative services such as vote processing and recordkeeping
functions. Except as noted below, the proxy administration firm for MFS and its
clients, including the MFS Funds, is ISS. The proxy administration
firm for MFS Development Funds, LLC is Glass, Lewis & Co., Inc. (“Glass
Lewis”; Glass Lewis and ISS are each hereinafter referred to as the
“Proxy Administrator”).
The
Proxy Administrator receives proxy statements and proxy ballots directly or
indirectly from various custodians, logs these materials into its database
and
matches upcoming meetings with MFS Fund and client portfolio holdings, which are
inputted into the Proxy Administrator’s system by an MFS
holdings
data-feed. The Proxy Administrator then reconciles a list of all MFS accounts
that hold shares of a company’s stock and the number of shares held
on the record date by these accounts with the Proxy Administrator’s list of any
upcoming shareholder’s meeting of that company. If a proxy ballot has
not been received, the Proxy Administrator and/or MFS may contact the client’s
custodian requesting the reason as to why a ballot has not been received.
Through the use of the Proxy Administrator system, ballots and proxy material
summaries for all upcoming shareholders’ meetings are available
on-line to certain MFS employees and members of the MFS Proxy Voting
Committee.
MFS
also receives research reports and vote recommendations from proxy advisory
firms. These reports are only one input among many in our voting analysis,
which includes other sources of information such as proxy materials, company
engagement discussions, other third-party research and data. MFS
has due diligence procedures in place to help ensure that the research we
receive from our proxy advisory firms is materially accurate and that we
address
any material conflicts of interest involving these proxy advisory firms. This
due diligence includes an analysis of the adequacy and quality of the
advisory
firm
staff,
its conflict of interest policies and procedures and independent audit reports.
We also review the proxy policies, methodologies and peer-group-composition
methodology of our proxy advisory firms at least annually. Additionally, we also
receive reports from our proxy advisory firms regarding
any violations or changes to conflict of interest procedures.
2.
Analyzing and Voting Proxies
Proxies
are voted in accordance with these MFS Proxy Voting Policies and Procedures. The
Proxy Administrator, at the prior direction of MFS, automatically
votes all proxy matters that do not require the particular exercise of
discretion or judgment with respect to these MFS Proxy Voting Policies
and Procedures as determined by MFS. In these circumstances, if the Proxy
Administrator, based on MFS’ prior direction, expects to
vote
against
management with respect to a proxy matter and MFS becomes aware that the issuer
has filed or will file additional soliciting materials sufficiently
in advance of the deadline for casting a vote at the meeting, MFS will consider
such information when casting its vote. With respect to proxy
matters that require the particular exercise of discretion or judgment, the MFS
Proxy Voting Committee or its representatives considers and votes on
those proxy matters. In analyzing all proxy matters, MFS uses a variety of
materials and information, including, but not limited to, the issuer’s proxy
statement
and other proxy solicitation materials (including supplemental materials), our
own internal research and research and recommendations provided
by other third parties (including research of the Proxy Administrator). As
described herein, MFS may also determine that it is beneficial in analyzing
a proxy voting matter for members of the Proxy Voting Committee or its
representatives to engage with the company on such matter. MFS also
uses its own internal research, the research of Proxy Administrators and/or
other third party research tools and vendors to identify (i) circumstances
in
which a board may have approved an executive compensation plan that is excessive
or poorly aligned with the portfolio company’s business or its shareholders,
(ii) environmental, social and governance proposals that warrant further
consideration, or (iii) circumstances in which a company is not in compliance
with local governance or compensation best practices. Representatives of the MFS
Proxy Voting Committee review, as appropriate, votes cast
to ensure conformity with these MFS Proxy Voting Policies and
Procedures.
For
certain types of votes (e.g. mergers and acquisitions, proxy contests and
capitalization matters), MFS’ stewardship team will seek a recommendation
from the MFS investment analyst that is responsible for analyzing the company
and/or portfolio managers that holds the security in their
portfolio.3 For certain other votes that require a case-by-case analysis per
these policies (e.g., potentially excessive executive compensation issues,
or
certain shareholder proposals), the stewardship team will likewise consult with
MFS investment analysts and/or portfolio managers.3 However, the MFS
Proxy Voting Committee will ultimately be responsible for the manner in which
all ballots are voted.
As
noted above, MFS reserves the right to override the guidelines when such an
override is, in MFS’ best judgment, consistent with the overall principle
of
voting proxies in the best long-term economic interests of MFS’ clients. Any
such override of the guidelines shall be analyzed, documented and reported
in accordance with the procedures set forth in these policies.
In
accordance with its contract with MFS, the Proxy Administrator also generates a
variety of reports for the MFS Proxy Voting Committee and makes available
on-line various other types of information so that the MFS Proxy Voting
Committee or its representatives may review and monitor the votes cast
by the Proxy Administrator on behalf of MFS’ clients.
______________________
3
From time to time, due to travel schedules and other commitments, an appropriate
portfolio manager or research analyst may not be available to provide a vote
recommendation. If such a
recommendation
cannot be obtained within a reasonable time prior to the cut-off date of the
shareholder meeting, the MFS Proxy Voting Committee may determine to abstain
from voting.
For
those markets that utilize a “record date” to determine which shareholders are
eligible to vote, MFS generally will vote all eligible shares pursuant
to
these guidelines regardless of whether all (or a portion of) the shares held by
our clients have been sold prior to the meeting date.
3.
Securities Lending
From
time to time, certain MFS Funds may participate in a securities lending program.
In the event MFS or its agent receives timely notice of a shareholder
meeting for a U.S. security, MFS and its agent will attempt to recall any
securities on loan before the meeting’s record date so that MFS will
be
entitled to vote these shares. However, there may be instances in which MFS is
unable to timely recall securities on loan for a U.S.
security, in which cases MFS will not be able to vote these shares. MFS will
report to the appropriate board of the MFS Funds those instances in which
MFS is not able to timely recall the loaned securities. MFS generally does not
recall non-U.S. securities on loan because there may be insufficient
advance
notice of proxy materials, record dates, or vote cut-off dates to allow MFS to
timely recall the shares in certain markets on an automated basis. As
a result, non-U.S. securities that are on loan will not generally be voted. If
MFS receives timely notice of what MFS determines to be an unusual, significant
vote for a non-U.S.
security whereas MFS shares are on loan and determines that voting is in the
best long-term economic interest of shareholders, then MFS will attempt
to timely recall the loaned shares.
4.
Potential impediments to voting
In
accordance with local law or business practices, some companies or custodians
prevent the sale of shares that have been voted for a certain period
beginning
prior to the shareholder meeting and ending on the day following the meeting
(“share blocking”). Depending on the country in which a company
is domiciled, the blocking period may begin a stated number of days prior or
subsequent to the meeting (e.g., one, three or five days) or on a date
established by the company. While practices vary, in many countries the block
period can be continued for a longer period if the shareholder meeting
is adjourned and postponed to a later date. Similarly, practices vary widely as
to the ability of a shareholder to have the “block” restriction lifted
early (e.g., in some countries shares generally can be “unblocked” up to two
days prior to the meeting whereas in other countries the removal of the
block appears to be discretionary with the issuer’s transfer agent). Due to
these restrictions, MFS must balance the benefits to its clients of voting
proxies
against the potentially serious portfolio management consequences of a reduced
flexibility to sell the underlying shares at the most advantageous
time. For companies in countries with share blocking periods or in markets where
some custodians may block shares, the disadvantage of
being unable to sell the stock regardless of changing conditions generally
outweighs the advantages of voting at the shareholder meeting for routine
items. Accordingly, MFS will not vote those proxies in the absence of an
unusual, significant vote that outweighs the disadvantage of being unable
to sell the stock.
From
time to time, governments may impose economic sanctions which may prohibit us
from transacting business with certain companies or individuals.
These sanctions may also prohibit the voting of proxies at certain companies or
on certain individuals. In such instances, MFS will not vote at
certain companies or on certain individuals if it determines that doing so is in
violation of the sanctions.
In
limited circumstances, other market specific impediments to voting shares may
limit our ability to cast votes, including, but not limited to, late
delivery
of proxy materials, untimely vote cut-off dates, power of attorney and share
re-registration requirements, or any other unusual voting requirements.
In these limited instances, MFS votes securities on a best- efforts basis in the
context of the guidelines described above.
D.
ENGAGEMENT
As
part of its approach to stewardship MFS engages with companies in which it
invests on a range of priority issues. Where sufficient progress has not
been
made on a particular issue of engagement, MFS may determine a vote against
management may be warranted to reflect our concerns and influence
for change in the best long-term economic interests of our clients.
MFS
may determine that it is appropriate and beneficial to engage in a dialogue or
written communication with a company or other shareholders specifically
regarding certain matters on the company’s proxy statement that are of concern
to shareholders, including environmental, social and governance
matters. This may be to discuss and build our understanding of a certain
proposal, or to provide further context to the company on our vote
decision.
A
company or shareholder may also seek to engage with members of the MFS Proxy
Voting Committee or Stewardship Team in advance of the company’s
formal proxy solicitation to review issues more generally or gauge support for
certain contemplated proposals. For further information on requesting
engagement with MFS on proxy voting issues or information about MFS’ engagement
priorities, please contact [email protected].
E.
RECORDS RETENTION
MFS
will retain copies of these MFS Proxy Voting Policies and Procedures in effect
from time to time and will retain all proxy voting reports submitted to
the
Board of Trustees of the MFS Funds for the period required by applicable law.
Proxy solicitation materials, including electronic versions of the proxy
ballots
completed by representatives of the MFS Proxy Voting Committee, together with
their respective notes and comments, are maintained in an electronic
format by the Proxy Administrator and are accessible on-line by the MFS Proxy
Voting Committee
and other MFS employees.
All proxy voting materials
and supporting documentation, including records generated by the Proxy
Administrator’s system as to proxies processed, including the dates when
proxy ballots
were
received and submitted, and the votes on each company’s proxy issues, are
retained as required by applicable law.
F. REPORTS
U.S. Registered MFS
Funds
MFS
publicly discloses the proxy voting records of the U.S. registered MFS Funds on
a quarterly basis. MFS will also report the results of its voting to the
Board
of Trustees of the U.S. registered MFS Funds. These reports will include: (i) a
summary of how votes were cast (including advisory votes on pay and
“golden parachutes”); (ii) a summary of votes against management’s
recommendation; (iii) a review of situations where MFS did not vote in
accordance
with the guidelines and the rationale therefore; (iv) a review of the procedures
used by MFS to identify material conflicts of interest and any matters
identified as a material conflict of interest; (v) a review of these policies
and the guidelines; (vi) a review of our proxy engagement activity; (vii) a
report
and impact assessment of instances in which the recall of loaned securities of a
U.S. issuer was unsuccessful; and (viii) as necessary or appropriate,
any proposed modifications thereto to reflect new developments in corporate
governance and other issues. Based on these reviews, the Trustees
of the U.S. registered MFS Funds will consider possible modifications to these
policies to the extent necessary or advisable.
Other MFS Clients
MFS
may publicly disclose the proxy voting records of certain other clients
(including certain MFS Funds) or the votes it casts with respect to certain
matters
as required by law. A report can also be printed by MFS for each client who has
requested that MFS furnish a record of votes cast. The report specifies
the proxy issues which have been voted for the client during the year and the
position taken with respect to each issue and, upon request, may
identify situations where MFS did not vote in accordance with the MFS Proxy
Voting Policies and Procedures.
Firm-wide Voting
Records
MFS
also publicly discloses its firm-wide proxy voting records on a quarterly
basis.
Except
as described above, MFS generally will not divulge actual voting practices to
any party other than the client or its representatives because we consider
that information to be confidential and proprietary to the client. However, as
noted above, MFS may determine that it is appropriate and beneficial
to engage in a dialogue with a company regarding certain matters. During such
dialogue with the company, MFS may disclose the vote it intends
to cast in order to potentially effect positive change at a company in regards
to environmental, social or governance issues.
Newton
Investment Management North America, LLC
Proxy
Voting Summary effective as of October 31, 2023
Policy
Statement
As
a fiduciary and to meet its obligations as an SEC registered investment adviser,
Newton Investment Management North America, LLC (“Newton”), a subsidiary
of The Bank of New York Mellon, (“BNY Mellon”) owes its clients a duty of
care and a duty of loyalty with respect to all services undertaken on
the client’s behalf including (where applicable) the exercise of voting
rights.
This
summary describes Newton’s approach to exercising voting rights, where
discretion over the voting decisions has been delegated to Newton by its
clients
and where Newton provides guidance on exercising voting rights in securities
that Newton has recommended to clients on a non-discretionary basis, e.g.
model accounts.
Where
applicable, Newton will use its best efforts to exercise voting rights as part
of its authority to manage, acquire and dispose of account assets. With
respect of funds, i.e. registered investment companies, UCITS or AIFs,
which Newton manages and/or sub-advises, Newton will exercise voting
rights
under this Policy pursuant to an authority granted under the applicable client
agreements.
Newton
will exercise voting rights in a prudent and diligent manner and in the best
interests of clients.
Voting
Guidelines
Newton
has established overarching voting guidelines which inform our ultimate voting
decision, based on guidance established by internationally recognized
governance principles including the OECD Corporate Governance Principles,
the ICGN Global Governance Principles, the UK Investment Association’s
Principles of Remuneration, and the UK Corporate Governance Code, in addition to
other local governance codes.
We
have used the services of an independent voting service provider to translate
these guidelines into explicit voting actions forming a bespoke voting
policy
for Newton. This policy will be applied to all our votable holdings,
enabling a universal approach to our voting while allowing us to deploy
in-depth
case-by-case analysis from Newton’s stewardship team for those issuers and/or
proposals which merit greater focus due to the materiality of our
investment or the importance of the issue at hand (e.g., shareholder resolution,
corporate action, related-party transactions). In these instances, communication
with or input from the wider investment team may be sought, as well as, if
relevant, engagement with the company. The stewardship team
retains the ultimate discretion to deviate the vote instruction from Newton’s
bespoke policy’s recommendation.
Our
active approach to voting means that our voting decisions reflect our investment
rationale and take into consideration engagement activity and the
company’s approach to relevant codes, market practices and regulations. These
are applied to the company’s unique situation, while also taking into
account any explanations offered for why the company has adopted a certain
position or policy.
Newton
seeks to make proxy voting decisions that are in the best long-term financial
interests of its clients and which seek to support investor value creation
by supporting proposals that are consistent with our corporate governance views
and investment case.
In
general, voting decisions are taken consistently across all Newton’s clients
that are invested in the same underlying company. This is in line with
Newton’s
investment process that focuses on the long-term success of the investee
company. Further, it is Newton’s intention to exercise voting rights
in
all circumstances where it retains voting authority.
Voting
Procedures
All
voting opportunities are communicated to Newton by way of an electronic voting
platform.
The
Responsible Investment team reviews all resolutions for matters of concern. Any
such contentious issues identified may be referred to the appropriate
global fundamental equity analyst or portfolio manager for comment. Where an
issue remains contentious, Newton may also decide to confer
or engage with the company or other relevant stakeholders.
An
electronic voting service is employed to submit voting decisions. Each voting
decision is submitted via the electronic voting service by a member of
the
Responsible Investment team but can only be executed by way of an alternate
member of the team approving the vote within the same system.
Members
of certain BNY Mellon operations teams are responsible for administrative
elements surrounding the exercise of voting rights by ensuring the right
to exercise clients’ votes is available and that these votes are
exercised.
Voting
Service Providers
Newton
utilizes an independent voting service provider for the purposes of managing
upcoming meetings and instructing voting decisions via its electronic
platform, and for providing research. Its voting recommendations are not
routinely followed; it is only in the event that we recognize a potential
material conflict of interest that the recommendation of our external voting
service provider will be applied.
Newton’s
external voting provider is subject to the requirements set by Newton’s Vendor
Management Oversight Group. As such, regular due diligence meetings
are held, which includes reviewing its operational performance, service quality,
and robustness of research and its internal controls, including management
of its potential material conflicts of interest. In addition, and along with its
other clients, Newton participates in consultations that seek specific
feedback on proxy voting matters. This helps ensure alignment of interest
between Newton’s expectations and the voting recommendations provided
by the external provider.
Conflicts
of Interest
Where
Newton acts as a proxy for its clients, a conflict could arise between Newton,
the investee company and/or a client when exercising voting rights.
Newton has in place procedures for ensuring potential material conflicts of
interests are mitigated, while its clients’ voting rights are exercised in
their
best interests. Newton seeks to avoid potential material conflicts of interest
through the application of the proxy voting guidelines in an objective
and
consistent manner across client accounts, based on, as applicable, internal, and
external research and recommendations provided by third party proxy
advisory services and without consideration of any Newton client relationship
factors, among other considerations.
Where
a potential material conflict of interest exists
between Newton, the underlying company and/or a client, the voting
recommendations of an independent
third-party proxy service provider will be applied.
Disclosures
and Reporting
Newton
publishes various items related to it’s approach, engagements and proxy voting
decisions. Newton’s Proxy Voting Policy and procedures is also summarized
in its Form ADV, which is filed with the SEC and furnished to clients.
Upon request, Newton will provide clients with information on how their
proxies were voted by Newton.
In
addition, Newton will submit any applicable regulatory filings related to its
proxy voting approach and decisions as required.
Securities
Lending
Newton
does not engage in securities lending on behalf of its clients; this activity is
at the discretion of individual clients.
Controls,
Record Keeping and Auditing
Records
are kept of all voting decisions, including evidence of the submission and
approval process, which are subject to external audit. In addition, the
Corporate
Actions team reports monthly on critical risk indicators in relation to voting
matters.
APPENDIX
C
Ratings
Definitions
Below
are summaries of the ratings definitions used by some of the rating
organizations. Those ratings represent the opinion of the rating organizations
as to the credit quality of the issues that they rate. The summaries are based
upon publicly available information provided by the rating organizations.
Ratings of Long-Term Obligations and
Preferred Stocks
— A Fund utilizes ratings provided by rating organizations in order to determine
eligibility of long-term
obligations. The ratings described in this section may also be used for
evaluating the credit quality for preferred stocks.
Credit
ratings typically evaluate the safety of principal and interest payments, not
the market value risk of bonds. The rating organizations may fail to
update
a credit rating on a timely basis to reflect changes in economic or financial
conditions that may affect the market value of the security. For these
reasons, credit ratings may not be an accurate indicator of the market value of
a bond.
The
four highest Moody’s ratings for long-term obligations (or issuers thereof) are
Aaa, Aa, A and Baa. Obligations rated Aaa are judged to be of the highest
quality,
subject to the lowest level of credit risk. Obligations rated Aa are judged to
be of high quality and are
subject
to very low credit risk. Obligations
rated A are judged to be upper-medium grade and are
subject
to low credit risk. Obligations rated Baa are judged to be medium-grade
and
subject to moderate credit risk and, as such, may possess certain speculative
characteristics.
Moody’s
ratings of Ba, B, Caa, Ca and C are considered below investment grade.
Obligations rated Ba are judged to be speculative and are
subject
to substantial
credit risk. Obligations rated B are considered speculative and are
subject
to high credit risk. Obligations rated Caa are judged to be speculative,
of
poor standing and subject to very high credit risk. Obligations rated Ca are
highly speculative and are likely in, or very near, default, with some
prospect of recovery of principal and interest. Obligations rated C are the
lowest rated and are typically in default, with little prospect for recovery
of
principal or interest. Moody’s appends
numerical modifiers 1, 2, and 3 to each generic rating classification from Aa
through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category. Additionally, a
“(hyb)” indicator is appended to all ratings of hybrid securities issued
by banks, insurers, finance companies, and securities firms.
By their terms, hybrid securities allow for the omission of scheduled dividends,
interest,
or principal payments, which can potentially result in impairment if such an
omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that could result in impairment. Together
with the hybrid indicator, the long-term obligation rating assigned
to a hybrid security is an expression of the relative credit risk associated
with that security.
The
four highest S&P Global ratings for long-term obligations are AAA, AA, A and
BBB. An obligation rated AAA has the highest rating assigned by S&P
Global and indicates that the obligor’s capacity to meet its financial
commitments on the obligation is extremely strong. An obligation rated AA
differs
from the highest-rated obligations only to a small degree. The obligor’s
capacity to meet its financial commitments on the obligation is very
strong.
An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations
in higher-rated categories. However, the obligor’s capacity to meet its
financial commitments on the obligation is still strong. An obligation
rated
BBB exhibits adequate protection parameters; however, adverse economic
conditions or changing circumstances are more likely to weaken the obligor’s
capacity to meet its financial commitments
on the obligation.
S&P
Global ratings of BB, B, CCC, CC, and
C
are regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or
major exposure
to adverse conditions. An obligation rated BB is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
that
could lead to the obligor’s inadequate capacity to meet its
financial commitments
on the obligation. An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently
has the capacity to meet its financial commitments
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor’s
capacity or willingness to meet its financial commitments
on the obligation. An obligation rated CCC is currently vulnerable to
nonpayment
and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitments
on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitments
on the obligation.
An obligation rated CC is currently highly vulnerable to nonpayment. The CC
rating is used when a default has not yet occurred
but S&P Global
expects default to be a virtual certainty, regardless of the anticipated time to
default. An obligation rated C is currently highly vulnerable to nonpayment,
and the obligation is expected to have lower relative seniority or lower
ultimate recovery compared with
obligations that are rated higher. An
obligation rated D
is in default or in breach of an imputed promise. For non-hybrid capital
instruments, the D rating category is used when payments
on an obligation are not made on the date due,
unless S&P Global believes that such payments will be made within
the
next five
business days
in the absence of a stated grace period or within the earlier of the stated
grace period or the
next 30
calendar days. The D rating also will
be
used upon
the filing of a bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A
rating on an obligation
is lowered to D if it is subject to a distressed debt
restructuring.
An SD (selective
default) rating
is assigned
when S&P Global believes that the obligor has selectively defaulted on a
specific issue or class of obligations but it will continue to meet its
payment
obligations on other issues or classes of obligations in a timely manner. The
ratings from AA to CCC may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the rating
categories.
The
four highest ratings for long-term obligations by Fitch Ratings are AAA, AA, A
and BBB. Obligations rated AAA are deemed to be of the highest credit
quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in cases
of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events. Obligations rated AA are deemed to be of very high
credit quality. AA ratings denote expectations of very low credit
risk. They indicate very strong capacity for payment of financial commitments.
This
capacity is not significantly vulnerable to foreseeable events. Obligations
rated A are deemed to be of high credit quality. An A rating denotes
expectations
of low credit
risk. The capacity for payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable
to adverse
business or
economic conditions than is the case for higher ratings. Obligations rated BBB
are deemed to be of good credit
quality.
BBB ratings indicate that expectations of credit
risk are currently low. The capacity for payment of financial commitments is
considered adequate,
but adverse business or
economic conditions are more likely to impair this capacity. This is the lowest
investment grade category.
Fitch’s
ratings of BB, B, CCC, CC, C, RD and D are considered below investment grade or
speculative grade. Obligations rated BB are deemed to be speculative.
BB ratings indicate an elevated vulnerability to credit
risk, particularly in the event of adverse changes in business or economic
conditions over
time; however, business or financial alternatives
may be available to allow financial commitments to be met.
Obligations rated B are deemed to be highly
speculative. B ratings indicate that material credit
risk is present, but a limited margin of safety remains. Financial commitments
are currently being
met; however, the capacity for continued payment is vulnerable to deterioration
in the business and economic environment. CCC
ratings indicate
that substantial credit risk is present. CC ratings indicate very high levels of
credit risk. C indicates
exceptionally high levels of credit risk
Obligations
rated C indicate a default or default-like process had begun,
or the issuer is in standstill,
or for a closed funding vehicle, payment capacity is
irrevocably impaired. Ratings in the categories of ‘CCC’, ‘CC’, and ‘C’ can also
relate to obligations or issuers that are in default. In this case, the
rating
does not opine on default risk but reflects the recovery expectation
only.
Conditions that are indicative of a C category rating for an issuer include:
(a) the issuer has entered into a grace or cure period following non-payment of
a material financial obligation; (b) the issuer has entered into a temporary
negotiated waiver or standstill agreement following a payment default on a
material financial obligation; (c) the formal announcement by the
issuer or their agent of a distressed debt exchange; or (d) a closed financing
vehicle where payment capacity is irrevocably impaired such that it is
not
expected to pay interest and/or principal in full during the life of the
transaction, but where no payment default is imminent. Obligations rated RD
indicate
an issuer that, in Fitch Ratings’ opinion, has experienced an uncured payment
default or
distressed debt exchange on
a bond, loan or other material
financial obligation but which has not entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up
procedure,
and which has not otherwise ceased operating. This would include: (a) the
selective payment default on a specific class or currency of debt; (b)
the uncured expiry of any applicable grace period, cure period or default
forbearance period following a payment default on a bank loan, capital
markets
security or other material financial obligation; (c) the extension of multiple
waivers or forbearance periods upon a payment default on one or more
material financial obligations, either in series or in parallel; or (d)
ordinary
execution
of a distressed debt exchange on one or more material financial
obligations. Obligations rated D indicate an issuer that, in Fitch Ratings’
opinion, has entered into bankruptcy filings, administration, receivership,
liquidation or other formal winding-up procedure
or that
has otherwise ceased business. Default ratings are not assigned prospectively to
entities
or their obligations; within this context, non-payment on an instrument that
contains a deferral feature or grace period will generally not be considered
a default until after the expiration of the deferral or grace period,
unless a default is otherwise driven by bankruptcy or other similar circumstance,
or by a distressed debt exchange. In
all cases, the assignment of a default rating reflects the agency’s opinion as
to the most appropriate rating
category consistent with the rest of its universe of ratings
and may differ from the definition of default under the terms of an issuer’s
financial obligations
or local commercial practice. The modifiers “+” or “-” may be appended to a
rating to denote relative status within major rating categories.
Such suffixes are not added to the AAA obligation
rating
category, or to corporate
finance obligation ratings in the categories below CCC.
Ratings of Municipal
Obligations
— Moody’s ratings for short-term investment-grade municipal obligations are
designated Municipal Investment Grade (MIG
or VMIG in the case of variable rate demand obligations) and are divided into
three levels — MIG/VMIG 1, MIG/VMIG 2, and
MIG/VMIG
3.
The MIG/VMIG
1 designation
denotes superior credit quality.
Excellent protection is afforded by
established cash flows, highly reliable liquidity support, or demonstrated
broad-based access to the market for refinancing. The MIG/VMIG 2 designation
denotes strong credit quality. Margins
of protection are ample,
although not as large as in the preceding group. The MIG/VMIG 3 designation
denotes acceptable credit quality. Liquidity and cash-flow protection
may be narrow, and market access for refinancing is likely to be less
well-established. An SG designation
denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient margins of
protection.
S&P
Global uses SP-1, SP-2, SP-3, and D to rate short-term municipal obligations. A
rating of SP-1 denotes a strong capacity to pay principal and interest.
An issue
determined to possess a very strong capacity to pay debt
service is given a plus (+) designation. A rating of SP-2 denotes a satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes. A rating
of SP-3 denotes a speculative capacity to pay principal and interest. A rating
of D is assigned upon failure to pay the note when due, completion of
a distressed debt
restructuring,
or the filing of a bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty,
for example due to automatic stay provisions.
Ratings of Short-Term
Obligations
— Moody’s short-term ratings, designated as P-1, P-2, P-3, or NP, are opinions
of the ability of issuers to honor short-term
financial obligations that generally have an original maturity not exceeding
thirteen months. The rating P-1 (Prime-1) is the highest short-term
rating assigned by Moody’s and it denotes an issuer (or supporting institution)
that has a superior ability to repay short-term debt obligations.
The rating P-2 (Prime-2) denotes an issuer (or supporting institution) that has
a strong ability to repay short-term debt obligations. The rating
P-3 (Prime-3) denotes an issuer (or supporting institution) that has an
acceptable ability to
repay
short-term obligations.
The rating NP (Not Prime)
denotes an issuer (or supporting institution) that does not fall within any of
the Prime rating categories.
S&P
Global short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that typically
means
obligations with an original maturity of no more than 365 days.
A short-term obligation rated A-1 is rated in the highest category by
S&P
Global and indicates that the obligor’s capacity to meet its financial
commitments
on the obligation is strong. Within this category, certain obligations
are designated with a plus sign (+). This indicates that the obligor’s capacity
to meet its financial commitments
on these obligations is extremely
strong. A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor’s capacity to
meet its financial commitments
on the obligation is satisfactory.
A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to weaken
the obligor’s capacity
to meet its financial commitments
on the obligation. A short-term obligation rated B is regarded
as vulnerable and has significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitments;
however,
it faces major ongoing uncertainties that
could lead to the obligor’s inadequate capacity to meet its financial
commitments.
A short-term obligation
rated C is currently vulnerable to nonpayment and is dependent upon favorable
business, financial, and economic conditions for the obligor to
meet its financial commitments
on the obligation. A short-term obligation rated D
is in default or in breach of an imputed promise. For non-hybrid capital
instruments, the D rating category is used when payments on an obligation are
not made on the date due, unless S&P Global believes that such
payments
will be made within any stated grace period. However, any stated grace period
longer than five business days will be treated as five business days.
The D rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual
certainty, for example due to automatic stay provisions. An obligation’s rating
is lowered to D if it is subject to a distressed debt
restructuring.
An SD
rating is assigned when S&P
Global believes that the
obligor has selectively defaulted on a specific issue or class of obligations
but it will continue to meet
its payment obligations on other issues or classes of obligations in a timely
manner.
Fitch
Rating’s
Short-Term Ratings are assigned to obligations whose initial maturity is viewed
as “short term” based on market convention (a long-term rating
can also be used to rate an issue with short maturity). Typically, this means a
timeframe of up to
13 months for corporate,
sovereign, and structured
obligations and up to 36 months for obligations in U.S.
public finance markets. A
short-term issuer or obligation rating is based in all cases on
the short-term vulnerability to default of the rated entity and relates to the
capacity to meet financial obligations in accordance with the documentation
governing the relevant obligation. Short-term deposit ratings may be adjusted
for loss severity.
A rating of F1 denotes an obligation of the
highest short-term credit quality. It indicates the strongest intrinsic capacity
for timely payment of financial commitments and may have an added “+”
to denote any exceptionally strong credit feature. A rating of F2 denotes good
short-term credit quality. It indicates a good intrinsic capacity for
timely
payment of financial commitments. A rating of F3 denotes fair short-term credit
quality. It
indicates that the
intrinsic capacity for timely payment of
financial commitments is adequate. A rating of B denotes an obligation that is
of speculative short-term credit quality, indicating minimal capacity
for
timely payment of financial commitments as well as heightened vulnerability to
near term adverse changes in financial and economic conditions. A rating
of C denotes a high short-term default risk,
and indicates that default
is a real possibility. A rating of RD indicates an entity that has defaulted on
one
or more of its financial commitments, although it continues to meet other
financial obligations. RD
is typically
applicable to entity ratings only.
A
rating
of D indicates a broad-based default event for an entity,
or the default of a short-term obligation.
APPENDIX
D
GLOSSARY
| |
|
|
ADRs |
American
Depositary Receipts |
Advisers
Act |
Investment
Advisers Act of 1940, as amended. |
American
Beacon or the Manager |
American
Beacon Advisors, Inc. |
BDCs |
Business
Development Companies |
Beacon
Funds |
American
Beacon Funds |
Board |
Board
of Trustees |
Brexit |
The
United Kingdom’s departure from the European Union. |
CCO |
Chief
Compliance Officer |
CD |
Certificate
of Deposit |
CDSC |
Contingent
Deferred Sales Charge |
CFTC |
Commodity
Futures Trading Commission |
Denial
of Services |
A
cybersecurity incident that results in customers or employees being
unable
to access electronic systems. |
Dividends |
A
Fund’s distributions from net investment income. |
Dodd-Frank
Act |
Dodd-Frank
Wall Street Reform and Consumer Protection Act |
DRD |
Dividends-received
deduction. |
EMU |
The
European Union’s Economic and Monetary Union |
ETF |
Exchange-Traded
Fund |
EU |
European
Union |
Fannie
Mae |
Federal
National Mortgage Association |
FHFA |
Federal
Housing Finance Agency |
FHLMC |
Federal
Home Loan Mortgage Corporation |
FINRA |
Financial
Industry Regulatory Authority, Inc. |
Floaters |
Floating
rate debt instruments |
FNMA |
Federal
National Mortgage Association |
Forwards |
Forward
Currency Contracts |
Freddie
Mac |
Federal
Home Loan Mortgage Corporation |
GDR |
Global
Depositary Receipt |
Ginnie
Mae |
Government
National Mortgage Association |
GNMA |
Government
National Mortgage Association |
Holdings
Policy |
Policies
and Procedures for Disclosure of Portfolio Holdings |
Internal
Revenue Code |
Internal
Revenue Code of 1986, as amended |
Investment
Company Act |
Investment
Company Act of 1940, as amended |
IPO |
Initial
Public Offering |
IRA |
Individual
Retirement Account |
IRS |
Internal
Revenue Service |
ISS |
Institutional
Shareholder Services |
LIBOR |
ICE
LIBOR |
LLC |
Limited
Liability Company |
LOI |
Letter
of Intent |
Management
Agreement |
The
Fund’s Management Agreement with the Manager. |
Manager |
American
Beacon Advisors, Inc. |
MLP |
Master
Limited Partnership |
Moody’s |
Moody’s
Investors Service, Inc. |
| |
|
|
NAV |
Net
asset value |
NDF |
Non-deliverable
forward contracts |
NYSE |
New
York Stock Exchange |
OTC |
Over-the-Counter |
Proxy
Policy |
Proxy
Voting Policy and Procedures |
QDI |
Qualified
Dividend Income |
REIT |
Real
Estate Investment Trust |
REMICs |
Real
Estate Mortgage Investment Conduits |
RIC |
Regulated
Investment Company |
S&P
Global |
S&P
Global Ratings |
SAI |
Statement
of Additional Information |
SEC |
Securities
and Exchange Commission |
Securities
Act |
Securities
Act of 1933, as amended |
State
Street |
State
Street Bank and Trust Co. |
STRIPS |
Separately
traded registered interest and principal securities |
TBA |
To
be announced security |
Trust |
American
Beacon Funds |
Trustee
Retirement Plan |
Trustee
Retirement and Trustee Emeritus and Retirement Plan |
UK |
United
Kingdom |
UMBS |
Uniform
mortgage-backed security |
Voluntary
Action |
When
a Fund voluntarily participates in corporate actions (for example,
rights
offerings, conversion privileges, exchange offers, credit event
settlements,
etc.) where the issuer or counterparty offers securities or instruments
to holders or counterparties, such as the Fund, and the acquisition
is determined to be beneficial to Fund
shareholders. |
PROSPECTUS
March
1, 2024
|
|
| |
|
Share
Class |
|
Y |
R5 |
Investor |
American
Beacon EAM International Small Cap Fund |
TOVYX |
TOVIX |
TIVFX |
This
Prospectus contains important information you should know about investing,
including information about risks. Please read it before you invest
and keep it for future reference.
As
with all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or determined if this Prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
| |
American
Beacon EAM
International Small Cap FundSM
|
|
Investment
Objective
The
Fund’s investment objective is long-term capital
appreciation.
Fees
and Expenses of the Fund
This
table describes the fees and expenses that you may pay if you buy, hold, and
sell shares of the Fund. You
may pay other fees, such as brokerage commissions
and other fees to financial intermediaries, which are not reflected in the
tables and examples below.
More information is available from
your financial professional and in “Choosing Your Share Class” on page
16
of the Prospectus.
Shareholder
Fees
(fees paid directly from your investment)
|
|
| |
Share
Class |
Y |
R5 |
Investor |
Maximum
sales charge imposed on purchases (as a percentage of offering
price) |
|
|
|
Maximum
deferred sales charge (as a percentage of the lower of original offering
price or redemption proceeds) |
|
|
|
|
|
| |
Annual
Fund Operating Expenses
(Expenses that you pay each year as a percentage of the value of your
investment) |
Share
Class |
Y |
R5 |
Investor |
Management
Fees |
|
|
|
Distribution
and/or Service (12b-1) Fees |
|
|
|
Other
Expenses |
|
|
|
Acquired
Fund Fees and Expenses |
|
|
|
Total
Annual Fund Operating Expenses2
|
|
|
|
Fee
Waiver and/or expense reimbursement3
|
|
|
|
Total
Annual Fund Operating Expenses after fee waiver and/or expense
reimbursement |
|
|
|
1 |
Other
Expenses for the Y Class and Investor Class shares include 0.01%
securities lending
expenses. |
2 |
The
Total Annual Fund Operating Expenses do not correlate to the ratio of
expenses to average net assets provided in the Fund’s Financial Highlights
table, which reflects the operating
expenses of the Fund and does not include Acquired Fund Fees and
Expenses.
|
3 |
American
Beacon Advisors, Inc. (the “Manager”) has contractually agreed to
waive fees and/or reimburse expenses of the Fund’s Y Class, R5 Class and
Investor Class shares, as applicable,
through December 31,
2025 to the extent that Total Annual Fund Operating
Expenses exceed 1.10% for the Y Class, 0.89% for the R5 Class, and 1.30%
for the Investor
Class (excluding taxes, interest, brokerage commissions, acquired fund
fees and expenses, securities lending fees, expenses associated with
securities sold short, litigation,
and other extraordinary expenses). The contractual expense reimbursement
can be changed or terminated only in the discretion and with the approval
of a majority of the
Fund’s Board of Trustees. The Manager will itself waive fees and/or
reimburse expenses of the Fund to maintain the contractual expense ratio
caps for each applicable class of
shares or make arrangements with other service providers to do so. The
Manager may also, from time to time, voluntarily waive fees and/or
reimburse expenses of the Fund. The
Manager can be reimbursed by the Fund for any contractual or voluntary fee
waivers or expense reimbursements if reimbursement to the Manager (a)
occurs within three years
from the date of the Manager’s waiver/reimbursement and (b) does not cause
the Total Annual Fund Operating Expenses of a class to exceed the lesser
of the contractual percentage
limit in effect at the time of the waiver/reimbursement or the time of the
recoupment. |
Example
This
Example is intended to help you compare the cost of investing in the Fund with
the cost of investing in other mutual funds. The Example assumes that
you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that
your
investment has a 5% return each year and that the Fund’s operating expenses
remain the same,
except that the Example reflects the fee waiver/expense reimbursement arrangement
for each share class through December 31, 2025. Although
your actual costs may be higher or lower, based on these assumptions,
whether you redeem or hold your shares, your costs would
be:
|
|
|
| |
Share
Class |
1
Year |
3
Years |
5
Years |
10
Years |
Y |
$114 |
$375 |
$670 |
$1,509 |
R5 |
$92 |
$328 |
$612 |
$1,424 |
Investor |
$134 |
$437 |
$776 |
$1,733
|
Portfolio
Turnover
The
Fund pays transaction costs, such as commissions, when it buys and sells
securities (or “turns over” its portfolio). A higher portfolio turnover rate may
indicate
higher transaction costs and may result in higher taxes when Fund shares are
held in a taxable account. These costs, which are not reflected in annual
Fund
operating expenses or in the Example, affect the Fund’s performance. During the
most recent fiscal year, the Fund’s portfolio turnover rate was 292%
of the
average value of its portfolio.
Principal
Investment Strategies
Under
normal circumstances, at least 80% of the Fund’s net assets (plus the amount of
any borrowings for investment purposes) are invested in equity securities
of small market capitalization companies that are economically tied to countries
outside of the United States, including developed and emerging market
countries. The Fund considers a company to be economically tied to a country
outside of the United States if the company is included in the MSCI®
ACWI
ex USA Small Cap Index or is otherwise classified by MSCI as a non-United States
company. The Fund may also consider other companies to be economically
tied to a country outside of the United States if the sub-advisor determines
that
■ |
the
company’s security is primarily listed for trading in a non-United States
market; |
■ |
the
company is headquartered in a non-United States country;
or |
■ |
the
company has at least half of its assets or derives at least half of its
revenues outside the United
States. |
Prospectus
– Fund Summary1
These
companies have market capitalizations within the market capitalization range of
the companies in the MSCI ACWI ex USA Small Cap Index at the time
of
investment. The market capitalization range of the MSCI ACWI ex USA Small Cap
Index was $10.2
million to $7.6
billion as of December
29, 2023.
The Fund
may hold smaller companies considered micro-capitalization companies, as well as
mid-capitalization
companies. The Fund invests principally in equity securities,
which may include common stocks, depositary receipts and U.S. dollar-denominated
foreign stocks traded on U.S. exchanges. The Fund’s investments
in equity securities may be denominated in foreign currencies, and the Fund may
invest directly in foreign currencies.
The
investment process of the Fund’s sub-advisor is based on bottom-up analysis of
companies rather than top-down country or sector allocation. The sub-advisor’s
process is intended to add long-term value primarily through stock selection.
The Fund may have significant exposure to Japanese and European companies.
However, as the composition of the Fund’s portfolio changes over time, the
Fund’s exposure to Japan and Europe may be lower at a future date, and
the Fund’s exposure to other countries or regions may be
higher.
The
sub-advisor seeks to generate returns by harnessing the power of the momentum
premium, which is the principle that companies that have outperformed
in the recent past will continue to outperform for a period of time. The
sub-advisor seeks to exploit behavioral biases around change, which cause
investors to underreact to new information. The sub-advisor believes these
underreactions to new information lead to opportunities to invest in
companies
with improving or accelerating financial performance that is expected to
continue, otherwise known as momentum. The sub-advisor’s disciplined
“Informed
Momentum” approach to investing combines stock selection, tailored risk
management, and efficient implementation to seek to harness the momentum
premium to generate returns. The stocks of companies held by the Fund may
exhibit characteristics of both value stocks and growth stocks during
the
time they are held by the Fund. The Fund holds approximately 100-150
investments.
The
Fund may also invest cash balances in other investment companies, including a
government money market fund advised by the Manager, with respect to
which
the Manager also receives a management fee. The Fund may seek to earn additional
income by lending its securities to certain qualified broker-dealers
and
institutions on a short-term or long-term
basis.
The
Fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment
strategies.
Principal
Risks
There
is no assurance that the Fund will achieve its investment objective,
and you could lose part or all of your investment in the Fund.
The
Fund is not designed
for investors who need an assured level of current income and is intended to be
a long-term investment. The Fund is not a complete investment
program and may not be appropriate for all investors. Investors should carefully
consider their own investment goals and risk tolerance
before investing in the Fund.
The principal
risks of investing in the Fund listed below are presented in alphabetical order
and not in order of importance
or potential exposure. Among other matters, this presentation is intended to
facilitate your ability to find particular risks and compare them with
the
risks of other funds. Each risk summarized below is considered a “principal
risk” of investing in the Fund, regardless of the order in which it
appears.
Currency
Risk
The
Fund may have exposure to foreign currencies.
Foreign currencies may fluctuate significantly over short periods of time, may
be affected unpredictably by intervention,
or the failure to intervene, of the U.S.
or foreign governments or central banks, and may be affected by currency
controls or political developments
in the U.S. or abroad. Foreign currencies may also decline in value relative to
the U.S. dollar and other currencies and thereby affect the Fund’s investments.
Cybersecurity
and Operational Risk
Operational
risks arising from, among other problems, human errors, systems and technology
disruptions or failures, or cybersecurity incidents may negatively impact
the Fund and its service providers as well as the ability of shareholders to
transact in
the Fund’s shares,
and result in financial losses. Cybersecurity incidents
may allow an unauthorized party to gain access to Fund assets, shareholder data,
or proprietary information, or cause the Fund or its service providers,
as well as securities trading venues and their service providers, to suffer data
corruption or lose operational functionality. Cybersecurity incidents
can
result from deliberate attacks or unintentional events. It is not possible for
the Fund or its service providers to identify all of the operational risks that
may affect
the Fund or to develop processes and controls to completely eliminate or
mitigate their occurrence or effects. The Fund cannot control the cybersecurity
plans
and systems of its service providers, its counterparties or the issuers of
securities in which the Fund invests. The
issuers of the Fund’s investments are likely
to be
dependent on computers for their
operations
and require ready access to their
data and the
internet to conduct their business. Thus, cybersecurity incidents
could also affect issuers of the
Fund’s investments,
leading to significant loss of value.
Emerging
Markets Risk
When
investing in emerging markets, the risks of investing in foreign securities are
heightened. Emerging markets are generally smaller, less developed, less
liquid
and more volatile than the securities markets of the U.S. and other developed
markets. There are also risks of: greater political or economic uncertainties;
an economy’s dependence on revenues from particular commodities or on
international aid or development assistance; currency transfer restrictions;
a limited number of potential buyers for such securities resulting in increased
volatility and limited liquidity for emerging market securities; trading
suspensions
and other restrictions on investment; delays and disruptions in securities
clearing and settlement procedures; and significant limitations on investor
rights and recourse. The governments of emerging market countries may also be
more unstable and more likely to impose capital controls, nationalize
a company or industry, place restrictions on foreign ownership and on
withdrawing sale proceeds of securities from the country, intervene in the
financial
markets, and/or impose burdensome taxes that could adversely affect security
prices. In addition, there may be less publicly available information
about
issuers in emerging markets than would be available about issuers in more
developed capital markets, and such issuers may not be subject to accounting,
auditing, financial reporting and recordkeeping standards and requirements
comparable to those to which U.S. companies are
subject.
Equity
Investments Risk
Equity
securities are subject to investment risk, issuer risk and market risk. In
general, the values of stocks and other equity securities fluctuate, and
sometimes widely
fluctuate, in response to changes in a company’s financial condition as well as
general market, economic and political conditions and other factors. The
Fund
may experience a significant or complete loss on its investment in an equity
security. In addition, stock prices may be particularly sensitive to rising
interest
rates, which increase borrowing costs and the costs of capital. The Fund may
invest in the following equity securities, which may expose the Fund to
the
following additional risks:
■ |
Common
Stock Risk.
The value of a company’s common stock may fall as a result of factors
affecting the company, companies in the same industry or sector,
or the financial markets overall. Common stock generally is subordinate to
preferred stock upon the liquidation or bankruptcy of the issuing
company. |
■ |
Depositary
Receipts and/or U.S. Dollar-Denominated Foreign Stocks Traded on U.S.
Exchanges Risk.
Depositary receipts and U.S. dollar-denominated foreign stocks
traded on U.S. exchanges are subject to certain of the risks associated
with investing directly in foreign securities, including, but not limited
to, currency
exchange rate fluctuations, political and financial instability in the
home country of a particular depositary receipt or foreign stock, less
liquidity, more
volatility, less government regulation and supervision and delays in
transaction
settlement. |
2Prospectus
– Fund Summary
Foreign
Investing Risk
Non-U.S.
investments carry potential risks not associated with U.S. investments. Such
risks include, but are not limited to: (1) currency exchange rate fluctuations,
(2) political and financial instability, (3) less liquidity, (4) lack of uniform
accounting, auditing and financial reporting standards, (5) greater volatility,
(6) different government regulation and supervision of foreign stock exchanges,
brokers and listed companies, and (7) delays or failures in transaction
payment and settlement in some foreign markets. The Fund’s investment in a
foreign issuer may subject the Fund to regulatory, political, currency,
security,
economic and other risks associated with that country. Global economic and
financial markets have become increasingly interconnected and conditions
(including recent volatility, terrorism, war and political instability) and
events (including natural disasters) in one country, region or financial market
may
adversely impact issuers in a different country, region or financial
market.
Geographic
Concentration Risk
From
time to time, based on market or economic conditions, the Fund may invest a
significant portion of its assets in the securities of issuers located in, or
with
significant economic ties to, a single country or geographic region, which could
increase the risk that economic, market,
political,
business, regulatory, diplomatic,
social and environmental conditions in that particular country or geographic
region may have a significant impact on the Fund’s performance. Investing
in such a manner could cause the Fund’s performance to be more volatile than the
performance of more geographically diverse funds.
A decline in the
economies or financial markets of one country or region may adversely affect the
economies or financial markets of another.
■ |
European
Securities Risk.
The Fund’s performance may be affected by political, social and economic
conditions in Europe, such as growth of economic output
(the gross national product
of the countries in the region),
the rate of inflation, the rate at which capital is reinvested into
European economies, the success
of governmental actions to reduce budget deficits, the resource
self-sufficiency of European countries,
the monetary exchange rates between European
countries,
and conflict between European countries. The European financial markets
have experienced and may continue to experience volatility and
adverse trends due to concerns relating to economic downturns; rising
government debt levels and the possible default on government debt;
national unemployment
in several European countries; public
health crises; political unrest; economic sanctions; inflation; energy
crises; and war and military conflict, such
as the Russian invasion of Ukraine. A default
or debt restructuring
by any European country could adversely impact holders of that country’s
debt and sellers
of credit default swaps linked to that country’s creditworthiness, which
may be located in other countries. Such a default or debt restructuring
could affect
exposures to European
countries.
In addition, issuers have faced difficulties obtaining credit or
refinancing existing obligations, and financial markets have
experienced extreme volatility and declines in asset values and liquidity.
These
events have affected the exchange rate of the Euro and may continue to
significantly
affect European countries. |
|
Responses
to financial problems by European governments, central banks, and others,
including austerity measures and other reforms, may not produce the
desired
results, may result in social unrest and may limit future growth and
economic recovery or may have unintended consequences. The Fund makes
investments
in securities of issuers that are domiciled in member states of the
European Union (the “EU”). The economies and markets of European
countries
are often closely connected and interdependent, and events in one country
in Europe can have an adverse impact on other European countries.
One
or more countries may abandon the Euro and/or withdraw from the EU. The
impact of these actions, especially if they occur in a disorderly fashion,
could
be significant and far-reaching. The United Kingdom’s withdrawal from the
EU could be an indication that one or more other countries may withdraw
from
the EU and/or abandon the Euro. These events and actions have affected,
and may in the future affect, the value and exchange rate of the Euro and
may
continue to significantly affect the economies of every country in Europe,
including countries that do not use the Euro and non-EU member
states. |
|
The
continuing effects on the economies of European countries of the
Russia/Ukraine war and Russia’s response to sanctions imposed by
the U.S., EU, UK and
others, are impossible to predict, but have been and could continue to be
significant. For example, exports in Eastern Europe have been disrupted
for certain
key commodities, pushing commodity prices to record highs. Also, both
wholesale energy prices and energy prices charged to consumers in Europe
have
increased
significantly. |
■ |
Japan
Investment Risk.
The Japanese economy may
be subject to economic, political and social instability, which could have
an adverse effect on the Japanese
securities held by the Fund. The Japanese economy, which is
heavily dependent upon international trade,
may be adversely affected by global
competition,
trade
tariffs, other government
interventions and protectionist
measures, excessive
regulation,
changes in international trade agreements, the economic
conditions of its trading partners, the performance
of the global
economy,
and regional and global conflicts. Political tensions between Japan and
its
trading partners could adversely affect the economy, especially the export
sector, and destabilize the region as a whole. The domestic Japanese
economy faces
several concerns, including large government deficits,
a declining domestic population and low birth rate, workforce shortages,
and inflation.
The Japanese
government’s
fiscal and monetary
policies may have negative impacts on the Japanese economy. Japan is also
heavily dependent on oil and other commodity
imports, and higher commodity prices could therefore have a negative
impact on the Japanese economy. Currency fluctuations, which have
been
significant at times, can have a considerable impact on exports and the
overall Japanese economy. The
Japanese yen may be affected by currency volatility
elsewhere in Asia, especially Southeast Asia.
Japanese intervention in the currency markets could cause the value of the
yen to fluctuate sharply and
unpredictably and could cause losses to investors. Natural disasters such
as earthquakes, volcanic
eruptions,
typhoons or tsunamis, could occur in Japan and
surrounding areas and may have a significant impact on the business
operations of Japanese companies in the affected regions and Japan’s
economy. These
and other factors could have a negative impact on the Fund’s performance
and increase the volatility of an investment in the
Fund. |
Growth
Companies Risk
Growth
companies are expected to increase their earnings at a certain rate. When these
expectations are not met or decrease, the prices of these stocks may
decline,
sometimes sharply, even if earnings showed an absolute increase. The Fund’s
investments in growth companies may be more sensitive to company earnings
and more volatile than the market in general primarily because their stock
prices are based heavily on future expectations. If an assessment of the
prospects
for a company’s growth is incorrect, then the price of the company’s stock may
fall or not approach the value placed on it. Growth company stocks may
also lack the dividend yield that can cushion stock price declines in market
downturns.
High
Portfolio Turnover Risk
Portfolio
turnover is a measure of the Fund’s trading activity over a one-year period. A
portfolio turnover rate of 100% would indicate that the Fund sold and
replaced
the entire value of its securities holdings during the period. The Fund may
engage in active and frequent trading and may have a high portfolio turnover
rate, which could increase the Fund’s transaction costs, have a negative impact
on performance, and generate higher capital gain distributions to shareholders
than if the Fund had a lower portfolio turnover
rate.
Investment
Risk
An
investment in the Fund is not a deposit with a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government
agency.
When you sell your shares of the Fund, they could be worth less than what you
paid for them. Therefore, you may lose money by investing
in the Fund.
Issuer
Risk
The
value of, and/or the return generated by, a security may decline for a number of
reasons that directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer’s goods or services, as
well as the historical and prospective earnings of the issuer and the
value
of its assets.
Prospectus
– Fund Summary3
Market
Risk
The
Fund is subject to the risk that the securities markets will move down,
sometimes rapidly and unpredictably, based on overall economic conditions and
other
factors, which may negatively affect the Fund’s performance. Equity securities
generally have greater price volatility than fixed-income securities,
although
under certain market conditions fixed-income securities may have comparable or
greater price volatility. During a general downturn in the securities
markets,
multiple assets may decline in value simultaneously. Prices in many financial
markets have increased significantly over the last decade, but there have
also
been periods of adverse market and financial developments and cyclical change
during that timeframe, which have resulted in unusually high levels of
volatility
in domestic and foreign financial markets that has caused losses for investors
and may occur again in the future. The value of a security may decline
due
to adverse issuer-specific conditions, general market conditions unrelated to a
particular issuer, such as changes in interest or inflation rates, or factors
that
affect a particular industry or industries. Changes in the financial condition
of a single issuer or market segment also can impact the market as a whole.
Geopolitical
and other events, including war, terrorism, economic uncertainty, trade
disputes, pandemics, public health crises, natural disasters and related
events
have led, and in the future may continue to lead, to instability in world
economies and markets generally and reduced liquidity in equity, credit and
fixed-income
markets, which may disrupt economies and markets and adversely affect the value
of your investment. Changes in value may be temporary or may
last for extended periods.
Policy
changes by the U.S. government and/or Federal Reserve and political events
within the U.S. and abroad, such as changes in the U.S. presidential
administration
and Congress, the U.S. government’s inability at times to agree on a long-term
budget and deficit reduction plan, the threat or
occurrence of
a federal
government shutdown and threats or
the occurrence of a failure
to increase the federal government’s debt limit,
which could result in a default on the government’s
obligations, may affect investor and consumer confidence and may adversely
impact financial markets and the broader economy, perhaps suddenly
and to a significant degree.
Markets
and market participants are increasingly reliant upon both publicly available
and proprietary information data systems. Data imprecision, software or
other
technology malfunctions, programming inaccuracies, unauthorized use or access,
and similar circumstances may impair the performance of these systems
and may have an adverse impact upon a single issuer, a group of issuers, or the
market at large.
The
financial markets generally move in cycles, with periods of rising prices
followed by periods of declining prices. The value of your investment may
reflect these
fluctuations.
■ |
Recent
Market Events Risk.
Both U.S. and international markets have experienced significant
volatility in recent months and years. As a result of such volatility,
investment returns may fluctuate significantly. Moreover, the risks
discussed herein associated with an investment in the Fund may be
increased. |
|
Although
interest rates were unusually low in recent years in the U.S. and
abroad, in 2022, the Federal Reserve and certain foreign central banks
began to raise
interest rates as part of their efforts to address rising inflation. It is
difficult to accurately predict the pace at which interest rates may
continue to increase,
the timing, frequency or magnitude of any such increases, or when such
increases might stop. Additionally, various economic and political factors
could
cause the Federal Reserve or another foreign central bank to change their
approach in the future and such actions may result in an economic
slowdown
in the U.S. and abroad. Unexpected increases in interest rates could lead
to market volatility or reduce liquidity in certain sectors of the market.
Deteriorating
economic fundamentals may, in turn, increase the risk of default or
insolvency of particular issuers, negatively impact market value, cause
credit
spreads to widen, and reduce bank balance sheets. Any of these could cause
an increase in market volatility, reduce liquidity across various markets
or
decrease confidence in the markets. Additionally, high public debt in the
U.S. and other countries creates ongoing systemic and market risks and
policymaking
uncertainty. |
|
In
March 2023, the shutdown of certain financial institutions in
the U.S. and questions regarding the viability of other financial
institutions raised economic concerns
over disruption in the U.S. and global banking systems. There can be no
certainty that the actions taken by the U.S. or foreign governments will
be
effective in mitigating the effects of financial institution failures on
the economy and restoring public confidence in the U.S. and global banking
systems. |
|
Some
countries, including the U.S., have in recent years adopted more
protectionist trade policies. Slowing global economic growth; risks
associated with a trade
agreement between the United Kingdom and the European Union; the risks
associated with ongoing trade negotiations with China; and the
possibility
of changes to some international trade agreements; political or economic
dysfunction within some nations, including major producers of oil; and
dramatic
changes in commodity and currency prices could have adverse effects that
cannot be foreseen at the present
time. |
|
Tensions,
war, or open conflict between nations, such as between Russia and Ukraine,
in the Middle East or in eastern Asia could affect the economies of
many
nations, including the United States. The duration of ongoing hostilities
in the Middle East and between Russia and Ukraine, and any sanctions and
related
events cannot be predicted. Those events present material uncertainty and
risk with respect to markets globally and the performance of the Fund
and
its investments or operations could be negatively
impacted. |
|
Regulators
in the U.S. have proposed and recently adopted a number of changes
to regulations involving the markets and issuers, some of which apply to
the
Fund. The full effect of various newly-adopted regulations is not
currently known. Additionally, it is not clear whether the proposed
regulations will be adopted.
However, due to the broad scope of the new and proposed regulations,
certain changes could limit the Fund’s ability to pursue its investment
strategies
or make certain investments, or may make it more costly for the Fund to
operate, which may impact
performance. |
|
Economists
and others have expressed increasing concern about the potential effects
of global climate change on property and security values. Certain
issuers,
industries and regions may be adversely affected by the impacts of climate
change, including on the demand for and the development of goods and
services
and related production costs, and the impacts of legislation, regulation
and international accords related to climate change, as well as any
indirect consequences
of regulation or business trends driven by climate
change. |
Market
Timing Risk
The
Fund is subject to the risk of market timing activities by investors due to the
nature of the Fund’s investments, which requires the Fund, in certain
instances,
to fair value certain of its investments. Some investors may engage in frequent
short-term trading in the Fund to take advantage of any price differentials
that may be reflected in the net asset value (“NAV”) of the Fund’s shares.
Frequent trading by Fund shareholders poses risks to other shareholders
in
the Fund, including (i) the dilution of the Fund’s NAV, (ii) an increase in the
Fund’s expenses, and (iii) interference with the ability to execute efficient
investment
strategies.
Micro-Capitalization
Companies Risk
Micro-capitalization
companies are subject to substantially greater risks of loss and price
fluctuations, sometimes rapidly and unpredictably, because their earnings
and revenues tend to be less predictable. Since micro-capitalization companies
may not have an operating history, product lines, or financial resources,
their share prices tend to be more volatile and their markets less liquid than
companies with larger market capitalizations, and they can be sensitive
to
changes in overall economic conditions, interest rates, borrowing costs and
earnings. The shares of micro-capitalization companies tend to trade less
frequently
than those of larger, more established companies, which can adversely affect the
pricing of these securities and the future ability to sell these securities.
4Prospectus
– Fund Summary
Mid-Capitalization
Companies Risk
Investing
in the securities of mid-capitalization companies involves greater risk and the
possibility of greater price volatility, which at times can be rapid and
unpredictable,
than investing in larger-capitalization and more established companies. Since
mid-capitalization companies may have narrower commercial markets
and more limited operating history, product lines, and managerial and financial
resources than larger, more established companies, the securities of
these
companies may lack sufficient market liquidity, and they can be particularly
sensitive to changes in overall economic conditions, interest rates, borrowing
costs
and earnings.
Other
Investment Companies Risk
To
the extent that the Fund invests in shares of other registered investment
companies, the Fund will indirectly bear the fees and expenses charged by those
investment
companies in addition to the Fund’s direct fees and expenses. To the extent the
Fund invests in other investment companies that invest in equity securities,
fixed-income securities and/or foreign securities, or that track an index, the
Fund is subject to the risks associated with the underlying investments
held
by the investment company or the index fluctuations to which the investment
company is subject. The Fund will be subject to the risks associated with
investments
in those companies, including but not limited to the
following:
■ |
Government
Money Market Funds Risk.
Investments in government money market funds are subject to interest rate
risk, credit risk, and market risk. Interest
rate risk is the risk that rising interest rates could cause the value of
such an investment to decline. Credit risk is the risk that the issuer,
guarantor or
insurer of an obligation, or the counterparty to a transaction, may fail
or become less able or unwilling, to make timely payment of interest or
principal or otherwise
honor its obligations, or that it may default
completely. |
Redemption
Risk
The
Fund may experience periods of high levels of redemptions that could cause the
Fund to sell assets at inopportune times or at a loss or depressed value.
Heavy
redemptions could hurt the Fund’s performance. The sale of assets to meet
redemption requests may create net capital gains, which could cause the
Fund
to have to distribute substantial capital gains. Redemption risk is greater to
the extent that one or more investors or intermediaries control a large
percentage
of investments in the Fund. In addition, redemption risk is heightened during
periods of declining or illiquid markets. During periods of heavy redemptions,
the Fund may borrow funds through the interfund credit facility or from a bank
line of credit, which may increase costs.
Securities
Lending Risk
To
the extent the Fund lends its securities, it may be subject to the following
risks: (i) the securities in which the Fund reinvests cash collateral may
decrease in value,
causing the Fund to incur a loss, or may not perform sufficiently to cover the
Fund’s payment to the borrower of a pre-negotiated fee or “rebate” for
the
use of that cash collateral in connection with the loan; (ii) non-cash
collateral may decline in value, resulting in the Fund becoming under-secured;
(iii) delays
may occur in the recovery of loaned securities from borrowers, which could
result in the Fund being unable to vote proxies or settle transactions or
cause
the Fund to incur increased costs; and (iv) if the borrower becomes subject to
insolvency or similar proceedings, the Fund could incur delays in its ability
to
enforce its rights in its collateral.
Securities
Selection Risk
Securities
selected for the Fund may not perform to expectations. This could result in the
Fund’s underperformance compared to its performance index(es), or other
funds with similar investment objectives or
strategies.
Small-Capitalization
Companies Risk
Investing
in the securities of small-capitalization companies involves greater risk and
the possibility of greater price volatility, which at times can be rapid and
unpredictable,
than investing in larger-capitalization and more established companies. Since
small-capitalization companies may have narrower commercial markets,
and more limited operating history, product lines, and managerial and financial
resources than larger, more established companies, the securities of
these
companies may lack sufficient market liquidity and they can be particularly
sensitive to changes in overall economic conditions, interest rates, borrowing
costs
and earnings.
Valuation
Risk
Certain
of the Fund’s assets may be valued at a price different from the price at which
they can be sold. This risk may be especially pronounced for investments
that are illiquid or may become illiquid, or securities that trade in relatively
thin markets and/or markets that experience extreme volatility. The valuation
of the Fund’s investments in an accurate and timely manner may be impacted by
technological issues and/or errors by third party service providers,
such
as pricing services or accounting agents.
Value
Stocks Risk
Value
stocks are subject to the risk that their intrinsic or full value may never be
realized by the market, that a stock judged to be undervalued may be
appropriately
priced, or that their prices may decline. Although value stocks tend to be
inexpensive relative to their earnings, they can continue to be inexpensive
for long periods of time. The Fund’s investments in value stocks seek to limit
potential downside price risk over time; however, value stock prices
still
may decline substantially. In addition, the Fund may produce more modest gains
as a trade-off for this potentially lower risk. The Fund’s investment in
value
stocks could cause the Fund to underperform funds that use a growth or non-value
approach to investing or have a broader investment
style.
Fund
Performance
The
bar chart and table below provide an indication of risk by showing changes in
the Fund’s performance over time. The bar chart shows how the Fund’s
performance
has varied from year to year. The table shows how the Fund’s average annual
total returns compare to a broad-based market index,
as well as an additional
index that reflects the markets in which the Fund invests and is the Fund’s
benchmark index,
for the periods indicated.
Effective January 21, 2023, a new
sub-advisor began managing the Fund and the Fund implemented a policy to invest
at least 80% of its net assets (plus the amount of borrowings for investment
purposes) in equity securities of small market capitalization companies that are
economically tied to countries outside of the United States, including
developed and emerging market countries. Performance through January 20, 2023
reflects the Fund’s performance under the management and strategy
of its prior sub-advisor.
Each
of the Fund’s share classes commenced operations on January 22, 2019. The Fund
acquired the assets and liabilities of The Tocqueville International
Value
Fund, a series of The Tocqueville Trust, in a reorganization that closed upon
the close of business on January 18, 2019. In connection with that reorganization,
the Investor Class shares of the Fund have adopted the performance history and
financial statements of the Fund’s predecessor. In the bar chart
and table below, the performance of the Fund’s Investor Class shares for periods
prior to January 22, 2019 reflects the returns of the shares of the Fund’s
predecessor. In the table below, the performance of the Y Class and R5 Class
shares for periods prior to January 22, 2019 reflects the returns of the
shares
of the Fund’s predecessor. The Y Class and R5 Class shares would have had
similar annual returns to the shares of the Fund’s predecessor because the
shares
of each class represent investments in the same portfolio securities. However,
the shares of the Fund’s predecessor had different expenses than the Y
Class
and R5 Class shares, which would affect performance. To the extent that the
Fund’s predecessor had lower expenses than a newer share class, the performance
of the Fund’s predecessor would likely have been higher than the newer share
class would have realized during the same period. The Y Class and R5
Class performance shown in the table below has not been adjusted for differences
in operating expenses between those share classes and the shares of
Prospectus
– Fund Summary5
the
predecessor fund. You may obtain updated performance information on the Fund’s
website at www.americanbeaconfunds.com.
Past
performance (before and
after taxes) is not necessarily an indication of how the Fund will perform in
the future.
| |
Calendar
year total returns for Investor Class Shares.
Year Ended 12/31 |
|
Highest
Quarterly Return: 17.94% 4th
Quarter 2022 01/01/2014
through 12/31/2023
Lowest
Quarterly Return: -23.42% 1st
Quarter 2020 01/01/2014
through
12/31/2023 |
Average
annual total returns
for periods ended December 31, 2023
|
|
|
| |
|
Inception
Date of
Class |
1
Year |
5
Years |
10
Years |
Investor
Class |
|
|
|
|
Returns
Before Taxes |
|
|
|
|
Returns
After Taxes on Distributions |
|
|
|
|
Returns
After Taxes on Distributions and Sales of Fund Shares |
|
|
|
|
|
|
|
| |
|
Inception
Date of
Class |
1
Year |
5
Years |
10
Years |
Share
Class
(Before Taxes) |
|
|
|
|
Y |
|
|
|
|
R5 |
|
|
|
|
|
|
| |
|
1
Year |
5
Years |
10
Years |
Index
(Reflects no deduction for fees, expenses, or taxes, other than
withholding taxes, as noted) |
|
|
|
MSCI®
EAFE Index (Net)* |
|
|
|
MSCI®
ACWI ex USA Small Cap Index (Net)* |
|
|
|
* |
Reflects
the reinvestment of dividends after the deduction of withholding taxes,
using a tax rate applicable to non-resident individuals who do not benefit
from double taxation treaties. |
After-tax
returns are calculated using the historical highest individual federal marginal
income tax rates and do not reflect the impact of state and local income
taxes.
Actual after-tax returns depend on an investor’s tax situation and may differ
from those shown. The
return after taxes on distributions and sale of Fund shares
may exceed the return before taxes due to an assumed tax benefit from any losses
on a sale of Fund shares at the end of the measurement period.
If
you
are a tax-exempt entity or hold your Fund shares through a tax-deferred
arrangement, such as an individual retirement account (“IRA”) or a 401(k) plan,
the
after-tax returns do not apply to your situation.
After-tax
returns are shown only for Investor Class shares of the Fund; after-tax returns
for other share classes
will vary.
Management
The
Manager
The
Fund has retained American Beacon Advisors, Inc. to serve as its
Manager.
Sub-Advisor
The
Fund’s investment sub-advisor is EAM Global Investors LLC.
Portfolio
Managers
|
| |
EAM
Global Investors LLC |
Travis
Prentice Chief
Investment Officer and Portfolio Manager Since
2024
Joshua
Moss Managing
Director and Portfolio Manager Since
2023 |
John
Scripp Managing
Director and Portfolio Manager Since
2023 |
6Prospectus
– Fund Summary
Purchase
and Sale of Fund Shares
You
may buy or sell shares of the Fund through a retirement plan, an investment
professional, a broker-dealer, or other financial intermediary. You may
purchase
or redeem shares of the Fund on any day the New York Stock Exchange (“NYSE”) is
open, at the Fund’s net asset value (“NAV”) per share next calculated
after your order is received in proper form, subject to any applicable sales
charge. The Manager may, in its sole discretion, allow certain individuals
to
invest directly in the Fund. For more information regarding eligibility to
invest directly please see “About Your Investment - Purchase and Redemption of
Shares.”
Direct mutual fund account shareholders may buy subsequent shares or sell shares
in various ways:
|
| |
Internet |
www.americanbeaconfunds.com |
Phone |
To
reach an American Beacon representative call 1-800-658-5811, option
1
Through
the Automated Voice Response Service call 1-800-658-5811, option 2
(Investor Class only) |
Mail |
American
Beacon Funds
P.O.
Box 219643
Kansas
City, MO 64121-9643 |
Overnight
Delivery:
American
Beacon Funds
430
W. 7th Street, Suite 219643
Kansas
City, MO 64105-1407 |
|
|
| |
|
New
Account |
Existing
Account |
Share
Class |
Minimum
Initial Investment Amount |
Purchase/Redemption
Minimum by Check/ACH/Exchange |
Purchase/Redemption
Minimum by Wire |
Investor |
$2,500 |
$50 |
$250 |
Y |
$100,000 |
$50 |
None |
R5 |
$250,000 |
$50 |
None |
Tax
Information
Dividends,
capital gains distributions,
and other distributions, if any, that you receive as
a result of your investment in
the Fund are subject to federal income tax
and may also be subject to state and local income taxes, unless you are a
tax-exempt entity or your account is tax-deferred, such as an
individual retirement
account (“IRA”) or a 401(k) plan (in which case you may be taxed later, upon the
withdrawal of your investment from such account or plan).
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), the Fund and the Fund’s distributor, Resolute
Investment
Distributors, Inc., or the Manager 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
individual financial professional to recommend the Fund over another investment.
Ask
your individual financial professional or visit your financial intermediary’s
website for more information.
Additional
Information About the Fund
To
help you better understand the Fund, this section provides a detailed discussion
of the Fund’s investment policies, its principal strategies and principal risks
and
performance index. However, this Prospectus does not describe all of the Fund’s
investment practices. Capitalized
terms that are not otherwise defined
are defined in Appendix A.
For additional information, please see the Fund’s SAI, which is available at
www.americanbeaconfunds.com or by contacting
us via telephone at 1-800-658-5811, by U.S. mail at P.O. Box 219643, Kansas
City, MO 64121-9643, or by e-mail at [email protected].
Additional
Information About Investment Policies and Strategies
Investment
Objective
The
American Beacon EAM International Small Cap Fund’s investment objective is
long-term capital appreciation.
The
Fund’s investment objective is “non-fundamental,” which means that it may be
changed by the Fund’s Board without the approval of Fund
shareholders.
80%
Investment Policy
The
Fund has a non-fundamental policy to invest under normal circumstances at least
80% of its net assets (plus the amount of any borrowings for investment
purposes) in equity securities of small market capitalization companies that are
economically tied to countries outside of the United States, including
developed and emerging market countries.
If
the Fund changes its 80% investment policy, a notice will be sent to
shareholders at least 60 days in advance of the change and this prospectus will
be supplemented.
Temporary
Defensive Policy
The
Fund may depart from its principal investment strategy by taking temporary
defensive or interim positions in response to adverse market, economic,
political,
or other conditions. During these times, the Fund may not achieve its investment
objective.
Additional
Information About the Management of the Fund
The
Fund has retained American Beacon Advisors, Inc. to serve as its Manager. The
Manager may allocate the assets of the Fund among different sub-advisors.
The Manager provides or oversees the provision of all administrative, investment
advisory and portfolio management services to the Fund. The Manager:
■ |
develops
overall investment strategies for the
Fund, |
■ |
selects
and changes sub-advisors, |
■ |
allocates
assets among sub-advisors, |
■ |
monitors
and evaluates the sub-advisor’s investment
performance, |
■ |
monitors
the sub-advisor’s compliance with the Fund’s investment objective,
policies and restrictions, |
■ |
oversees
the Fund’s securities lending activities and actions taken by the
securities lending agent to the extent applicable,
and |
Prospectus
– Additional Information About the Fund7
■ |
directs
the investment of the portion of Fund assets that the sub-advisor
determines should be allocated to short-term
investments. |
The
assets of the Fund are currently allocated by the Manager to one sub-advisor,
EAM Global Investors LLC (“EAM”). EAM has full discretion to purchase and
sell
securities for the Fund in accordance with the Fund’s objective, policies,
restrictions, and more specific strategies provided by the Manager. The Manager
oversees
the sub-advisor but does not reassess individual security selections made by the
sub-advisor for the Fund.
The
Fund’s assets may be allocated to another sub-advisor or among one or more
additional sub-advisors in the future by the Manager. The Fund operates in
a
manager-of-managers structure. The Fund and the Manager have received an
exemptive order from the SEC that permits the Fund, subject to certain
conditions
and approval by the Board, to hire and replace sub-advisors, and materially
amend agreements with sub-advisors, that are unaffiliated with the Manager
without approval of the shareholders. In the future, the Fund and the Manager
may rely on an SEC staff no-action letter, dated July 9, 2019, that would
permit the Fund to expand its exemptive relief to hire and replace sub-advisors
that are affiliated and unaffiliated with the Manager without shareholder
approval, subject to approval by the Board and other conditions. The Manager has
ultimate responsibility, subject to oversight by the Board, to oversee
sub-advisors and recommend their hiring, termination and replacement. The SEC
order also exempts the Fund from disclosing the advisory fees paid by
the Fund to individual sub-advisors in a multi-manager fund in various documents
filed with the SEC and provided to shareholders. In the future, the Fund
may
rely on the SEC staff no-action letter to expand its exemptive relief to
individual sub-advisors that are affiliated with the Manager. Under that
no-action letter,
the fees payable to sub-advisors unaffiliated with or partially-owned by the
Manager or its parent company would be aggregated, and fees payable to
sub-advisors
that are wholly-owned by the Manager or its parent company, if any, would be
aggregated with fees payable to the Manager. Whenever a sub-advisor
change is proposed in reliance on the order, in order for the change to be
implemented, the Board, including a majority of its “non-interested”
trustees,
must approve the change. In addition, the Fund is required to provide
shareholders with certain information regarding any new sub-advisor within 90
days
of the hiring of any new sub-advisor.
Additional
Information About Investments
This
section provides more detailed information regarding certain of the Fund’s
principal investment strategies as well as information regarding the Fund’s
strategy
with respect to investment of cash balances.
Cash
Management
To
gain market exposure on cash balances held in anticipation of liquidity needs or
to reduce market exposure in anticipation of liquidity needs, the Fund may
utilize
the following investments:
■ |
Government
Money Market Funds. The
Fund may invest cash balances in government money market funds that are
registered as investment companies under
the Investment Company Act, including a government money market fund
advised by the Manager, with respect to which the Manager also receives
a
management fee. If the Fund invests in government money market funds, the
Fund becomes a shareholder of that investment company. As a result, Fund
shareholders
will bear their proportionate share of the expenses, including, for
example, advisory and administrative fees of the government money market
funds
in which the Fund invests, such as advisory fees charged by the Manager to
any applicable government money market funds advised by the Manager,
in
addition to the fees and expenses Fund shareholders directly bear in
connection with the Fund’s own operations. Shareholders also would be
exposed to the
risks associated with government money market funds and the portfolio
investments of such government money market funds, including the risk that
a government
money market fund’s yield will be lower than the return that the Fund
would have received from other investments that provide liquidity.
Investments
in government money market funds are not insured or guaranteed by the
Federal Deposit Insurance Corporation (FDIC) or any other government
agency. |
Currencies
The Fund
may have exposure to foreign currencies by using various instruments. The Fund
may engage in these transactions in order to hedge or protect against
uncertainty in the level of future foreign exchange rates in the purchase and
sale of securities, or to shift exposure to foreign currency fluctuations
from
one country to another. In
order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the
sale of a foreign security into U.S. dollars, the Fund may enter into spot
currency trades. In a spot trade, the Fund agrees to exchange one currency for
another
at the current exchange rate. Spot trades allow for prompt delivery and
settlement at the rate prevailing in the currency exchange market. Spot trades
may
increase or decrease the Fund’s exposure to currency risks.
The instruments in which the Fund may invest that provide exposure to foreign
currencies include
the following:
■ |
Foreign
Currency-Denominated Securities |
Equity
Investments
The Fund’s
equity investments may include:
■ |
Common
Stock.
Common stock generally takes the form of shares in a corporation which
represent an equity or ownership interest. Holders of common stock
generally have voting rights in the issuer and are entitled to receive
common stock dividends when, as and if declared by the company’s board of
directors.
Returns on common stock investments consist of any dividends received plus
the amount of appreciation or depreciation in the value of the stock.
Common
stock normally occupies the most subordinated position in an issuer’s
capital structure. It ranks below preferred stock and debt securities in
claims for
dividends and for assets of the company in a liquidation or bankruptcy.
Common stock may be traded via an exchange or over-the-counter.
Over-the-counter
stock may be less liquid than exchange-traded
stock. |
■ |
Depositary
Receipts and/or U.S. Dollar-Denominated Foreign Stocks Traded on U.S.
Exchanges.
ADRs are U.S. dollar-denominated receipts representing interests
in the securities of a foreign issuer. ADRs typically are issued by
domestic banks and trust companies and represent the deposit with the bank
of the
securities of a foreign issuer. Depositary receipts may not be denominated
in the same currency as the securities into which they may be converted.
Investing
in depositary receipts and U.S. dollar-denominated foreign stocks traded
on U.S. exchanges entails substantially the same risks as direct
investment in
foreign securities. In addition, the Fund may invest in unsponsored
depositary receipts, which are implemented by a depositary bank with no
direct involvement
of the foreign issuers, and the issuers are not obligated to disclose
material information about the underlying securities to investors in the
United
States. Ownership of unsponsored depositary receipts may not entitle the
Fund to the same benefits and rights as ownership of the underlying
securities
or of sponsored depositary receipts, which are implemented in
collaboration with the foreign issuers. |
Other
Investment Companies
The Fund,
at times, may invest in shares of other investment companies. The
Fund may invest in securities of an investment company advised by the Manager,
with
respect to which the Manager also receives a management fee.
Investments
in the securities of other investment companies may involve duplication of
advisory
fees and certain other expenses. By investing in another investment company, the
Fund becomes a shareholder of that investment company. As a result,
Fund shareholders indirectly will bear the Fund’s proportionate share of the
fees and expenses paid by shareholders of the other investment company,
in
addition to the fees and expenses Fund shareholders directly bear in connection
with the Fund’s own operations. These other fees and expenses, if
8Prospectus
– Additional Information About the Fund
applicable,
are reflected as Acquired Fund Fees and Expenses and are included in the Fees
and Expenses Table for the Fund in this Prospectus. Investment in other
investment companies may involve the payment of substantial premiums above the
value of such issuer’s portfolio securities.
■ |
Government
Money Market Funds. The
Fund can invest free cash balances in registered open-end investment
companies regulated as government money market
funds under the Investment Company Act to provide liquidity or for
defensive purposes. The Fund could invest in government money market funds
rather
than purchasing individual short-term investments. If the Fund invests in
government money market funds, shareholders will bear their proportionate
share
of the expenses, including for example, advisory and administrative fees,
of the government money market funds in which the Fund invests, including
advisory
fees charged by the Manager to any applicable government money market
funds advised by the Manager. Although a government money market
fund
is designed to be a relatively low risk investment, it is not free of
risk. Despite the short maturities and high credit quality of a government
money market
fund’s investments, increases in interest rates and deteriorations in the
credit quality of the instruments the government money market fund has
purchased
may reduce the government money market fund’s yield and can cause the
price of a government money market security to decrease. In addition,
a
government money market fund is subject to the risk that the value of an
investment may be eroded over time by
inflation. |
Additional
Information About Risks
The
greatest risk of investing in a mutual fund is that its returns will fluctuate
and you could lose money. The following section provides additional information
regarding
the Fund’s principal risk factors in light of its principal investment
strategies. The principal risks of investing in the Fund listed below are
presented in alphabetical
order and not in order of importance or potential exposure. Among other matters,
this presentation is intended to facilitate your ability to find particular
risks and compare them with the risks of other funds. Each risk summarized below
is considered a “principal risk” of investing in the Fund, regardless
of the order in which it appears.
Currency
Risk
The
Fund may have exposure to foreign currencies.
Foreign currencies may fluctuate significantly over short periods of time for a
number of reasons, including changes
in interest rates, may be affected unpredictably by intervention, or the failure
to intervene, of the U.S. or foreign governments, central banks, or supranational
entities such as the International Monetary Fund, and may be affected by the
imposition of currency controls or political developments in the U.S.
or abroad. As a result, the Fund’s exposure to foreign currencies may
reduce the returns of the Fund. Foreign currencies may decline in value
relative to the
U.S. dollar and other currencies and thereby affect the Fund’s
investments. In addition, changes in currency exchange rates could adversely
impact investment
gains or add to investment losses.
Cybersecurity
and Operational Risk
Operational
risks arising from, among other problems, human errors, systems and technology
disruptions or failures, or cybersecurity incidents may negatively impact
the Fund, its service providers, and third-party fund distribution platforms, as
well as the ability of shareholders to transact in
the Fund’s shares,
and result
in financial losses. Cybersecurity incidents may allow an unauthorized party to
gain access to Fund assets, shareholder data, or proprietary information,
or
cause the Fund or its service providers, as well as the securities trading
venues and their service providers, to suffer data corruption or lose
operational functionality.
Cybersecurity incidents can result from deliberate attacks or unintentional
events. A cybersecurity incident could, among other things, result in
the
loss or theft of shareholder data or funds, shareholders or service providers
being unable to access electronic systems (also known as “denial of services”),
loss
or theft of proprietary information or financial
data, the inability to process Fund transactions, interference with the Fund’s
ability to calculate its NAV, impediments
to trading, physical damage to a computer or network system, or remediation
costs associated with system repairs. The occurrence of any of these
problems could result in a loss of information, violations of applicable privacy
and other laws, regulatory scrutiny, penalties, fines, reputational damage,
additional
compliance requirements, and other consequences, any of which could have a
material adverse effect on the Fund or its shareholders. The Manager,
through its monitoring and oversight of Fund service providers, endeavors to
determine that service providers take appropriate precautions to avoid
and
mitigate risks that could lead to such problems. While the Manager has
established business continuity plans and risk management systems seeking to
address
these problems, there are inherent limitations in such plans and systems, and it
is not possible for the Manager, other Fund service providers, or third-party
fund distribution platforms to identify all of the operational risks that may
affect the Fund or to develop processes and controls to completely eliminate
or mitigate their occurrence or effects. Recent geopolitical tensions may
increase the scale and sophistication of deliberate attacks, particularly those
from
nation-states or from entities with nation-state backing. The Fund cannot
control the cybersecurity plans and systems of its service providers, its
counterparties
or the issuers of securities in which the Fund invests. The
issuers of the Fund’s investments are likely to be
dependent on computers for their
operations
and require ready access to their
data and the
internet to conduct their business. Thus, cybersecurity incidents could also
affect issuers of the
Fund’s
investments,
leading to significant loss of value.
Emerging
Markets Risk
When
investing in emerging markets, the risks of investing in foreign securities are
heightened. Emerging markets have unique risks that are greater than, or
in
addition to, the risks associated with investing in developed markets because
emerging markets are generally smaller, less developed, less liquid and more
volatile
than the securities markets of the U.S. and other developed markets. There are
also risks of: greater political and economic uncertainties; an economy’s
dependence on revenues from particular commodities or on international aid or
development assistance; currency transfer restrictions; a limited number
of potential buyers for such securities, resulting in increased volatility and
limited liquidity for emerging market securities; trading suspensions and
other
restrictions on investment; delays and disruptions in securities clearing and
settlement procedures; and significant limitations on investor rights and
recourse.
The economies and political environments of emerging market countries tend to be
more unstable than those of developed countries, resulting in more
volatile rates of return than the developed markets and substantially greater
risk to investors. The governments of emerging market countries may also
be
more unstable and more likely to impose capital controls, nationalize a company
or industry, place restrictions on foreign ownership and on withdrawing
sale
proceeds of securities from the country, intervene in the financial markets,
and/or impose burdensome taxes that could adversely affect security prices.
Emerging
market countries often have less uniformity in accounting, auditing, financial
reporting and recordkeeping requirements and less reliable clearance
and
settlement, registration, and custodial procedures. In addition, there may be
less publicly available or less reliable information about issuers in emerging
markets
than would be available about issuers in more developed capital markets, which
can impede the sub-advisor’s ability to accurately evaluate foreign securities.
Such issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which U.S. companies
are subject. In certain emerging market countries, fraud and corruption may be
more prevalent than in developed market countries, and investor protections
may be more limited than those in other countries. It may be difficult to obtain
or enforce legal judgments against non-U.S. companies and non-U.S.
persons in foreign jurisdictions, either through the foreign judicial system or
through a private arbitration process. These matters have the potential
to
impact the Fund’s investment objective and performance.
Equity
Investments Risk
Equity
securities are subject to investment risk, issuer risk and market risk. In
general, the values of stocks and other equity securities fluctuate, and
sometimes widely
fluctuate, in response to changes in a company’s financial condition as well as
general market, economic and political conditions and other factors. The
Fund
may experience a significant or complete loss on its investment in an equity
security. In addition, stock prices may be particularly sensitive to rising
interest
rates, which increase borrowing costs and the costs of capital. The Fund may
invest in the following equity securities, which may expose the Fund to
the
following additional risks:
Prospectus
– Additional Information About the Fund9
■ |
Common
Stock Risk.
The value of a company’s common stock may fall as a result of factors
directly relating to that company, such as decisions made by its
management
or decreased demand for the company’s products or services. A stock’s
value may also decline because of factors affecting not just the
company,
but also companies in the same industry or sector. The price of a
company’s stock may also be affected by changes in financial markets that
are relatively
unrelated to the company, such as changes in interest rates, exchange
rates or industry regulation. Companies that pay dividends on their
common
stock generally only do so after they invest in their own business and
make required payments to bondholders and on other debt and preferred
stock.
Therefore, the value of a company’s common stock will usually be more
volatile than its bonds, other debt and preferred stock. Common stock
generally
is subordinate to preferred stock upon the liquidation or bankruptcy of
the issuing company. In the event of an issuer’s bankruptcy, there is
substantial
risk that there will be nothing left to pay common stockholders after
payments, if any, to bondholders and preferred stockholders have been
made. |
■ |
Depositary
Receipts Risk. The
Fund may invest in securities issued by foreign companies through ADRs.
These securities are generally subject to many of the same
risks of investing in the foreign securities that they evidence or into
which they may be converted, including, but not limited to, currency
exchange rate
fluctuations, political and financial instability in the home country of a
particular depositary receipt, less liquidity, more volatility, less
government regulation
and supervision and delays in transaction settlement. There may be an
imperfect correlation between the market value of depositary receipts and
the
underlying foreign securities. |
■ |
U.S.
Dollar-Denominated Foreign Stocks Traded on U.S. Exchanges
Risk. Foreign
(non-U.S.) companies that list their stocks on U.S. exchanges may be
exempt
from certain accounting and corporate governance standards that apply to
U.S. companies that list on the same exchange. Foreign stocks traded on
U.S.
exchanges transact and settle in U.S. dollars, but performance of these
stocks can be impacted by political and financial instability in the home
country of
a particular foreign company. To the extent the Fund invests
in U.S. dollar-denominated foreign stocks traded on U.S. exchanges,
delisting of these stocks
could impact the Fund‘s ability to transact in such securities and
could significantly impact their liquidity and market price. In addition,
the Fund would
have to seek other markets in which to transact in such securities which
would also increase the Fund’s costs. |
Foreign
Investing Risk
Non-U.S.
investments carry potential risks not associated with U.S. investments. Such
risks include, but are not limited to: (1) currency exchange rate fluctuations,
(2) political and financial instability, (3) less liquidity, (4) lack of uniform
accounting, auditing and financial reporting standards, (5) greater volatility;
(6) different government regulation and supervision of foreign banks, stock
exchanges, brokers and listed companies, and (7) delays in transaction
settlement
in some foreign markets. There may be very limited oversight of certain foreign
banks or securities depositories that hold foreign securities and currency,
and the laws of certain countries may limit the ability to recover such assets
if a foreign bank, depository, or their agents goes bankrupt. Additionally,
in certain markets, the Fund may not receive timely payment for securities or
other instruments it has delivered or receive delivery of securities
paid
for and may be subject to increased risk that the counterparty will fail to make
payments or delivery when due or default completely. To the extent the
Fund
invests a significant portion of its assets in securities of a single country or
region, it is more likely to be affected by events or conditions of that country
or
region. The Fund’s investment in a foreign issuer may subject the Fund to
regulatory, political, currency, security, economic and other risks associated
with that
country.
There
may be restrictions on the flow of international capital, including the possible
seizure or nationalization of the securities issued by non-U.S. issuers held
by
the Fund. In addition, the repatriation of investment income, capital or the
proceeds of sales of securities from certain of the countries may require
advance government
notification or authority, and if a deterioration occurs in a country’s balance
of payments, the country could impose temporary restrictions on foreign
capital remittances. The Fund also could be adversely affected by delays in, or
a refusal to grant, any required governmental approval for repatriation,
as
well as by the application to it of other restrictions on investment. Global
economic and financial markets have become increasingly interconnected and
conditions
(including recent volatility, terrorism, war and political instability) and
events (including natural disasters) in one country, region or financial market
may
adversely impact issuers in a different country, region or financial
market.
Geographic
Concentration Risk
From
time to time, based on market or economic conditions, the Fund may invest a
significant portion of its assets in the securities of issuers located in, or
with
significant economic ties to, a single country or geographic region, which could
increase the risk that economic, political, business, regulatory, diplomatic,
social and environmental conditions in that particular country or geographic
region may have a significant impact on the Fund’s performance. Investing
in such a manner could cause the Fund’s performance to be more volatile
than the performance of more geographically diverse funds. The economies
and financial markets of certain countries or regions can be highly
interdependent. Therefore, a decline in the economies or financial markets of
one
country or region may adversely affect the economies or financial markets of
another.
■ |
European
Securities Risk. The
Fund’s performance may be affected by political, social and economic
conditions in Europe, such as growth of economic output
(the gross national product
of the countries in the region),
the rate of inflation, the rate at which capital is reinvested into
European economies, the success
of governmental actions to reduce budget deficits, the resource
self-sufficiency of European countries,
interest rates in European countries, monetary
exchange rates between European countries,
and conflict between European countries. Most developed countries in
Western Europe are members
of the European Union (“EU”)
and many are also members of the Economic and Monetary Union (“EMU” or
“Eurozone”). European countries can
be significantly affected by the tight fiscal and monetary controls that
the EMU imposes on its members and with which candidates for EMU
membership
are required to comply. |
|
While
certain EU countries continue to use their own currency, Eurozone
countries use the Euro as their currency. Changes in imports or exports,
changes in governmental
or EU regulations on trade, changes in the exchange rate of the Euro and
the currencies of other EU countries which are not in the Eurozone,
the
threat of default or actual default by one or more EU member states on its
sovereign debt, and/or an economic recession in one or more EU member
states
may have a significant adverse effect on the economies of other EU member
states and their trading partners, including non-EU European countries.
A
breakup of the Eurozone, particularly a disorderly breakup, would pose
special challenges for the financial markets and could lead to exchange
controls and/or
market closures. The economies and markets of European countries are often
closely connected and interdependent, and events in one country in
Europe
can have an adverse impact on other European
countries. |
|
The
European financial markets have experienced and may continue to experience
volatility and adverse trends due to concerns relating to economic
downturns;
rising government debt levels and the possible default on government debt;
national unemployment in several European countries; public health
crises; political unrest; economic sanctions; inflation; energy crises;
the future of the Euro as a common currency; and war and military
conflict, such as
the Russian invasion of Ukraine. These events have affected the exchange
rate of the Euro and may continue to significantly affect European
countries. Responses
to financial problems by European governments, central banks, and others,
including austerity measures, interest rate rises and other reforms,
may
not produce the desired results, may result in social unrest and may limit
future growth and economic recovery or may have unintended consequences.
Many
European nations are susceptible to economic risks associated with high
levels of debt. Non-governmental issuers, and even certain governments,
have
defaulted on, or been forced to restructure, their debts, and other
issuers have faced difficulties obtaining credit or refinancing existing
obligations. A default
or debt restructuring by any European country could adversely impact
holders of that country’s debt and sellers of credit default swaps linked
to that country’s creditworthiness,
which may be located in other countries. Such a default or debt
restructuring could affect exposures to other European
|
10Prospectus
– Additional Information About the Fund
|
countries
and their companies as well. In addition, issuers have faced difficulties
obtaining credit or refinancing existing obligations, and financial
markets have
experienced extreme volatility and declines in asset values and liquidity.
Furthermore, certain European countries have had to accept assistance from
supranational
agencies such as the International Monetary Fund, the European Stability
Mechanism or others. There can be no assurance that any creditors
or
supranational agencies will continue to intervene or provide further
assistance, and markets may react adversely to any expected reduction in
the financial
support provided by these creditors. |
|
The
United Kingdom has withdrawn from the EU, and one or more other
countries may withdraw from the EU and/or abandon the Euro. These events
and actions
have affected, and may in the future affect, the value and exchange rate
of the Euro and may continue to significantly affect the economies of
every country
in Europe, including countries that do not use the Euro and non-EU member
states. The impact of these actions, especially if they occur in a
disorderly
fashion, is not clear but could be significant and far
reaching. |
|
The
national politics of European countries have been unpredictable and
subject to influence by disruptive political groups and ideologies.
European governments
may be subject to change and such countries may experience social and
political unrest. Unanticipated or sudden political or social developments
may result in sudden and significant investment losses. Russia’s war with
Ukraine has negatively impacted European economic activity. The
effects
on the economies of European countries of the Russia/Ukraine war and
Russia’s response to sanctions imposed by the U.S., the EU, UK and
others are
impossible to predict but have been and could continue to be significant
and have a severe adverse impact on the region, including significant
impacts on
the regional, European, and global economies and the markets for certain
securities and commodities, such as oil and natural gas. For example,
exports in
Eastern Europe have been disrupted for certain key commodities, pushing
certain commodity prices to record highs. Also, both wholesale energy
prices and
energy prices charged to consumers in Europe have increased
significantly. |
■ |
Japan
Investment Risk. The
Fund’s investments
in the securities of Japanese issuers,
mean that the
Fund is susceptible to changes in Japanese economic and political
conditions, the reliability of financial information available concerning
these issuers, and the legal, tax and regulatory environment surrounding
these
issuers. The Japanese economy,
which
is heavily dependent upon international trade,
may be adversely affected by global
competition,
trade tariffs, embargos,
boycotts and other government
interventions and protectionist
measures, excessive
regulation,
changes in international trade
agreements,
impacts
of the COVID-19 pandemic, including supply chain issues, the
economic conditions of its trading partners, the
performance
of the global
economy,
and
regional and global conflicts. The domestic Japanese economy faces several
concerns, including large government deficits,
a declining domestic population
and low birth rate, workforce shortages and inflation. Japan also has an
aging workforce and has experienced a significant population decline in
recent
years. Japan’s labor market appears to be undergoing fundamental
structural changes, as a labor market traditionally accustomed to lifetime
employment
adjusts to meet the need for increased labor mobility, which may adversely
affect Japan’s economic competitiveness. Japan’s financial system
faces
several concerns, including extensive cross-ownership by major
corporations, a changing corporate governance structure, and large
government deficits,
each of which may cause a slowdown of the Japanese economy.
In addition, the Japanese economic growth rate could be impacted by Bank
of Japan
monetary policies, rising interest rates, tax increases, budget deficits,
consumer confidence and volatility in the Japanese yen. The Japanese
government
tax and fiscal policies may also have negative impacts on the Japanese
economy. Currency fluctuations, which have been significant at times,
can
have a considerable impact on exports and the overall Japanese economy.
The
Japanese yen may be affected by currency volatility elsewhere in Asia,
especially
Southeast Asia. In addition, the yen has had a history of unpredictable
and volatile movements against the U.S. dollar.
Japanese intervention in the
currency markets could cause the value of the yen to fluctuate sharply and
unpredictably and could cause losses to investors. Japan is located in a
part of
the world that has historically been prone to natural disasters such as
earthquakes,
tsunamis, typhoons
and volcanic eruptions, which
may have a significant
impact on the business operations of Japanese companies in the affected
regions and Japan’s economy. Japan
also faces risks associated with climate
change and transitioning to a lower-carbon economy. Relations
with its neighbors, particularly China, North Korea, South Korea and
Russia, have at times
been strained due to territorial disputes, historical animosities and
defense concerns. Political tensions between Japan and its trading
partners could adversely
affect the economy, especially the export sector, and destabilize the
region as a whole. Japan is also heavily dependent on oil and other
commodity
imports, and higher commodity prices could therefore have a negative
impact on the Japanese economy. These and other factors could have a
negative
impact on the Fund’s performance and increase the volatility of an
investment in the Fund. |
Growth
Companies Risk
Growth
companies are those that are expected to have the potential for above-average or
rapid growth. Growth companies are expected to increase their earnings
at a certain rate. When these expectations are not met or decrease, the prices
of these stocks may decline, sometimes sharply, even if earnings showed
an absolute increase. The Fund’s investments in growth companies may be more
sensitive to company earnings and more volatile than the market in general
primarily because their stock prices are based heavily on future expectations.
If an assessment of the prospects for a company’s growth is incorrect,
then
the price of the company’s stock may fall or not approach the value placed on
it. Growth company stocks may lack the dividend yield that can cushion
stock
price declines in market downturns. Growth companies may have limited operating
histories and greater business risks, and their potential for profitability
may be dependent on regulatory approval of their products or regulatory
developments affecting certain sectors, which could have an adverse impact
upon growth companies’ future growth and profitability. Different investment
styles tend to shift in and out of favor, depending on market conditions
and
investor sentiment. The Fund’s growth style could cause it to underperform funds
that use a value or non-growth approach to investing or have a broader
investment
style.
High
Portfolio Turnover Risk
Portfolio
turnover is a measure of the Fund’s trading activity over a one-year
period. A portfolio turnover rate of 100% would indicate that the Fund
sold and replaced
the entire value of its securities holdings during the period. The Fund
may engage in active and frequent trading and may have a high portfolio
turnover
rate, which could increase the Fund’s transaction costs because of
increased broker commissions resulting from such transactions. These costs are
not reflected
in the Fund’s annual operating expenses or in the expense example, but
they can have a negative impact on performance and generate higher capital
gain distributions to shareholders than if the Fund had a low portfolio
turnover rate. Frequent trading by the Fund could also result in increased
realized
net capital gains, distributions of which are taxable to the Fund’s
shareholders when Fund shares are held in a taxable account (including net
short-term
capital gain distributions, which are taxable to them as ordinary
income).
Investment
Risk
An
investment in the Fund is not a deposit with a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government
agency. The Fund should not be relied upon as a complete investment
program. The share price of the Fund fluctuates, which means that when
you
sell your shares of the Fund, they could be worth less than what you paid
for them. Therefore, you may lose money by investing in
the Fund.
Issuer
Risk
The
value of, and/or the return generated by, a security may decline for a number of
reasons that directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer’s goods or services, as
well as the historical and prospective earnings of the issuer and the
value
of its assets. When the issuer of a security implements strategic initiatives,
including mergers, acquisitions and dispositions, there is the risk that the
market
response to such initiatives will cause the share price of the issuer’s
securities to fall. An individual security may be more volatile, and may perform
differently,
than the market as a whole.
Prospectus
– Additional Information About the Fund11
Market
Risk
The Fund
is subject to the risk that the securities markets will move down, sometimes
rapidly and unpredictably, based on overall economic conditions and other
factors, which may negatively affect the Fund’s performance. Equity securities
generally have greater price volatility than fixed-income securities,
although
under certain market conditions fixed-income securities may have comparable or
greater price volatility. During a general downturn in the securities
markets,
multiple asset classes may decline in value simultaneously. In some cases,
traditional market participants have been less willing to make a market in
some
types of debt instruments, which has affected the liquidity of those
instruments. During times of market turmoil, investors tend to look to the
safety of securities
issued or backed by the U.S. Treasury, causing the prices of these securities to
rise and the yields to decline. Reduced liquidity in fixed-income and
credit
markets may negatively affect many issuers worldwide. Prices in many financial
markets have increased significantly over the last decade, but there have
also
been periods of adverse market and financial developments and cyclical change
during that timeframe, which have resulted in unusually high levels of
volatility
in domestic and foreign financial markets that has caused losses for investors
and may occur again in the future, particularly if markets enter a period
of
uncertainty or economic weakness. Periods of unusually high volatility in the
financial markets and restrictive credit conditions, sometimes limited to a
particular
sector or geographic region, continue to recur. The value of a security may
decline due to adverse issuer-specific conditions or general market conditions
unrelated to a particular issuer, such as real or perceived adverse
geopolitical, regulatory, market, economic or other developments that may cause
broad
changes in market value, changes in the general outlook for corporate earnings,
changes in interest, currency or inflation rates, lack of liquidity in the
markets,
public perceptions concerning these developments or adverse market sentiment
generally. The value of a security may also decline due to factors that
affect a particular industry or industries, such as tariffs, labor shortages or
increased production costs and competitive conditions within an industry.
Changes
in the financial condition of a single issuer or market segment also can impact
the market as a whole.
Geopolitical
and other events, including war, terrorism, economic uncertainty, trade
disputes, pandemics, public health crises, natural disasters and related
events
have led, and in the future may continue to lead, to instability in world
economies and markets generally and reduced liquidity, which may adversely
affect
the value of your investment. Such market disruptions have caused, and may
continue to cause, broad changes in market value, negative public perceptions
concerning these developments, a reduction in the willingness and ability of
some lenders to extend credit, difficulties for some borrowers in obtaining
financing on attractive terms, if at all, and adverse investor sentiment or
publicity. Changes in value may be temporary or may last for extended
periods.
Adverse market events may also lead to increased shareholder redemptions, which
could cause the Fund to sell investments at an inopportune time to
meet redemption requests by shareholders and may increase the Fund’s portfolio
turnover, which could increase the costs that the Fund incurs and lower
the
Fund’s performance. Even when securities markets perform well, there is no
assurance that the investments held by the Fund will increase in value along
with
the broader market.
Policy
changes by the U.S. government and/or Federal Reserve and political events
within the U.S. and abroad, such as changes in the U.S. presidential
administration
and Congress, the U.S. government’s inability at times to agree on a long-term
budget and deficit reduction plan, the threat or
occurrence of
a federal
government shutdown and threats or
the occurrence of a failure
to increase the federal government’s debt limit,
which could result in a default on the government’s
obligations, may affect investor and consumer confidence and may adversely
impact financial markets and the broader economy, perhaps suddenly
and to a significant degree. The severity or duration of adverse economic
conditions may also be affected by policy changes made by governments
or
quasi-governmental organizations. Global economies and financial markets are
becoming increasingly interconnected, which increases the possibility of
many
markets being affected by events in a single country or events affecting a
single or small number of issuers.
Markets
and market participants are increasingly reliant upon both publicly available
and proprietary information data systems. Data imprecision, software or
other
technology malfunctions, programming inaccuracies, unauthorized use or access,
and similar circumstances may impair the performance of these systems
and may have an adverse impact upon a single issuer, a group of issuers, or the
market at large. In certain cases, an exchange or market may close or
issue
trading halts on either specific securities or even the entire market, which may
result in the Fund being, among other things, unable to buy or sell certain
securities
or financial instruments or accurately price its investments. These fluctuations
in securities prices could be a sustained trend or a drastic movement.
The
financial markets generally move in cycles, with periods of rising prices
followed by periods of declining prices. The value of your investment may
reflect these
fluctuations.
■ |
Recent
Market Events Risk.
Both U.S. and international markets have experienced significant
volatility in recent months and years. As a result of such volatility,
investment returns may fluctuate significantly. Moreover, the risks
discussed herein associated with an investment in the Fund may be
increased. Deteriorating
economic fundamentals may increase the risk of default or insolvency of
particular issuers, negatively impact market value, increase market
volatility,
cause credit spreads to widen, reduce bank balance sheets and cause
unexpected changes in interest rates. Any of these could cause an increase
in
market volatility, reduce liquidity across various sectors or markets or
decrease confidence in the markets. Historical patterns of correlation
among asset classes
may break down in unanticipated ways during times of high volatility,
disrupting investment programs and potentially causing
losses. |
|
Although
interest rates were unusually low in recent years in the U.S. and
abroad, in 2022, the U.S. Federal Reserve and certain foreign central
banks began to
raise interest rates as part of their efforts to address rising inflation.
In addition, ongoing inflation pressures could continue to cause an
increase in interest
rates and/or negatively impact issuers. It is difficult to accurately
predict the pace at which interest rates may increase, the timing,
frequency or magnitude
of any such increases in interest rates, or when such increases might
stop. Additionally, various economic and political factors, such as rising
inflation
rates, could cause the Federal Reserve or other foreign banks to change
their approach in the future as such actions may result in an economic
slowdown
both in the U.S. and abroad. Unexpected increases in interest rates could
lead to market volatility or reduce liquidity in certain sectors of the
market.
Also, regulators have expressed concern that rate increases may cause
investors to sell fixed income securities faster than the market can
absorb them,
contributing to price volatility. Over the longer term, rising interest
rates may present a greater risk than has historically been the case due
to the prior
period of relatively low rates and the effect of government fiscal and
monetary policy initiatives and potential market reaction to those
initiatives, or their
alteration or cessation. It is difficult to predict the impact on various
markets of significant rate increases or other significant policy
changes. |
|
In
March 2023, the shutdown of certain financial institutions in
the U.S. and questions regarding the viability of other financial
institutions raised economic concerns
over disruption in the U.S. and global banking systems. There can be no
certainty that the actions taken by the U.S. or foreign governments will
be
effective in mitigating the effects of financial institution failures on
the economy and restoring public confidence in the U.S. and global banking
systems. |
|
Some
countries, including the U.S., have in recent years adopted more
protectionist trade policies. Slowing global economic growth; the rise in
protectionist trade
policies; changes to international trade agreements; risks associated with
the trade agreement between the United Kingdom and the European Union
and
the risks associated with ongoing trade negotiations with China; political
or economic dysfunction within some nations, including major producers of
oil;
and dramatic changes in commodity and currency prices could have adverse
effects that cannot be foreseen at the present time. Tensions, war
or open conflict
between nations, such as between Russia and Ukraine, in the Middle East or
in eastern Asia could affect the economies of many nations, including
the
United States. The duration of ongoing hostilities and any sanctions and
related events cannot be predicted. Those events present material
uncertainty and
risk with respect to markets globally and the performance of the Fund and
its investments or operations could be negatively
impacted. |
|
Regulators
in the U.S. have proposed and recently adopted a number of changes to
regulations involving the markets and issuers, some of which apply to
the
Fund. The full effect of various newly-adopted regulations is not
currently known. Additionally, it is not clear whether the proposed
regulations will be adopted.
However, due to the broad scope of the new and proposed regulations,
certain changes could limit the Fund’s ability to pursue its investment
|
12Prospectus
– Additional Information About the Fund
|
strategies
or make certain investments, or may make it more costly for the Fund to
operate, which may impact performance. Further, advancements in
technology
may also adversely impact market movements and liquidity and may affect
the overall performance of the Fund. For example, the advanced
development
and increased regulation of artificial intelligence may impact the economy
and the performance of the Fund. As artificial intelligence is used
more
widely, the value of the Fund’s holdings may be impacted, which could
impact the overall performance of the
Fund. |
|
High
public debt in the U.S. and other countries creates ongoing systemic and
market risks and policymaking uncertainty. There is no assurance that the
U.S.
Congress will act to raise the nation’s debt ceiling; a failure to do so
could cause market turmoil and substantial investment risks that cannot
now be fully
predicted. Unexpected political, regulatory and diplomatic events within
the U.S. and abroad may affect investor and consumer confidence and may
adversely
impact financial markets and the broader
economy. |
|
Certain
illnesses spread rapidly and have the potential to significantly and
adversely affect the global economy. The impact of epidemics and/or
pandemics that
may arise in the future could negatively affect the economies of many
nations, individual companies and the global securities and commodities
markets,
including their liquidity, in ways that cannot necessarily be foreseen at
the present time and could last for an extended period of time. China’s
economy,
which has been sustained through debt-financed spending on housing and
infrastructure, appears to be experiencing a significant slowdown and
growing
at a lower rate than prior years. Due to the size of China’s economy, such
a slowdown could impact financial markets and the broader economy.
|
|
Economists
and others have expressed increasing concern about the potential effects
of global climate change on property and security values. Impacts
from
climate change may include significant risks to global financial assets
and economic growth. A rise in sea levels, an increase in powerful
windstorms and/or
a climate-driven increase in sea levels or flooding could cause coastal
properties to lose value or become unmarketable altogether. Certain
issuers, industries
and regions may be adversely affected by the impacts of climate change,
including on the demand for and the development of goods and services
and related production costs, and the impacts of legislation, regulation
and international accords related to climate change, as well as any
indirect consequences
of regulation or business trends driven by climate change. Regulatory
changes and divestment movements tied to concerns about climate
change
could adversely affect the value of certain land and the viability of
industries whose activities or products are seen as accelerating climate
change. Losses
related to climate change could adversely affect, among others, corporate
issuers and mortgage lenders, the value of mortgage-backed securities,
the
bonds of municipalities that depend on tax or other revenues and tourist
dollars generated by affected properties, and insurers of the property
and/or of corporate,
municipal or mortgage-backed securities. |
Market
Timing
Risk
The
Fund is subject to the risk of market timing activities by investors due to the
nature of its investments, which requires the Fund in certain instances to fair
value
certain of its investments. Some investors may engage in frequent short-term
trading in the Fund to take advantage of any price differentials that may
be
reflected in the NAV of the Fund’s shares. Frequent trading by Fund shareholders
poses risks to other shareholders in the Fund, including (i) the dilution of
the
Fund’s NAV, (ii) an increase in the Fund’s expenses, and (iii) interference with
the ability to execute efficient investment strategies. While the Manager
monitors
trading in the Fund, there is no guarantee that it can detect all market timing
activities.
Micro-Capitalization
Companies Risk
Micro-capitalization
companies are subject to substantially greater risks of loss and price
fluctuations, sometimes rapidly and unpredictably, because their earnings
and revenues tend to be less predictable. In addition, some companies may
experience significant losses. Since micro-capitalization companies may
not
have an operating history, product lines, or financial resources, their share
prices also tend to be more volatile and their markets less liquid than
companies
with larger market capitalizations, and they can be sensitive to changes in
overall economic conditions, interest rates, borrowing costs and earnings.
The shares of micro-capitalization companies tend to trade less frequently than
those of larger, more established companies, which can adversely affect
the pricing of these securities and the future ability to sell these securities.
Micro-capitalization companies face greater risk of business failure, which
could
increase the volatility of the Fund’s portfolio.
Mid-Capitalization
Companies Risk
Investments
in mid-capitalization companies generally involve greater risks and the
possibility of greater price volatility, which at times can be rapid and
unpredictable,
than investments in larger, more established companies. Mid-capitalization
companies often have narrower commercial markets and more limited
operating history, product lines, and managerial and financial resources than
larger, more established companies. As a result, performance can be more
volatile and they may face greater risk of business failure, which could
increase the volatility of the Fund’s portfolio. Generally, the smaller the
company size,
the greater these risks. Additionally, mid-capitalization companies may have
less market liquidity than large-capitalization companies, and they can be
sensitive
to changes in overall economic conditions, interest rates, borrowing costs and
earnings.
Other
Investment Companies Risk
To
the extent that the Fund invests in shares of other registered investment
companies, the Fund will indirectly bear the fees and expenses, including,
for example,
advisory and administrative fees, charged by those investment companies in
addition to the Fund’s direct fees and expenses. If the Fund invests in
other
investment companies, the Fund may receive distributions of taxable gains from
portfolio transactions by that investment company and may recognize taxable
gains from transactions in shares of that investment company, which could be
taxable to the Fund’s shareholders when distributed to them. The Fund
must
rely on the investment company in which it invests to achieve its investment
objective. If the investment company fails to achieve its investment
objective,
the value of the Fund’s investment may decline, adversely affecting
the Fund’s performance. To the extent the Fund invests in other
investment companies
that invest in equity securities, fixed-income securities and/or foreign
securities, or that track an index, the Fund is subject to the risks
associated with
the underlying investments held by the investment company or the index
fluctuations to which the investment company is subject. The Fund will be
subject
to the risks associated with investments in those companies, including but not
limited to the following:
■ |
Government
Money Market Funds Risk. Investments
in government money market funds are subject to interest rate risk, credit
risk, and market risk. Interest
rate risk is the risk that rising interest rates could cause the Fund’s
investment to lose value. A decline in short-term interest rates or a low
interest rate
environment would lower a government money market fund’s yield and the
return on the Fund’s investment. Credit risk is the risk that the issuer,
guarantor
or insurer of an obligation, or the counterparty to a transaction, may
fail or become less able or unwilling, to make timely payment of interest
or principal
or otherwise honor its obligations, or that it may default completely.
There is the risk that the issuers or guarantors of securities owned by a
government
money market fund, including securities issued by U.S. Government
agencies, which are not backed by the full faith and credit of the U.S.
Government,
will default on the payment of principal or interest or the obligation to
repurchase securities from the government money market fund. This
could
cause the government money market fund’s NAV to decline below $1.00 per
share, which would cause the Fund’s investment to lose value. The SEC
has
proposed rule amendments that, if adopted, among other changes, may
require government money market funds to convert to a floating net asset
value
per share in a negative interest rate
environment. |
Redemption
Risk
The Fund
may experience periods of heavy redemptions that could cause the Fund to sell
assets at inopportune times or at a loss or a depressed value. Heavy
redemptions,
whether by a few large investors or many smaller investors, could hurt the
Fund’s performance. Redemption risk is greater to the extent that one
or
more investors or intermediaries control a large percentage of investments in
the Fund, have short investment horizons, or have unpredictable cash flow
needs.
The risk of loss is also greater if redemption requests are frequent, occur in
times of overall market turmoil or declining prices for the securities sold, or
Prospectus
– Additional Information About the Fund13
when
the securities the Fund wishes to sell are illiquid. Certain securities that
were liquid when purchased may later become illiquid, particularly in times of
overall
economic distress. Redemption
risk is heightened if the
Fund invests in emerging market securities, which are generally less liquid than
the securities of U.S.
and other developed markets.
During periods of heavy redemptions, the Fund may borrow funds through the
interfund credit facility, or from a bank line of
credit, which may increase costs. The sale of assets to meet redemption requests
may create net capital gains or losses, which could cause the Fund to have
to
distribute substantial capital gains.
Securities
Lending Risk
The
Fund may lend its portfolio securities
to brokers, dealers and financial institutions in order to obtain additional
income. Borrowers of the Fund’s securities provide
collateral either in the form of cash, which the Fund reinvests in securities or
in the form of non-cash collateral consisting of securities issued or
guaranteed
by the U.S. government or one of its agencies or instrumentalities. The Fund
will be responsible for the risks associated with the investment of cash
collateral, including any collateral invested in an affiliated government money
market fund. The Fund may lose money on its investment of cash collateral
or
may fail to earn sufficient income on its investment to cover its payment to the
borrower of a pre-negotiated fee or “rebate” for the use of that cash
collateral
in connection with the loan. The Fund could also lose money due to a decline in
the value of non-cash collateral. In addition, delays may occur in the
recovery
of securities from borrowers, which could interfere with the Fund’s ability to
vote proxies or to settle transactions or could result in increased costs.
Moreover,
if the borrower becomes subject to insolvency or similar proceedings, the Fund
could incur delays in its ability to enforce its rights in its collateral.
There
also is a risk that a borrower may default on its obligation to return loaned
securities at a time when the value of the Fund’s collateral is inadequate.
Although
the Fund’s securities lending agent may indemnify the Fund against that risk, it
is also possible that the securities lending agent will be unable to
satisfy
its indemnification obligations. In any case in which the loaned securities are
not returned to the Fund before an ex-dividend date, whether or not due
to
a default by the borrower, the payment in lieu of the dividend that the Fund
receives from the securities’ borrower would not be treated as a dividend for
federal
income tax purposes and thus would not qualify for treatment as “qualified
dividend income” (as described under “Distributions and Taxes – Taxes”
below).
Securities
Selection Risk
Securities
selected for the Fund may decline substantially in value or may not perform to
expectations. Judgments about the attractiveness, value and anticipated
price movements of a security or asset class may be incorrect, and there is no
guarantee that securities will perform as anticipated. This could result
in the Fund’s underperformance compared to other funds with similar investment
objectives.
Small-Capitalization
Companies Risk
Investments
in small-capitalization companies generally involve greater risks and the
possibility of greater price volatility, which at times can be rapid and
unpredictable,
than investments in larger capitalization and more established companies.
Small-capitalization companies often have narrower commercial markets
and more limited operating history, product lines, and managerial and financial
resources than larger, more established companies. As a result, performance
of small-capitalization companies can be more volatile and these companies may
face greater risk of business failure, which could increase the volatility
of the Fund’s portfolio. Generally, the smaller the company size, the
greater these risks. Additionally, small-capitalization companies may have less
market
liquidity than larger capitalization companies, and they can be sensitive to
changes in overall economic conditions, interest rates, borrowing costs and
earnings.
Valuation
Risk
This
is the risk that a security may be valued at a price different from the price at
which it can be sold. This risk may be especially pronounced for investments
that
may be illiquid or may become illiquid and for securities that trade in
relatively thin markets and/or markets that experience extreme volatility. The
valuation
of the Fund’s investments in an accurate and timely manner may be impacted by
technological issues and/or errors by third party service providers,
such
as pricing services or accounting agents. If market conditions make it difficult
to value certain investments, SEC rules and applicable accounting protocols
may
require the valuation of these investments using more subjective methods, such
as fair-value methodologies. Using fair value methodologies to price
investments
may result in a value that is different from an investment’s most recent closing
price and from the prices used by others for the same investment. Investors
who purchase or redeem Fund shares on days when the Fund is holding fair-valued
securities may receive fewer or more shares, or lower or higher redemption
proceeds, than they would have received if the securities had not been fair
valued or a different valuation methodology had been used. The value
of
foreign securities, certain fixed-income securities and currencies, as
applicable, may be materially affected by events after the close of the markets
on which they
are traded, but before the Fund determines its NAV.
Value
Stocks Risk
Investments
in value stocks are subject to the risk that their intrinsic or full value may
never be realized by the market, that a stock judged to be undervalued
may
be appropriately priced, or that their prices may decline. This may result in
the value stocks’ prices remaining undervalued for extended periods of time
and
they may not ever realize their intrinsic or full value. While the Fund’s
investments in value stocks seek to limit potential downside price risk over
time, value
stock prices still may decline substantially. In addition, the Fund may produce
more modest gains as a trade-off for this potentially lower risk. Different
investment
styles tend to shift in and out of favor, depending on market conditions and
investor sentiment. The Fund’s performance also may be affected adversely
if value stocks become unpopular with, or lose favor among, investors. The
Fund’s value style could cause it to underperform funds that use a growth
or non-value approach to investing or have a broader investment
style.
Additional
Information About Performance Indices
The
Fund’s performance is compared to the MSCI®
EAFE Index (Net) and the MSCI®
ACWI ex USA Small Cap Index. Set forth below is additional information
regarding
the indices to which the Fund’s performance is compared.
■ |
The
MSCI®
EAFE Index (Net) is designed to represent the performance of large- and
mid-capitalization securities across 21 developed markets countries,
including
countries in Europe, Australasia and the Far East, and excluding the U.S.
and Canada. It covers approximately 85% of the free float-adjusted
market
capitalization in each country. The MSCI® EAFE Index (Net) returns
reflect invested dividends net of withholding taxes, but reflect no
deduction for fees,
expenses, or other taxes. |
■ |
The
MSCI®
ACWI (All Country World Index) ex USA Small Cap Index (Net) is a market
capitalization-weighted index designed to measure the investable
equity
market performance for global investors of small cap stocks in developed
and emerging markets, excluding the United
States. |
Notices Regarding Index
Data
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 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.
14Prospectus
– Additional Information About the Fund
Fund
Management
The
Manager
AMERICAN
BEACON ADVISORS, INC. (the “Manager”)
serves as the Manager and administrator of the Fund. The Manager, located at 220
East Las Colinas
Boulevard, Suite 1200, Irving, Texas 75039, is an indirect wholly-owned
subsidiary of
Resolute Topco,
Inc. (“Topco”),
which is owned primarily by various
institutional investment funds that are managed by financial institutions and
other investment advisory firms. No owner of Topco owns 25% or more of
the outstanding equity or voting interests of Topco.
The
Manager was organized in 1986 to provide investment management, advisory, and
administrative services. The Manager is registered as an investment adviser
under the Advisers Act. The Manager, on behalf of the Fund, has filed a notice
claiming the CFTC Regulation 4.5 exclusion from registration as a CPO
under
the Commodity Exchange Act, and the Manager is also exempt from registration as
a commodity trading advisor under CFTC Regulation 4.14(a)(8) with respect
to the Fund.
For
the fiscal year ended October 31, 2023,
the Fund paid aggregate management fees to the Manager and investment advisory
fees to its sub-advisor of 0.74%
of the Fund’s average daily net assets, net of any waivers and recoupments of
management fees and sub-advisory fees.
As
compensation for services provided by the Manager in connection with securities
lending activities conducted by the Fund,
the lending Fund pays to the Manager,
with respect to cash collateral posted by borrowers, a fee of 10% of the net
monthly investment
income (the income
earned in the form of interest, dividends
and realized capital gains from
the investment of cash collateral, plus
any negative rebate fees paid by borrowers, less the rebate
amount paid to borrowers
as
well as
related expenses) and,
with respect to collateral
other than cash, a fee up to 10% of loan
fees
and demand premiums paid by borrowers.
The
SEC has granted exemptive
relief that permits the Fund to invest cash collateral received from securities
lending transactions in shares of one or more private
or registered investment companies managed by the Manager.
As
of the date of this Prospectus, the Fund intends to engage in securities lending
activities.
A
discussion of the Board’s consideration and approval of the Management Agreement
between the Fund
and the Manager and the Investment Advisory Agreement among
the Trust, on behalf of the Fund,
the sub-advisor and the Manager is available in the Fund’s
Annual Shareholder Report for the fiscal year ended October
31, 2023.
That report also includes a discussion of the Board’s consideration and approval
of the renewal of a Management Agreement previously
in effect for the Fund. A discussion of the Board’s consideration and
approval of the renewal of an Investment Advisory Agreement previously in
effect
for the Fund is available in the Fund’s Semi-Annual Shareholder Report for the
period ended April 30, 2023.
The
Manager has contractually agreed to waive fees and/or reimburse expenses of the
following share classes of the Fund to the extent that Total Annual Fund
Operating Expenses exceed a percentage of that class’s average daily net assets
(excluding taxes, interest, brokerage commissions, acquired fund fees
and
expenses, securities lending fees, expenses associated with securities sold
short, litigation, and other extraordinary expenses) through December
31, 2025 as
follows:
|
|
| |
American
Beacon Fund |
Y
Class |
R5
Class |
Investor
Class |
American
Beacon EAM International Small Cap Fund |
1.10% |
0.89% |
1.30% |
The
contractual expense reimbursement and
fee waiver by the Manager can
be changed or terminated only in the discretion and with the approval of a
majority
of the Fund’s Board of Trustees. The Manager will itself waive fees and/or
reimburse expenses of the Fund to maintain the contractual expense ratio
caps
for each applicable class of shares or make arrangements with other service
providers to do so. The Manager may also, from time to time, voluntarily
waive
fees and/or reimburse expenses of the Fund. The Board has approved a policy
whereby the Manager may seek repayment for any contractual or voluntary
fee waivers or expense reimbursements if reimbursement to the Manager (a) occurs
within three years from the date of the Manager’s waiver/reimbursement
and (b) does not cause the Total Annual Fund Operating Expenses of a class to
exceed the lesser of the contractual percentage limit in effect
at the time of the waiver/reimbursement or the time of
recoupment.
The
Sub-Advisor
Set
forth below is a brief description of the sub-advisor and the portfolio managers
with joint and primary responsibility for the day-to-day management of
the
Fund. The Fund’s SAI provides additional information about the portfolio
managers, including other accounts they manage, their ownership in the Fund
and
their compensation.
EAM
Global Investors LLC (“EAM’’),
215 Highway 101, Suite 216, Solana Beach, CA 92075, is a registered investment
advisor and serves as the sub-advisor to
the Fund. EAM is a Delaware Limited Liability Company and a majority-owned
subsidiary of EAM Investors, LLC (“EAM Investors”). As of December
31, 2023,
EAM, together with EAM Investors, had approximately $2.3 billion
in assets under management.
The
Trust, on behalf of the Fund, and the Manager have entered into an Investment
Advisory Agreement with EAM pursuant to which the Fund has agreed to
pay
EAM an annualized sub-advisory fee that is calculated and accrued daily based on
the Fund’s average daily net assets equal to 0.40% on the first $1 billion,
0.35% on the next $1 billion, and 0.325% on the Fund’s assets in excess of $2
billion.
Travis
Prentice
Mr. Prentice is CEO and Chief Investment Officer of EAM Investors, a firm he
co-founded in 2007. In addition, he is Portfolio Manager for EAM’s
US and Global strategies, as well as an analyst across all EAM’s strategies.
Prior to founding EAM, Travis was a Partner, Managing Director and Portfolio
Manager
with Nicholas-Applegate Capital Management where he had lead portfolio
management responsibilities for their Micro and Ultra Micro Cap investment
strategies and a senior role in the firm’s US Micro/Emerging Growth team. He has
25 years of institutional investment experience specializing in momentum-based
strategies. He holds an MBA from San Diego State University and a BA in
Economics and a BA in Psychology from the University of Arizona.
Joshua
Moss
Mr. Moss is a Managing Director and Portfolio Manager of EAM Investors, a firm
he co-founded in 2007. Mr. Moss is a Portfolio Manager for EAM’s
non-US strategies, as well as an analyst across all strategies managed by EAM
Investors. Prior to founding EAM Investors, he was a Vice President and
Equity
Analyst at Nicholas-Applegate Capital Management where he served on the firm’s
US Micro/Emerging Growth Team with primary research responsibilities
for the Micro Cap and Ultra Micro Cap investment strategies. Prior to joining
the US Micro/Emerging team, Mr. Moss was assigned to the firm’s Global
Select team. During his tenure with the Global Select strategy, his duties
included co-portfolio management and research head of the Global Consumer
Discretionary Sector. Previously, Mr. Moss was with Credit Suisse First Boston
as a Vice President in equity sales and investment banking. He has 22
years
of direct investment experience. He holds an MBA from the Anderson School of
Management at the University of California, Los Angeles and a BA from
the
University of California, San Diego.
Prospectus
– Fund Management15
John
Scripp
Mr. Scripp is a Managing Director and Portfolio Manager for EAM’s non-US
strategies and is an analyst across all investment strategies managed
by
EAM Investors. Prior to his portfolio manager position, Mr. Scripp served as a
research analyst with EAM Investors. Before joining the firm at its inception in
2007,
he had prior research experience at Nicholas-Applegate Capital Management
working with the US Micro/Emerging Growth investment team. Mr. Scripp
has
15 years of experience in the institutional investment business. He holds a BA
in Economics from the University of Wisconsin, Madison.
Valuation
of Shares
The
price of the Fund’s shares is based on its NAV. The Fund’s NAV per
share is computed by adding total assets, subtracting all of the Fund’s
liabilities, and dividing
the result by the total number of shares outstanding.
The
NAV per share of each class of the Fund’s shares is determined based on a pro
rata allocation of the Fund’s investment income, expenses and total capital
gains
and losses. The Fund’s NAV per share is determined each business day as of the
regular close of trading on the NYSE, which is typically 4:00 p.m. Eastern
Time. However, if trading on the NYSE closes at a time other than 4:00 p.m.
Eastern Time, the Fund’s NAV per share typically would still be determined
as of the regular close of trading on the NYSE. The Fund does not price its
shares on days that the NYSE is closed. Foreign exchanges may permit
trading
in foreign securities on days when the Fund is not open for business, which may
result in the value of the Fund’s portfolio investments being affected
at
a time when you are unable to buy or sell shares.
Equity
securities and certain derivative instruments that are traded on an exchange are
valued based on market value. Certain derivative instruments (other than
short-term securities) usually are valued on the basis of prices provided by a
pricing service. The price of debt securities generally is determined using
pricing
services or quotes obtained from broker/dealers who may consider a number of
inputs and factors, such as comparable characteristics, yield curve,
credit
spreads, estimated default rates, coupon rates, underlying collateral and
estimated cash flow. Investments in other mutual funds are valued at the
closing
NAV per share of the mutual funds on the day of valuation. Equity securities,
including shares of closed-end funds and ETFs, are valued at the last sale
price
or official closing price.
The
valuation of securities traded on foreign markets and certain fixed-income
securities will generally be based on prices determined as of the earlier
closing time
of the markets on which they primarily trade, unless a significant event has
occurred. When the Fund holds securities or other assets that are denominated
in a foreign currency, the exchange rates as of 4:00 p.m. Eastern Time will
normally be used.
Rule
2a-5 under the Investment Company Act establishes requirements for determining
fair value in good faith for purposes of the Investment Company Act,
including
related oversight and reporting requirements. The rule also defines when market
quotations are “readily available” for purposes of the Investment Company
Act, the threshold for determining whether a Fund must fair value a
security.
Among
other things, Rule 2a-5 permits the Fund’s board to designate the Fund’s primary
investment adviser as “valuation designee” to perform the Fund’s fair
value determinations subject to board oversight and certain reporting and other
requirements intended to ensure that the registered investment company’s
board receives the information it needs to oversee the investment adviser’s fair
value determinations. The Board has designated the Manager as valuation
designee under Rule 2a-5 to perform fair value functions in accordance with the
requirements of Rule 2a-5.
Securities
may be valued at fair value, as determined in good faith and pursuant to the
Manager’s procedures. For example, fair value pricing will be used when
market quotations are not readily available or reliable, as determined by the
Manager, such as for fixed income securities and when: (i) trading for a
security
is restricted or stopped; (ii) a security’s trading market is closed (other than
customary closings); or (iii) a security has been de-listed from a national
exchange.
A security with limited market liquidity may require fair value pricing if the
Manager determines that the available price does not reflect the security’s
true market value. In addition, if a significant event that the Manager
determines to affect the value of one or more securities held by the Fund
occurs
after the close of a related exchange but before the determination of the Fund’s
NAV per share, fair value pricing may be used on the affected security
or
securities. Securities of small-capitalization companies are also more likely to
require a fair value determination using these procedures because they are
more
thinly traded and less liquid than the securities of larger capitalization
companies. Securities may be fair valued as a result of significant events
occurring after
the close of the foreign markets in which it invests. In addition, the Fund may
invest in illiquid securities requiring these procedures.
Attempts
to determine the fair value of securities introduce an element of subjectivity
to the pricing of securities. As a result, the price of a security determined
through fair valuation techniques may differ from the price quoted or published
by other sources and may not accurately reflect the market value of
the security when trading resumes. If a reliable market quotation becomes
available for a security formerly valued through fair valuation techniques, the
Manager
compares the new market quotation to the fair value price to evaluate the
effectiveness of the Fund’s
fair valuation procedures. You may view the Fund’s
most recent NAV per share at www.americanbeaconfunds.com by clicking on ‘‘Quick
Links’’ and then ‘‘Daily NAVs.’’
About
Your Investment
Choosing
Your Share Class
The
Fund offers various classes of shares. Each share class of the Fund represents
an investment in the same portfolio of securities for that Fund, but each class
has
its own expense structure and combination of purchase restrictions and ongoing
fees, allowing you to choose the class that best fits your
situation.
Factors
you should consider when choosing a class of shares include:
■ |
How
long you expect to own the shares; |
■ |
How
much you intend to invest; |
■ |
Total
expenses associated with owning shares of each
class; |
■ |
Whether
you plan to take any distributions in the near future;
and |
■ |
Availability
of share classes. |
Each
investor’s financial considerations are different. You should speak with your
financial professional to help you decide which share class is best for
you.
Purchase
and Redemption of Shares
Eligibility
The
Y Class, R5 Class, and Investor Class shares offered in this Prospectus are
available to eligible investors who meet the minimum initial investment.
American
Beacon Funds do not accept accounts registered to foreign individuals or
entities, including foreign correspondent accounts. The Fund does not
conduct
operations and is not offered for purchase outside of the United
States.
Subject
to your eligibility, as described below, you may invest in the Fund through
intermediary organizations, such as broker-dealers, insurance companies,
plan
sponsors, third party administrators, and retirement plans. As described below,
the Manager may allow certain individuals to invest directly in the Fund in
its
sole discretion.
16Prospectus
– About Your Investment
If
you invest directly with the Fund, the fees and policies with respect to the
Fund’s shares that are outlined in this Prospectus are set by the Fund. The
Manager
and the Fund are not responsible for determining the suitability of the Fund or
a share class for any investor.
If
you invest through a financial intermediary, most of the information you will
need for managing your investment will come from your financial intermediary.
This
includes information on how to buy, sell and exchange shares of the Fund. If you
establish an account through a financial intermediary, the investment
minimums
described in this section may not apply. Investors investing in the Fund
through a financial intermediary should consult with their financial
intermediary
to ensure they obtain all information regarding the differences between
available share classes. Your broker-dealer or financial intermediary also
may
charge fees that are in addition to those described in this Prospectus. Please
contact your intermediary for information regarding investment minimums,
how
to purchase and redeem shares and applicable fees.
Minimum
Investment Amount by Share Class
|
|
| |
|
New
Account |
Existing
Account |
Share
Class |
Minimum
Initial Investment Amount |
Purchase/Redemption
Minimum by Check/ACH/Exchange |
Purchase/Redemption
Minimum by Wire |
Investor |
$2,500 |
$50 |
$250 |
Y |
$100,000 |
$50 |
None |
R5 |
$250,000 |
$50 |
None |
The
Manager may allow a reasonable period of time after opening an account for a Y
Class or R5 Class investor to meet the initial investment requirement. In
addition,
for investors such as trust companies and financial professionals who make
investments for a group of clients, the minimum initial investment can be
met
through aggregated purchase orders for more than one client.
Opening
an Account
You
may open an account through a retirement plan, an investment professional, a
broker-dealer, or other financial intermediary. Please contact your financial
intermediary
for more information on how to open an account. Shares you purchase through your
broker-dealer will normally be held in your account with that
firm.
Direct
mutual fund accounts are not available to new shareholders. Existing direct
mutual fund account shareholders may continue to buy or sell shares through
their existing direct mutual fund accounts, but will not be able to open new
direct mutual fund accounts. The Manager may allow the following individuals
or entities to open new direct mutual fund accounts in its sole discretion: (i)
corporate accounts, (ii) employees of the Manager, or its direct parent
company,
Resolute Investment Managers, Inc., and its affiliates and subsidiaries, (iii)
employees of a sub-advisor to a fund in the American Beacon Funds Complex,
(iv) members of the Board, and
(v) members
of the Manager’s Board of Directors.
To
help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify,
and record
information that identifies each person who opens an account. When you open an
account, you will be asked for information that will allow the Fund or
your financial institution to identify you. Non-public corporations and other
entities may be required to provide articles of incorporation, trust or
partnership agreements,
and taxpayer identification numbers on the account or other documentation. The
Fund is required by law to reject your new account application if
the required identifying information is not provided.
The Fund
reserves the right to liquidate a shareholder’s account at the current day’s NAV
per share and remit proceeds via check if the Fund or a financial institution is
unable to verify the shareholder’s identity within three days of account
opening.
Purchase
Policies
Shares
of the Fund are offered and purchase orders are typically accepted until 4:00
p.m. Eastern Time or the close of the NYSE (whichever comes first) on
each
day on which the NYSE is open for business. If a purchase order is received by
the Fund in good order prior to the Fund’s deadline, the purchase price
will
be the NAV per share next determined on that day. A purchase order is considered
to be received in good order when it complies with all of the Fund’s
applicable
policies. If a purchase order is received in good order after the applicable
deadline, the purchase price will be the NAV per share of the following
day
that the Fund is open for business. Shares of the Fund will only be issued
against full payment, as described more fully in this Prospectus and
SAI.
The
Fund has authorized certain third-party financial intermediaries, such as
broker-dealers, insurance companies, third-party administrators and trust
companies,
to receive purchase and redemption orders on behalf of the Fund and to designate
other intermediaries to receive purchase and redemption orders
on behalf of the Fund. The Fund is deemed to have received such orders when they
are received by the financial intermediaries or their designees. Thus,
an order to purchase or sell Fund shares will be priced at the Fund’s next
determined NAV per share after receipt by the financial intermediary or its
designee.
It is the responsibility of your broker-dealer or financial intermediary to
transmit orders that will be received by the Fund in proper form and in a
timely
manner. The Fund is not responsible for the failure of a broker-dealer or
financial intermediary to transmit a purchase order in proper form and in a
timely
manner.
Fund
shares may be purchased only in U.S. States and Territories in which they can be
legally sold. Prospective investors should inquire as to whether shares of
the
Fund are available for offer and sale in their jurisdiction. The Fund reserves
the right to refuse purchases if, in the judgment of the Fund, the transaction
would
adversely affect the Fund and its shareholders. The Fund has the right to reject
any purchase order or cease offering any or all classes of shares at any
time.
The Fund reserves the right to require payment by wire. Checks to purchase
shares are accepted subject to collection at full face value in U.S. funds and
must
be drawn in U.S. dollars on a U.S. bank. The Fund will not accept ‘‘starter’’
checks, credit card checks, money orders, cashier’s checks, or third-party
checks.
If
your payment is not received and collected, your purchase may be canceled and
you could be liable for any losses or fees the Fund or the Manager has
incurred.
Under applicable anti-money laundering regulations and other federal
regulations, purchase orders may be suspended, restricted, or canceled and
the
monies may be withheld.
Please
refer to the section titled ‘‘Frequent Trading and Market Timing’’ for
information on the Fund’s policies regarding frequent purchases, redemptions,
and exchanges.
Redemption
Policies
If
you purchased shares of the Fund through your financial intermediary, please
contact your broker-dealer or other financial intermediary to sell shares
of the Fund.
A sale or redemption of your shares is generally taxable to you. See
“Distributions and Taxes - Taxes.”
Prospectus
– About Your Investment17
The
redemption price will be the NAV per share next determined after a redemption
request is received in good order. In order to receive the redemption price
calculated
on a particular business day, redemption requests must be received in good order
by 4:00 p.m. Eastern Time or by the close of the NYSE (whichever
comes first).
Wire
proceeds from redemption requests received in good order by 4:00 p.m. Eastern
Time or by the close of the NYSE (whichever comes first) generally are
transmitted
to shareholders on the next day the Fund is open for business. In any event,
proceeds from a redemption request will typically be transmitted to a
shareholder
by no later than seven days after the receipt of a redemption request in good
order. Delivery of proceeds from shares purchased by check, ACH, or
pre-authorized automatic investment may be delayed until the funds have cleared,
which may take up to ten days.
The
Fund reserves the right to suspend redemptions or postpone the date of payment
for more than seven days (i) when the NYSE is closed (other than for
customary
weekend and holiday closings); (ii) when trading on the NYSE is restricted;
(iii) when the SEC determines that an emergency exists so that disposal
of the
Fund’s investments or determination of its NAV per share is not reasonably
practicable; or (iv) by order of the SEC for protection of the Fund’s
shareholders.
Although
the Fund intends to redeem shares by paying out available cash, cash generated
by selling portfolio holdings (including cash equivalent portfolio holdings),
or funds borrowed through the interfund credit facility, or from a bank line of
credit, in stressed market conditions and other appropriate circumstances,
the Fund reserves the right to pay the redemption price in whole or in part by
borrowing funds from external parties or distributing securities or
other assets held by the Fund. To the extent that the Fund redeems its shares in
this manner, the shareholder assumes the risk of a subsequent change in
the
market value of those securities, the cost of liquidating the securities and the
possibility of a lack of a liquid market for those securities.
Please
refer to the section titled ‘‘Frequent Trading and Market Timing’’ for
information on the Fund’s policies regarding frequent purchases, redemptions,
and exchanges.
Exchange
Policies
If
you purchased shares of the Fund through your financial intermediary, please
contact your financial intermediary to determine if you may take advantage of
the
exchange policies described in this section and for the intermediary’s policies
to effect an exchange.
Shares
of any class of the Fund may be exchanged for shares of the same class of
another American Beacon Fund under certain limited circumstances. Since
an
exchange involves a concurrent redemption and purchase, please review the
sections titled ‘‘Redemption Policies’’ and ‘‘Purchase Policies’’ for additional
limitations
that apply to redemptions and purchases. If Fund shares were purchased by check,
a shareholder must have owned those shares for at least ten days
prior to exchanging out of the Fund and into another fund.
The
eligibility and minimum investment requirement must be met for the class into
which the shareholder is exchanging. Fund shares may be acquired through
exchange only in U.S. states and Territories in which they can be legally sold.
The Fund reserves the right to charge a fee and to modify or terminate
the
exchange privilege at any time. The Fund reserves the right to refuse exchange
requests if, in the judgment of the Fund, the transaction would adversely
affect
the Fund and its shareholders. Please refer to the section titled “Frequent
Trading and Market Timing” for information on the Fund’s policies regarding
frequent
purchases, redemptions, and exchanges.
Shares
of any class of the Fund may be converted to shares of another class of the Fund
under certain limited circumstances. For federal income tax purposes,
the
conversion of shares of one share class of the Fund to shares of a different
share class of the Fund will not result in the realization of a capital gain or
loss. However,
an exchange of shares of the Fund for shares of a different American Beacon Fund
generally is considered a redemption and a concurrent purchase, respectively,
and thus may result in the realization of capital gain or loss for those
purposes.
How
to Purchase, Redeem or Exchange Shares
If
your account is through a broker-dealer or other financial intermediary, please
contact them directly to purchase, redeem or exchange shares of the Fund.
Your
broker-dealer or financial intermediary can help you open a new account, review
your financial needs and formulate long-term investment goals and objectives.
Your broker-dealer or financial intermediary will transmit your request to the
Fund and may charge you a fee for this service. Dealers, other
financial
intermediaries or fiduciaries purchasing shares for their customers are
responsible for determining the suitability of a particular share class for an
investor.
You should include the following information with any order:
|
•
Your name/account registration |
|
•
Type of transaction requested |
|
•
Fund name(s) and fund numbers |
|
•
Dollar amount or number of shares |
Transactions
for direct shareholders are conducted through:
|
| |
Internet |
www.americanbeaconfunds.com |
Phone |
To
reach an American Beacon representative call 1-800-658-5811, option
1
Through
the Automated Voice Response Service call 1-800-658-5811, option 2
(Investor Class Only) |
Mail |
American
Beacon Funds
PO
Box 219643
Kansas
City, MO 64121-9643 |
Overnight
Delivery:
American
Beacon Funds
430
W. 7th Street, Suite 219643
Kansas
City, MO 64105-1407 |
18Prospectus
– About Your Investment
Purchases
by Wire:
Send
a bank wire to State Street Bank and Trust Co. with these
instructions:
■ |
ABA#
0110-0002-8; AC-9905-342-3, |
■ |
Attn:
American Beacon Funds, |
■ |
the
fund name and fund number, and |
■ |
shareholder
account number and registration. |
|
|
| |
|
New
Account |
Existing
Account |
Share
Class |
Minimum
Initial Investment Amount |
Purchase/Redemption
Minimum by Check/ACH/Exchange |
Purchase/Redemption
Minimum by Wire |
Investor |
$2,500 |
$50 |
$250 |
Y |
$100,000 |
$50 |
None |
R5 |
$250,000 |
$50 |
None |
Redemption
proceeds will be mailed to the account of record or transmitted to commercial
bank designated on the account application form.
Supporting
documents may be required for redemptions by estates, trusts, guardianships,
custodians, corporations, and welfare, pension and profit sharing plans.
Redemption requests must also include authorized signature(s) of all persons
required to sign for the account. Call 1-800-658-5811 for
instructions.
To
protect the Fund and your account from fraud, a Medallion signature guarantee is
required for redemption orders:
■ |
with
a request to send the proceeds to an address or commercial bank account
other than the address or commercial bank account designated on the
account
application, or |
■ |
for
an account whose address has changed within the last 30 days if proceeds
are sent by check. |
The
Fund only accepts Medallion signature guarantees, which may be obtained at
participating banks, broker-dealers and credit unions. A notary public
cannot
provide a signature guarantee. Call 1-800-658-5811 for instructions and further
assistance.
Payments
to Financial Intermediaries
For
certain share classes, the Fund and/or the Manager (and/or the Manager’s
affiliates), at their own expense, may pay compensation to financial
intermediaries
for shareholder-related services and, if applicable, distribution-related
services, including administrative, sub-transfer agency type, recordkeeping
and shareholder communication services. For example, compensation may be paid to
make Fund shares available to sales representatives and/or
customers of a fund supermarket platform or similar program sponsor or for
services provided in connection with such fund supermarket platforms and
programs.
The
amount of compensation paid to different financial intermediaries may differ.
The compensation paid to a financial intermediary may be based on a variety
of factors, including average assets under management in accounts distributed
and/or serviced by the financial intermediary, gross sales by the financial
intermediary and/or the number of accounts serviced by the financial
intermediary that invest in the Fund. To the extent that the Fund pays any such
compensation,
it is designed to compensate the financial intermediary for providing services
that would otherwise be provided by the Manager, the Fund or its
transfer agent. To the extent the Manager or its affiliates pay such
compensation, it would likely include amounts from that party’s own
resources and constitute
what is sometimes referred to as ‘‘revenue sharing’’.
Compensation
received by a financial intermediary from the Fund, the Manager or an affiliate
of the Manager may include payments for marketing and/or training
expenses incurred by the financial intermediary, including expenses incurred by
the financial intermediary in educating (itself and) its salespersons with
respect
to Fund shares. For example, such compensation may include reimbursements for
expenses incurred in attending educational seminars regarding the Fund,
including travel and lodging expenses. It may also cover costs incurred by
financial intermediaries in connection with their efforts to sell Fund shares,
including
costs incurred compensating (registered) sales representatives and preparing,
printing and distributing sales literature.
Any
compensation received by a financial intermediary, whether from the Fund or the
Manager and/or its affiliates, and the prospect of receiving it may
provide
the financial intermediary with an incentive to recommend the shares of the
Fund, or a certain class of shares of the Fund, over other potential
investments.
Similarly, the compensation may cause financial intermediaries to elevate the
prominence of the Fund within its organization by, for example, placing
it on a list of preferred funds. You can contact your financial intermediary for
details about any such payments it receives from the Manager, its affiliates
and/or the Fund, or any other fees, expenses, or commissions your financial
intermediary may charge you in addition to those disclosed in this Prospectus.
Additional
Payments with Respect to Y Class Shares
Y
Class shares may also be available on brokerage platforms of firms that have
agreements with the Fund’s distributor to offer such shares solely when acting
as
an agent for the investor. An investor transacting in Y Class shares in these
programs may be required to pay a commission and/or other forms of compensation
to the broker. Shares of the Fund are available in other share classes that have
different fees and expenses.
General
Policies
If
a shareholder’s account balance falls below the following minimum levels, the
shareholder may be asked to increase the balance.
| |
Share
Class |
Account
Balance |
Investor |
$
2,500 |
Y |
$25,000 |
R5 |
$75,000 |
If
the account balance remains below the applicable minimum account balance after
45 days, the Fund reserves the right, upon 30 days’ advance written notice,
to close the account and send the proceeds to the shareholder. The Fund reserves
the authority to modify minimum account balances in its discretion.
A
traditional IRA or Roth IRA invested directly will be charged an annual
maintenance fee of $15.00 by the Custodian.
An
ACH privilege allows electronic transfer from a checking or savings account into
a direct account with the Fund. The ACH privilege may not be used for
initial
purchases but may be used for subsequent purchases and redemptions. Purchases of
Fund shares by ACH are subject to a limit of $2,000 per day. The Fund
reserves the right to waive such limit in its sole
discretion.
Prospectus
– About Your Investment19
ACH
privileges must be requested on the account application, or may be established
on an existing account by submitting a request in writing to the Fund.
Validated
signatures from all shareholders of record for the account are required on the
written request. See details below regarding signature validations. Such
privileges apply unless and until the Fund receives written instructions from
all shareholders of record canceling such privileges. Changes of bank account
information
must also be made in writing with validated signatures. The Fund reserves the
right to amend, suspend or discontinue the ACH privilege at any time
without prior notice. The ACH privilege does not apply to shares held in broker
“street name” accounts or in other omnibus accounts.
When
a signature validation is called for, a Medallion signature guarantee or
Signature Validation Program (“SVP”) stamp may be required. A Medallion
signature
guarantee is intended to provide signature validation for transactions
considered financial in nature, and an SVP stamp is intended to provide
signature
validation for transactions non-financial in nature. A Medallion signature
guarantee or SVP stamp may be obtained from a domestic bank or trust
company,
broker, dealer, clearing agency, savings association or other financial
institution which is participating in a Medallion program or SVP recognized by
the
Securities Transfer Association. The Fund may reject a Medallion signature
guarantee or SVP stamp. Shareholders should call 1-800-658-5811 for additional
details regarding the Fund’s signature guarantee requirements.
The
following policies apply to instructions you may provide to the Fund by
telephone:
■ |
The
Fund, its officers, trustees, employees, or agents are not responsible for
the authenticity of instructions provided by telephone, nor for any loss,
liability, cost
or expense incurred for acting on them. |
■ |
The
Fund employs procedures reasonably designed to confirm that instructions
communicated by telephone are genuine. |
■ |
Due
to the volume of calls or other unusual circumstances, telephone
redemptions may be difficult to implement during certain time
periods. |
The
Fund reserves the right to:
■ |
liquidate
a shareholder’s account at the current day’s NAV per share and remit
proceeds via check if the Fund or a financial institution is unable to
verify the shareholder’s
identity within three business days of account
opening, |
■ |
seek
reimbursement from the shareholder for any related loss incurred by the
Fund if payment for the purchase of Fund shares by check does not clear
the shareholder’s
bank, and |
■ |
reject
a purchase order and seek reimbursement from the shareholder for any
related loss incurred by the Fund if funds are not received by the
applicable wire
deadline. |
Escheatment
Please
be advised that certain state escheatment laws may require the Fund to turn over
your mutual fund account to the state listed in your account registration
as abandoned property unless you contact the Fund. Many states have added
‘‘inactivity’’ or the absence of customer-initiated
contact
as a component
of their rules and guidelines for the escheatment of unclaimed property. These
states consider property to be abandoned when there is no shareholder-initiated
activity
on an account for at least three (3) to five (5) years.
Depending
on the laws in your jurisdiction, customer-initiated contact might be achieved
by one of the following methods:
■ |
Send
a letter to American Beacon Funds via the United States Post
Office. |
■ |
Speak
to a Customer Service Representative on the phone after you go through a
security verification process. For
residents of certain states, contact cannot
be made by phone but must be in writing or through the Fund’s
secure
web application. |
■ |
Access
your account through the Fund’s secure web
application. |
■ |
Cashing
checks that are received and are made payable to the owner of the
account. |
The
Fund, the Manager, and the transfer
agent
will not be liable to shareholders or their representatives for good faith
compliance with escheatment laws. To learn
more about the escheatment rules for your particular state, please contact your
attorney or State Treasurer’s and/or Controller’s Offices. Unless you hold
your
shares directly with the Fund, you should contact your broker-dealer, retirement
plan, or other third-party intermediary regarding applicable state escheatment
laws.
Shareholders
that reside in the state of Texas may designate a representative to receive
escheatment notifications by completing and submitting a designation
form
that can be found on the website of the Texas Comptroller. While the designated
representative does not have any rights to claim or access the shareholder’s
account or assets, the escheatment period will cease if the representative
communicates knowledge of the shareholder’s location and confirms that
the shareholder has not abandoned his or her property. If a shareholder
designates a representative to receive escheatment notifications, any
escheatment
notices will be delivered both to the shareholder and the designated
representative. The completed designation form may be mailed to the below
address.
Contact
information:
|
American
Beacon Funds P.O.
Box 219643 Kansas
City, MO 64121-9643 1-800-658-5811 www.americanbeaconfunds.com |
Frequent
Trading and Market Timing
Frequent
trading by Fund shareholders poses risks to other shareholders in the Fund,
including: (i) the dilution of the Fund’s NAV per share, (ii) an increase in
the
Fund’s expenses, and (iii) interference with the portfolio managers’ ability to
execute efficient investment strategies. Frequent, short-term trading of Fund
shares
in an attempt to profit from day-to-day fluctuations in the Fund’s NAV per share
is known as market timing.
The
Fund’s Board of Trustees has adopted policies and procedures intended to
discourage frequent trading and market timing.
Shareholders
may transact one ‘‘round trip’’ in the Fund in any rolling 90-day period. A
‘‘round trip’’ is defined as two transactions, each in an opposite direction.
A round trip may involve either (i) a purchase or exchange into the Fund
followed by a redemption or exchange out of the Fund or (ii) a redemption
or
exchange out of the Fund followed by a purchase or exchange into the Fund. If
the Manager detects that a shareholder has exceeded one round trip in the
Fund
in any rolling 90-day period, the Manager, without prior notice to the
shareholder, may prohibit the shareholder from making further purchases of
the Fund.
In general, the Fund reserves the right to reject any purchase order, terminate
the exchange privilege, or liquidate the account of any shareholder that
the
Manager determines has engaged in frequent trading or market timing, regardless
of whether the shareholder’s activity violates any policy stated in this
Prospectus.
Additionally, the Manager may in its discretion, reject any purchase or exchange
into the Fund from any individual investor, institutional investor, or
group whose trading activity could disrupt the management of the Fund or dilute
the value of the Fund’s shares, including collective trading (e.g., following
the
advice of an investment newsletter). Such investors may be barred from future
purchases of American Beacon Funds.
20Prospectus
– About Your Investment
The
round-trip limit does not apply to the following transaction types:
■ |
shares
acquired through the reinvestment of dividends and other
distributions; |
■ |
systematic
purchases and redemptions; |
■ |
shares
redeemed to return excess IRA contributions;
or |
■ |
certain
transactions made within a retirement or employee benefit plan, such as
payroll contributions, minimum required distributions, loans, and hardship
withdrawals,
or other transactions that are initiated by a party other than the plan
participant. |
Financial
intermediaries that offer Fund shares, such as broker-dealers, third-party
administrators of retirement plans, and trust companies, will be asked to
enforce
the Fund’s policies to discourage frequent trading and market timing by
investors. However, certain intermediaries that offer Fund shares have
informed
the Fund that they are currently unable to enforce the Fund’s policies on an
automated basis. In those instances, the Manager will monitor trading
activity
of the intermediary in an attempt to detect patterns of activity that indicate
frequent trading or market timing by underlying investors. In some cases,
intermediaries
that offer Fund shares have their own policies to deter frequent trading and
market timing that differ from the Fund’s policies. The Fund may defer
to an intermediary’s policies. For more information, please contact the
financial intermediary through which you invest in the Fund.
The
Manager monitors trading activity in the Fund to attempt to identify
shareholders engaged in frequent trading or market timing. The Manager may
exclude
transactions below a certain dollar amount from monitoring and may change that
dollar amount from time to time. The ability of the Manager to detect
frequent trading and market timing activity by investors who own shares through
an intermediary is dependent upon the intermediary’s provision of information
necessary to identify transactions by the underlying investors. The Fund has
entered into agreements with the intermediaries that service the Fund’s
investors, pursuant to which the intermediaries agree to provide information on
investor transactions to the Fund and to act on the Fund’s instructions
to
restrict transactions by investors who the Manager has identified as having
violated the Fund’s policies and procedures to deter frequent trading and market
timing.
Wrap
programs offered by certain intermediaries may be designated ‘‘Qualified Wrap
Programs’’ by the Fund based on specific criteria established by the Fund
and
a certification by the intermediary that the criteria have been met. A Qualified
Wrap Program is a wrap program whose sponsoring intermediary: (i) certifies
that it has investment discretion over $50 million or more in client assets
invested in mutual funds at the time of the certification; (ii) certifies that
it directs
transactions in accounts participating in the wrap program(s) in concert with
changes in a model portfolio; (iii) provides the Manager a description of
the
wrap program(s); and (iv) managed by an intermediary that agrees to provide the
Manager sufficient information to identify individual accounts in the
intermediary’s
wrap program(s). For purposes of applying the round-trip limit, transactions
initiated by clients invested in a Qualified Wrap Program will not be
matched
to transactions initiated by the intermediary sponsoring the Qualified Wrap
Program. For example, a client’s purchase of the Fund followed within 90
days
by the intermediary’s redemption of the same Fund would not be considered a
round trip. However, transactions initiated by a Qualified Wrap Program
client
are subject to the round-trip limit and will be matched to determine if the
client has exceeded the round-trip limit. In addition, the Manager will monitor
transactions
initiated by Qualified Wrap Program intermediaries to determine whether any
intermediary has engaged in frequent trading or market timing. If the
Manager determines that an intermediary has engaged in activity that is harmful
to the Fund, the Manager will revoke the intermediary’s Qualified Wrap
Program
status. Upon termination of status as a Qualified Wrap Program, all account
transactions will be matched for purposes of testing compliance with the
Fund’s
frequent trading and market timing policies.
The
Fund reserves the right to modify the frequent trading and market timing
policies and procedures and grant or eliminate waivers to such policies and
procedures
at any time without advance notice to shareholders. There can be no assurance
that the Fund’s policies and procedures to deter frequent trading and
market timing will have the intended effect or that the Manager will be able to
detect frequent trading and market timing.
Distributions
and Taxes
The
Fund distributes most or all of its net earnings and realized gains, if any,
each taxable year in the form of dividends from net investment income
(“dividends”)
on an annual basis and distributions of realized net capital gains (“capital
gain distributions”) and net gains from foreign currency transactions
(sometimes
referred to below collectively as “other distributions”) on an annual basis (and
dividends and other distributions are sometimes referred to below collectively
as “distributions”). Different tax treatment applies to different types of
distributions (as described in the table under “Taxes”).
The
Fund does not have a fixed dividend rate nor does it guarantee that it will pay
any distributions in any particular period. Distributions paid by the Fund
with
respect to each class of shares are calculated in the same manner and at the
same time, but dividends on different classes of shares may be different as a
result
of the services and/or fees applicable to certain classes of
shares.
|
| |
American
Beacon Fund |
Dividends
Paid |
Other
Distributions Paid |
American
Beacon EAM International Small Cap Fund |
Annually |
Annually |
Options
for Receiving Dividends and Other Distributions
When
you open your Fund account, you can specify on your application how you want to
receive distributions. To change that option, you must notify the transfer
agent. Unless you instruct otherwise in your account application, distributions
payable to you by the Fund will be reinvested in additional shares of
the
distributing class of the Fund. There are four payment options
available:
■ |
Reinvest
All Distributions. You can elect to reinvest all distributions by the Fund
in additional shares of the distributing class of the
Fund. |
■ |
Reinvest
Only Some Distributions. You can elect to reinvest some types of
distributions by the Fund in additional shares of the distributing class
of the Fund while
receiving the other types of distributions by the Fund by check or having
them sent directly to your bank account by ACH (“in
cash”). |
■ |
Receive
All Distributions in Cash. You can elect to receive all
distributions in cash. |
■ |
Reinvest
Your Distributions in shares of another American Beacon Fund. You can
reinvest all of your distributions by the Fund on a particular class
of shares in
shares of the same class of another American Beacon Fund that is available
for exchanges. You must have an existing account in the same share
class
of the selected fund. |
Distributions
of Fund income are generally taxable to you regardless of the manner in which
received or reinvested.
If
you invest directly with the Fund, any election to receive distributions payable
by check will only apply to distributions totaling $10.00 or more. Any
distribution
by the Fund totaling less than $10.00 will be reinvested in shares of the
distributing class of the Fund and will not be paid to you by
check.
If
you elect to receive a distribution by check and the U.S. Postal Service
cannot deliver your check, or if your check remains uncashed for at least six
months, the
Fund reserves the right to reinvest the amount of your check, and to reinvest
all subsequent distributions, in shares of the distributing class of the Fund at
the
NAV per share on the day of the reinvestment. Interest will not accrue on
amounts represented by uncashed distribution or redemption checks.
Shareholders
investing in the Fund through a financial intermediary should discuss their
options for receiving distributions with the intermediary.
Prospectus
– About Your Investment21
Taxes
Fund
distributions are taxable to shareholders other than tax-qualified retirement
plans and accounts and other tax-exempt investors. However, the portion of
the
Fund’s dividends derived from its investments in U.S. Government obligations, if
any, is generally exempt from state and local income taxes. Fund dividends,
except those that are “qualified dividend income” (as described below), are
subject to federal income tax at the rates for ordinary income contained
in the Internal Revenue Code. The following table outlines the typical status of
transactions in taxable accounts:
| |
Type
of Transaction |
Federal
Tax Status |
Dividends
from net investment income* |
Ordinary
income** |
Distributions
of the excess of net short-term capital gain over net long-term capital
loss* |
Ordinary
income |
Distributions
of net gains from certain foreign currency transactions* |
Ordinary
income |
Distributions
of the excess of net long-term capital gain over net short-term capital
loss
(“net capital gain”)* |
Long-term
capital gains |
Redemptions
or exchanges of shares owned for more than one year |
Long-term
capital gains or losses |
Redemptions
or exchanges of shares owned for one year or less |
Net
gains are taxed at the same rate as ordinary income; net losses
are
subject to special rules |
* |
Whether
reinvested or taken in cash. |
** |
Except
for dividends that are attributable to ‘‘qualified dividend income,’’ if
any. |
To
the extent distributions are attributable to net capital gain that the Fund
recognizes they are subject to a 15% maximum federal income tax rate for
individual
and certain other non-corporate shareholders (each, an ‘‘individual’’) (20% for
individuals with taxable income exceeding certain thresholds, which are
indexed for inflation annually), regardless of how long the shareholder held his
or her Fund shares. A portion of the dividends the Fund pays to individuals
may
be ‘‘qualified dividend income’’ (‘‘QDI’’) and thus eligible for the
preferential rates, mentioned above, that apply to net capital gain. QDI is the
aggregate of
dividends the Fund receives on shares of most domestic corporations (excluding
most distributions from REITs) and certain foreign corporations with respect
to
which the Fund satisfies certain holding period and other restrictions. To be
eligible for those rates, a shareholder must meet similar restrictions with
respect to
his or her Fund shares.
A
portion of the dividends the Fund pays may also be eligible for the
dividends-received deduction allowed to corporations (“DRD”), subject to similar
holding period
and other restrictions, but the eligible portion may not exceed the aggregate
dividends the Fund receives from domestic corporations only.
A
shareholder may realize a taxable gain or loss when redeeming or exchanging
shares. That gain or loss is treated as a short-term or long-term capital gain
or loss,
depending on how long the redeemed or exchanged shares were held. Any capital
gain an individual shareholder recognizes on a redemption or exchange
of Fund shares that have been held for more than one year will qualify for the
15% and 20% tax rates mentioned above.
A
shareholder who wants to use an acceptable basis determination method with
respect to Fund shares other than the average basis method (the Fund’s
default
method) must elect to do so in writing, which may be electronic. The Fund, or
its administrative agent, must report to the Internal Revenue Service
(“IRS”)
and furnish to its shareholders the basis information for dispositions of Fund
shares. See “Tax Information” in the SAI for a description of the rules
regarding
that election and the Fund’s reporting obligation.
An
individual must pay a 3.8% tax on the lesser of (1) the individual’s ‘‘net
investment income,’’ which generally includes distributions the Fund pays and
net gains
realized on the redemption or exchange of Fund shares, or (2) the excess of the
individual’s ‘‘modified adjusted gross income’’ over a threshold amount
($250,000
for married persons filing jointly and $200,000 for single taxpayers). This tax
is in addition to any other taxes due on that income. A similar tax applies
to estates and trusts. Shareholders should consult their own tax advisers
regarding the effect, if any, this tax may have on their investment in Fund
shares.
Each
year, the Fund’s shareholders will receive tax information regarding Fund
distributions and dispositions of Fund shares to assist them in preparing their
income
tax returns.
The
foregoing is only a summary of some of the important federal income tax
considerations that may affect Fund shareholders, who should consult their tax
advisers
regarding specific questions as to the effect of federal, state and local income
taxes on an investment in the Fund.
Additional
Information
The
Fund’s Board oversees generally the operations of the Fund. The Trust enters
into contractual arrangements with various parties, including among others,
the
Fund’s manager, sub-advisor(s), custodian, transfer agent, and accountants, who
provide services to the Fund. Shareholders are not parties to any such
contractual
arrangements, and those contractual arrangements are not intended to create in
any shareholder any right to enforce them directly against the service
providers or to seek any remedy under them directly against the service
providers.
This
Prospectus provides information concerning the Fund that you should consider in
determining whether to purchase Fund shares. Neither this Prospectus
nor
the SAI is intended, or should be read, to be or create an agreement or contract
between the Trust or the Fund and any investor, or to create any rights in
any
shareholder or other person other than any rights under federal or state law
that may not be waived. Nothing in this Prospectus, the SAI or the Fund’s
reports
to shareholders is intended to provide investment advice and should not be
construed as investment advice.
Service
Plans and Service Fees
The
Fund has adopted a shareholder services plan for its Investor Class shares for
certain non-distribution shareholder services provided by financial intermediaries.
The shareholder services plan authorizes annual payment of up to 0.375% of the
average daily net assets attributable to the Investor Class shares.
In addition, the Fund may reimburse the Manager for certain
non-distribution shareholder services provided by financial intermediaries
attributable to Y
Class and R5 Class shares of the Fund.
22Prospectus
– Additional Information
Portfolio
Holdings
A
complete list of the Fund’s holdings is made available on the Fund’s website on
a quarterly basis approximately sixty days after the end of each calendar
quarter
and remains available for six months thereafter. A list of the Fund’s ten
largest holdings is made available on the Fund’s website on a quarterly basis.
The
ten largest holdings of the Fund are generally posted to the website
approximately fifteen days after the end of each calendar quarter and remain
available
until the next quarter. To access the holdings information, go to
www.americanbeaconfunds.com. The Fund’s ten largest holdings may also be
accessed
by selecting the Fund’s fact sheet.
A
description of the Fund’s policies and procedures regarding the disclosure of
portfolio holdings is available in the SAI, which you may access on the Fund’s
website
at www.americanbeaconfunds.com or call 1-800-658-5811 to request a free
copy.
Delivery
of Documents
The
summary prospectus, Annual Shareholder Reports and Semi-Annual Shareholder
Reports (“Shareholder Reports”) are available online at www.americanbeaconfunds.com/reports.
If you are interested in electronic delivery of the Fund’s summary prospectus,
please go to www.americanbeaconfunds.com
and click on ‘‘Quick Links’’ and then ‘‘Register for E-Delivery.’’ You can also
request to receive paper Shareholder Reports by calling
1-866-345-5954 with the unique ID number that is provided in the notification
you receive, or you may directly inform your financial intermediary of
your
wish.
To
reduce expenses, your financial institution may mail only one copy of the
summary prospectus and Shareholder Reports to those addresses shared by two
or
more accounts. If you wish to receive individual copies of these documents,
please contact your financial institution. Delivery of individual copies will
commence
thirty days after receiving your request.
Financial
Highlights
The
financial highlights tables are intended to help you understand the Fund’s
financial performance for the period of the Fund’s operations. 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 the Fund (assuming reinvestment of all dividends and other
distributions).
The
information in the financial highlights for the fiscal year ended October 31,
2022 and
October 31, 2023 has
been derived from the Fund’s financial statements
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, whose report, along with the Fund’s financial statements,
is included in the Fund’s Annual Shareholder Report, which you may obtain upon
request. The information in the financial highlights for the fiscal period
ended October 31, 2019 and the fiscal years ended October 31, 2020 and October
31, 2021, was audited by the Fund’s prior independent registered public
accounting firm. For periods prior to January 22, 2019, the financial highlights
of the Fund shown below for Investor Class shares of the Fund represent
the
financial history of the Fund’s predecessor, The Tocqueville International Value
Fund (“Tocqueville Fund”), a series of The Tocqueville Trust, which was
acquired
by the Fund in a reorganization that closed upon the close of business on
January 18, 2019.
Prospectus
– Additional Information23
|
|
|
|
| |
American
Beacon EAM International Small Cap FundSM
|
|
Y
Class |
For
a share outstanding throughout the period: |
Year
Ended October
31, 2023I
|
Year
Ended October
31, 2022 |
Year
Ended October
31, 2021 |
Year
Ended October
31, 2020 |
January
22, 2019A
to
October 31, 2019 |
Net
asset value, beginning of period |
|
|
|
|
|
Income
(loss) from investment operations: |
|
|
|
|
|
Net
investment income |
|
|
|
|
|
Net
gains (losses) on investments (both realized and unrealized)
|
|
|
|
|
|
Total
income (loss) from investment operations |
|
|
|
|
|
Less
distributions: |
|
|
|
|
|
Dividends
from net investment income |
|
|
|
|
|
Total
distributions |
|
|
|
|
|
Net
asset value, end of period |
|
|
|
|
|
Total
returnE
|
|
|
|
|
|
Ratios
and supplemental data: |
|
|
|
|
|
Net
assets, end of period |
$62,512,548 |
$96,269,149 |
$160,793,226 |
$136,563,697 |
$229,275,205 |
Ratios
to average net assets: |
|
|
|
|
|
Expenses,
before reimbursements and/or recoupments |
|
|
|
|
|
Expenses,
net of reimbursements and/or recoupments |
|
|
|
|
|
Net
investment income, before expense reimbursements
and/or recoupments |
|
|
|
|
|
Net
investment income, net of reimbursements and/or recoupments
|
|
|
|
|
|
Portfolio
turnover rate |
|
|
|
|
|
| |
A |
Commencement
of operations. |
B |
Per
share amounts have been calculated using the average shares
method. |
C |
Net
investment income includes a significant dividend payment from Keppel
Corp, Ltd. amounting to $0.0439. |
D |
Net
investment income includes a significant dividend payment from Vivendi SE
amounting to $0.3834. |
E |
Based
on net asset value, which does not reflect the sales charge, redemption
fee, or contingent deferred sales charge, if applicable. May include
adjustments in accordance with
U.S. GAAP and as such, the net asset value for reporting purposes and the
returns based upon those net asset values may differ from the net asset
value and returns for shareholder
transactions. |
F |
Not
annualized. |
G |
Annualized. |
H |
Portfolio
turnover rate is for the period from January 22, 2019 through October 31,
2019 and is not annualized. |
I |
On
January 20, 2023 Tocqueville Asset Management LP was terminated and ceased
managing assets of the Fund. On January 21, 2023, EAM Global Investors,
LLC began managing
assets of the Fund. |
24Prospectus
– Additional Information
|
|
|
|
| |
American
Beacon EAM International Small Cap FundSM
|
|
R5
ClassA
|
For
a share outstanding throughout the period: |
Year
Ended October
31, 2023K
|
Year
Ended October
31, 2022 |
Year
Ended October
31, 2021 |
Year
Ended October
31, 2020 |
January
22, 2019B
to
October 31, 2019 |
Net
asset value, beginning of period |
|
|
|
|
|
Income
(loss) from investment operations: |
|
|
|
|
|
Net
investment income |
|
|
|
|
|
Net
gains (losses) on investments (both realized and unrealized)
|
|
|
|
|
|
Total
income (loss) from investment operations |
|
|
|
|
|
Less
distributions: |
|
|
|
|
|
Dividends
from net investment income |
|
|
|
|
|
Total
distributions |
|
|
|
|
|
Net
asset value, end of period |
|
|
|
|
|
Total
returnF
|
|
|
|
|
|
Ratios
and supplemental data: |
|
|
|
|
|
Net
assets, end of period |
$6,316,496 |
$13,963,043 |
$20,907,091 |
$20,327,704 |
$37,138,368 |
Ratios
to average net assets: |
|
|
|
|
|
Expenses,
before reimbursements and/or recoupments |
|
|
|
|
|
Expenses,
net of reimbursements and/or recoupments |
|
|
|
|
|
Net
investment income, before expense reimbursements
and/or recoupments |
|
|
|
|
|
Net
investment income, net of reimbursements and/or recoupments
|
|
|
|
|
|
Portfolio
turnover rate |
|
|
|
|
|
| |
A |
Prior
to February 28, 2020, the R5 Class was known as Institutional
Class. |
B |
Commencement
of operations. |
C |
Per
share amounts have been calculated using the average shares
method. |
D |
Net
investment income includes a significant dividend payment from Keppel
Corp, Ltd. amounting to $0.0312. |
E |
Net
investment income includes a significant dividend payment from Vivendi SE
amounting to $0.3366. |
F |
Based
on net asset value, which does not reflect the sales charge, redemption
fee, or contingent deferred sales charge, if applicable. May include
adjustments in accordance with
U.S. GAAP and as such, the net asset value for reporting purposes and the
returns based upon those net asset values may differ from the net asset
value and returns for shareholder
transactions. |
G |
Not
annualized. |
H |
Annualized. |
I |
Expense
ratios may exceed stated expense caps in Note 2 in the Annual Shareholder
report due to security lending expenses. |
J |
Portfolio
turnover rate is for the period from January 22, 2019 through October 31,
2019 and is not annualized. |
K |
On
January 20, 2023 Tocqueville Asset Management LP was terminated and ceased
managing assets of the Fund. On January 21, 2023, EAM Global Investors,
LLC began managing
assets of the Fund. |
Prospectus
– Additional Information25
|
|
|
|
| |
American
Beacon EAM International Small Cap FundSM
|
|
Investor
Class |
For
a share outstanding throughout the period: |
Year
Ended October
31, 2023E
|
Year
Ended October
31, 2022 |
Year
Ended October
31, 2021 |
Year
Ended October
31, 2020 |
Year
Ended October
31, 2019 |
Net
asset value, beginning of period |
|
|
|
|
|
Income
(loss) from investment operations: |
|
|
|
|
|
Net
investment income |
|
|
|
|
|
Net
gains (losses) on investments (both realized and unrealized)
|
|
|
|
|
|
Total
income (loss) from investment operations |
|
|
|
|
|
Less
distributions: |
|
|
|
|
|
Dividends
from net investment income |
|
|
|
|
|
Total
distributions |
|
|
|
|
|
Net
asset value, end of period |
|
|
|
|
|
Total
returnD
|
|
|
|
|
|
Ratios
and supplemental data: |
|
|
|
|
|
Net
assets, end of period |
$60,994,147 |
$72,187,362 |
$180,324,267 |
$198,905,986 |
$355,423,059 |
Ratios
to average net assets: |
|
|
|
|
|
Expenses,
before reimbursements and/or recoupments |
|
|
|
|
|
Expenses,
net of reimbursements and/or recoupments |
|
|
|
|
|
Net
investment income, before expense reimbursements
and/or recoupments |
|
|
|
|
|
Net
investment income, net of reimbursements and/or recoupments
|
|
|
|
|
|
Portfolio
turnover rate |
|
|
|
|
|
| |
A |
Net
investment income includes a significant dividend payment from Keppel
Corp, Ltd. amounting to $0.0406. |
B |
Net
investment income includes a significant dividend payment from Vivendi SE
amounting to $0.3074. |
C |
Net
investment income per share is calculated using the ending balance prior
to consideration or adjustment for permanent book-to-tax
differences. |
D |
Based
on net asset value, which does not reflect the sales charge, redemption
fee, or contingent deferred sales charge, if applicable. May include
adjustments in accordance with
U.S. GAAP and as such, the net asset value for reporting purposes and the
returns based upon those net asset values may differ from the net asset
value and returns for shareholder
transactions. |
E |
On
January 20, 2023 Tocqueville Asset Management LP was terminated and ceased
managing assets of the Fund. On January 21, 2023, EAM Global Investors,
LLC began managing
assets of the Fund. |
26Prospectus
– Additional Information
Additional
Information
Additional
information about the Fund is found in the documents listed below. Request a
free copy of these documents by calling 1-800-658-5811
or you may access them on the Fund’s website at
www.americanbeaconfunds.com.
Annual
Shareholder Report/Semi-Annual Shareholder Report
The
Fund’s Annual and Semi-Annual Shareholder Reports list the Fund’s actual
investments as of the report’s date. They also include a discussion
by the Manager of market conditions and investment strategies that significantly
affected the Fund’s performance. The report of the
Fund’s independent registered public accounting firm is included in the Annual
Shareholder Report.
SAI
The
SAI contains more details about the Fund and its investment policies. The SAI is
incorporated in this Prospectus by reference (it is legally part
of this Prospectus). A current SAI is on file with the SEC.
To
obtain more information about the Fund or to request a copy of the documents
listed above:
| |
By
Telephone: |
Call 1-800-658-5811 |
By
Mail: |
American
Beacon Funds P.O.
Box 219643 Kansas
City, MO 64121-9643 |
By
E-mail: |
|
On
the Internet: |
Visit
our website at www.americanbeaconfunds.com Visit
the SEC website at www.sec.gov |
The
SAI and other information about the Fund are available on the EDGAR Database on
the SEC’s Internet site at www.sec.gov. Copies of this
information may be obtained, after paying a duplicating fee, by electronic mail
to [email protected], or by writing to the SEC’s Public Reference
Section, 100 F Street, NE, Washington, D.C. 20549-1520. The SAI and other
information about the Fund may also be reviewed and
copied at the SEC’s Public Reference Room. Information on the operation of the
SEC’s Public Reference Room may be obtained by calling
the SEC at (202) 551-8090.
| |
American
Beacon is a registered service mark of American Beacon Advisors, Inc. The
American Beacon Funds and
the American Beacon EAM International Small Cap Fund are service marks of
American Beacon Advisors, Inc. |
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SEC
File Number 811-04984
Appendix
A
GLOSSARY
|
| |
ACH |
Automated
Clearing House |
ADRs |
American
Depositary Receipts |
Advisers
Act |
Investment
Advisers Act of 1940, as amended |
American
Beacon or Manager |
American
Beacon Advisors, Inc. |
Beacon
Funds or the Trust |
American
Beacon Funds |
Board |
Board
of Trustees |
Brexit |
The
United Kingdom’s departure from the European Union |
Capital
Gains Distributions |
Distributions
of realized net capital gains |
CFTC |
Commodity
Futures Trading Commission |
Denial
of Services |
A
cybersecurity incident that results in customers or employees being unable
to access electronic systems |
Dividends |
Distributions
of most or all of the Fund’ s net investment income |
DRD |
Dividends-received
deduction |
EMU |
Economic
and Monetary Union |
|
ETF |
Exchange-Traded
Fund |
EU |
European
Union |
Forwards |
Forward
Currency Contracts |
Internal
Revenue Code |
Internal
Revenue Code of 1986, as amended |
Investment
Company Act |
Investment
Company Act of 1940, as amended |
IRA |
Individual
Retirement Account |
IRS |
Internal
Revenue Service |
Management
Agreement |
The
Fund’s Management Agreement with the Manager |
NAV |
Fund’s
net asset value |
NYSE |
New
York Stock Exchange |
OTC |
Over-the-Counter |
Other
Distributions |
Distributions
of net gains from foreign currency transactions |
QDI |
Qualified
Dividend Income |
REIT |
Real
Estate Investment Trust |
SAI |
Statement
of Additional Information |
SEC |
Securities
and Exchange Commission |
Securities
Act |
Securities
Act of 1933, as amended |
State
Street |
State
Street Bank and Trust Company |
SVP |
Signature
Validation Program |
Trust |
American
Beacon Funds |
UK |
United
Kingdom |
Prospectus
– Additional InformationA-1