ck0001511699-20230831
PRINCIPAL
STREET HIGH INCOME MUNICIPAL FUND
Institutional
Class – GSTAX
Investor
Class – GSTEX
A
Class – GSTFX
PRINCIPAL
STREET SHORT TERM MUNICIPAL FUND
Investor
Class – PSTEX
Institutional
Class – PSTYX
Statement
of Additional Information
December
29, 2023
This
Statement of Additional Information (“SAI”) provides general information about
the Principal Street High Income Municipal Fund (the "High Income Fund") and the
Principal Street Short Term Municipal Fund (the "Short Term Fund") (together,
the “Funds”), a series of Managed Portfolio Series (the “Trust”). This SAI is
not a prospectus and should be read in conjunction with the Funds’ current
prospectus dated December 29, 2023 (the “Prospectus”), as supplemented and
amended from time to time. In addition, the Funds’ financial statements for the
fiscal year ended August 31, 2023, are incorporated herein by reference to the
Funds’ annual
report
dated August 31, 2023. To obtain a copy of the Prospectus, free of charge,
please write or call the Funds at the address or toll-free telephone number
below, or visit the Funds’ website at
https://principalstreetfunds.com/.
Principal
Street High Income Municipal Fund
Principal
Street Short Term Municipal Fund
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
1-877-914-7343
The
Trust is a Delaware statutory trust organized on January 27, 2011, and is
registered with the U.S. Securities and Exchange Commission (“SEC”) as an
open-end management investment company. The Funds are two series, or mutual
funds, of the Trust. The High Income Fund commenced operations on September 15,
2017. Prior to October 15, 2019, the High Income Fund's name was the Green
Square High Income Municipal Fund. Prior to May 31, 2019, the High Income Fund’s
name was the Green Square Tax Exempt High Income Fund. The High Income Fund has
three classes of shares: Institutional Class, Investor Class, and A Class
shares. Institutional Class shares of the High Income Fund commenced operations
on September 15, 2017. Investor Class shares of the High Income Fund commenced
operations on March 23, 2020. A Class shares of the High Income Fund commenced
operations on February 16, 2022.
The
Short Term Fund has two classes of shares: Investor Class and Institutional
Class. The Short Term Fund is a non-diversified series and has its own
investment objective and policies.
Shares
of other series of the Trust are offered in separate prospectuses and SAIs. The
Funds do not hold themselves out as related to any other series within the Trust
for purposes of investment and investor services, nor do they share the same
investment adviser with any other series of the Trust. The Funds’ Prospectus and
this SAI are a part of the Trust’s Registration Statement filed with the SEC.
Copies of the Trust’s complete Registration Statement may be obtained from the
SEC upon payment of the prescribed fee, or may be accessed free of charge at the
SEC’s website at www.sec.gov. As permitted by Delaware law, the Trust’s Board of
Trustees (the “Board”) may create additional classes of the Funds and may create
additional series (and classes thereof) of the Trust and offer shares of these
series and classes under the Trust at any time without the vote of shareholders.
Principal
Street Partners, LLC (the “Adviser”) serves as the investment adviser for the
Funds.
All
shares of a series shall represent an equal proportionate interest in the assets
held with respect to that series (subject to the liabilities held with respect
to that series and such rights and preferences as may have been established and
designated with respect to classes of shares of such series), and each share of
a series shall be equal to each other share of that series.
Shares
are voted in the aggregate and not by series or class, except in matters where a
separate vote is required by the Investment Company Act of 1940, as amended (the
“1940 Act”), or when the matters affect only the interest of a particular series
or class. When matters are submitted to shareholders for a vote, each
shareholder is entitled to one vote for each full share owned and fractional
votes for fractional shares owned.
The
Trust does not normally hold annual meetings of shareholders. Meetings of the
shareholders shall be called by any member of the Board upon written request of
shareholders holding, in the aggregate, not less than 10% of the shares, such
request specifying the purpose or purposes for which such meeting is to be
called.
Interests
in each Fund are represented by shares of beneficial interest, each with no par
value per share. Each share of a Fund represents an equal proportionate interest
in the assets and liabilities belonging to a Fund and is entitled to such
distributions out of the income belonging to a Fund as may be declared by the
Board.
The
Board has the authority from time to time to divide or combine the shares of any
series into a greater or lesser number of shares of that series without
materially changing the proportionate beneficial interest of the shares of that
series in the assets belonging to that series or materially
affecting
the rights of shares of any other series. In case of the liquidation of a
series, the holders of shares of the series being liquidated are entitled to
receive a distribution out of the assets, net of the liabilities, belonging to
that series. Expenses attributable to any series (or class thereof) are borne by
that series (or class). Any general expenses of the Trust not readily
identifiable as belonging to a particular series are allocated by, or under the
direction of, the Board to all applicable series (and classes thereof) in such
manner and on such basis as the Board in its sole discretion deems fair and
equitable. No shareholder is liable to further calls for the payment of any sum
of money or assessment whatsoever with respect to the Trust or any series of the
Trust without his or her express consent.
All
consideration received by the Trust for the issue or sale of a Fund’s shares,
together with all assets in which such consideration is invested or reinvested,
and all income, earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds, subject only to the
rights of creditors, shall constitute the underlying assets of a
Fund.
The
following discussion supplements the description of the Fund’s investment
objective and principal investment strategies and principal risks set forth in
the Prospectus. Except for the fundamental investment limitations listed below
(see “Fundamental and Non-Fundamental Investment Limitations”), the Fund’s
investment strategies and policies are not fundamental and may be changed by
sole action of the Board, without shareholder approval. While the Fund is
permitted to hold securities and engage in various strategies as described
hereafter, it is not obligated to do so. The Fund might not invest in all of
these types of securities or use all of these techniques at any one time. The
Fund's transactions in a particular type of security or use of a particular
technique is subject to limitations imposed by the Fund's investment objective,
policies and restrictions described in the Fund's Prospectus and/or this SAI, as
well as the federal securities laws.
Investment
Objective
The
investment objective of each Fund is set forth under the “Summary Section” in
the Funds’ Prospectus.
Diversification/Non-Diversification
The
High Income Fund is diversified. A diversified fund is a fund that satisfies the
definition of a “diversified company” set forth in the 1940 Act.
The
Short Term Fund is non-diversified. A non-diversified fund is a fund that does
not satisfy the definition of a “diversified company” set forth in the 1940 Act.
A
“diversified company” means that as to 75% of the Fund’s total assets, excluding
cash, government securities and securities of other investment companies, (1) no
more than 5% may be invested in the securities of a single issuer, and (2) the
Fund may not hold more than 10% of the outstanding voting securities of a single
issuer.
Because
the Funds intend to qualify as “regulated investment companies” under Subchapter
M of the Internal Revenue Code of 1986, as amended, (the “Code”), each Fund will
limit its investments, excluding cash, cash items (including receivables), U.S.
government securities and securities of other regulated investment companies, so
that at the close of each quarter of the taxable year, (1) not more than 25% of
a Fund’s total assets will be invested in the securities of a single issuer, and
(2) with respect to 50% of its total assets, not more than 5% of a Fund’s total
assets will be invested in the
securities
of a single issuer and each Fund will not hold more than 10% of such issuer’s
outstanding voting securities.
Percentage
Limitations
Each
Fund’s compliance with its investment policy and limitation will be determined
immediately after and as a result of a Fund’s acquisition of such security or
other asset. Accordingly, except with respect to borrowing or illiquid
investments, any subsequent change in values, net assets or other circumstances
will not be considered when determining whether an investment complies with a
Fund’s investment policies and limitations. In addition, if a bankruptcy or
other extraordinary event occurs concerning a particular investment by a Fund,
the Fund may receive stock, real estate or other investments that a Fund would
not, or could not, buy. If this happens, a Fund will sell such investments as
soon as practicable while trying to maximize the return to its
shareholders.
Market
Volatility
U.S.
and international markets have from time to time experienced significant
volatility. Certain social, political, economic, environmental and other
conditions and events (such as natural disasters and weather-related phenomena
generally, epidemics and pandemics, terrorism, conflicts and social unrest) may
adversely interrupt the global economy and result in prolonged periods of
significant market volatility. During certain volatile periods, the fixed income
markets have experienced substantially lower valuations, reduced liquidity,
price volatility, credit downgrades, increased likelihood of default and
valuation difficulties. Concerns have spread to domestic and international
equity markets. In some cases, the stock prices of individual companies have
been negatively impacted even though there may be little or no apparent
degradation in the financial conditions or prospects of that company. Continued
volatility may have adverse effects on the Funds, and the risks discussed below
and in the Prospectus may increase.
The
outbreak of the coronavirus COVID-19 has significantly disrupted the global
economy and negatively impacted economic growth prospects. It is not possible to
estimate the impact that COVID-19 outbreak will continue to have on the
companies in a Fund’s portfolio, but the prolonged effect on the global economy
will largely depend upon the duration of the pandemic. Such events may adversely
affect a Fund’s performance. The Adviser continues to monitor this situation
closely.
Equity
Securities
An
equity security represents a proportionate share of the ownership of a company.
Its value is based on the success of the company’s business, any income paid to
stockholders, the value of its assets and general market conditions. The value
of equity securities will be affected by changes in the stock markets, which may
be the result of domestic or international political or economic news, changes
in interest rates or changing investor sentiment. At times, stock markets can be
volatile and stock prices can change substantially. Equity securities risk
affects a Fund’s net asset value per share (“NAV”), which will fluctuate as the
value of the securities it holds changes. Not all stock prices change uniformly
or at the same time, and not all stock markets move in the same direction at the
same time. Other factors affect a particular stock’s prices, such as poor
earnings reports by an issuer, loss of major customers, major litigation against
an issuer, or changes in governmental regulations affecting an industry. Adverse
news affecting one company can sometimes depress the stock prices of all
companies in the same industry. Not all factors can be predicted.
Common
stocks and preferred stocks are examples of equity securities. The fundamental
risk of investing in common and preferred stock is the risk that the value of
the stock might decrease.
Common
Stock
Common
stock represents an ownership interest in a company. In addition to the general
risks set forth above, investments in common stocks are subject to the risk that
in the event a company in
which
a Fund invests is liquidated, the holders of preferred stock and creditors of
that company will be paid in full before any payments are made to a Fund as
holders of common stock. It is possible that all assets of that company will be
exhausted before any payments are made to a Fund.
Preferred
Stock
Preferred
stock represents an ownership interest in a company, often pays dividends at a
specific rate and has a preference over common stocks in dividend payments and
liquidation of assets. A preferred stock is a blend of the characteristics of a
bond and common stock. It can offer the higher yield of a bond and has priority
over common stock in equity ownership, but does not have the seniority of a bond
and, unlike common stock its participation in the issuer’s growth may be
limited. Although the dividend is set at a fixed annual rate, in some
circumstances it can be changed or omitted by the issuer. In addition, preferred
stock usually does not have voting rights.
Debt
Securities
Each
Fund may invest in a wide range of debt securities, which may include investment
grade debt securities and below investment grade debt securities (commonly known
as “junk bonds” or “high yield bonds” or leveraged loans). Investment grade debt
securities are those rated BBB- or better by Standard & Poor’s Rating
Service, Inc. (“S&P”) or Baa3 or better by Moody’s Investors Service, Inc.
(“Moody’s”), or BBB- or better by Fitch Ratings Service (“Fitch”), each of which
are considered a nationally recognized statistical rating organization
(“NRSRO”), or an equivalent rating by another NRSRO. Securities rated BBB- by
S&P are considered investment grade, but Moody’s considers securities rated
Baa3 to have speculative characteristics. The Funds will not invest in
securities that are rated below D by S&P or Moody’s. A Fund may hold a debt
security rated below D if a downgrade occurs after the security has been
purchased. Each Fund may also invest in unrated debt securities that the Adviser
believes are of comparable quality to the rated securities which a Fund may
purchase.
Ratings
of Debt Obligations. Moody’s,
S&P and other NRSROs are private organizations that provide ratings of the
credit quality of debt obligations. The Funds may consider these ratings in
determining whether to purchase, sell or hold a security. Ratings are not
absolute assurances of quality. Consequently, securities with the same maturity,
interest rate and rating may have different market prices. Credit rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer’s current financial condition may be better or worse
than the rating indicates. Credit rating agencies receive fees from rated
issuers in connection with the issuance of ratings.
Below
Investment Grade Debt Securities.
Below investment grade debt securities generally offer a higher current yield
than that available for investment grade issues. However, below investment grade
debt securities involve higher risks, in that they are especially subject to
adverse changes in general economic conditions and in the industries in which
the issuers are engaged, to changes in the financial condition of the issuers
and to price fluctuations in response to changes in interest rates. During
periods of economic downturn or rising interest rates, highly leveraged issuers
may experience financial stress that could adversely affect their ability to
make payments of interest and principal and increase the possibility of default.
At times in recent years, the prices of many below investment grade debt
securities declined substantially, reflecting an expectation that many issuers
of such securities might experience financial difficulties. As a result, the
yields on below investment grade debt securities rose dramatically, reflecting
the risk that holders of such securities could lose a substantial portion of
their value as a result of the issuers’ financial restructuring or default.
There can be no assurance that such price declines will not recur. The market
for below investment grade debt issues generally is thinner and less active than
that for higher quality securities, which may limit
a
Fund’s ability to sell such securities at fair value in response to changes in
the economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of below investment grade debt securities, especially in a thinly
traded market. Changes by recognized rating services in their rating of a debt
security may affect the value of these investments. A Fund will not necessarily
dispose of a security when its rating is reduced below its rating at the time of
purchase. However, the Adviser will monitor the investment to determine whether
continued investment in the security will assist in meeting a Fund’s investment
objective.
Corporate
Debt Securities.
Corporate debt securities are fixed-income securities issued by businesses to
finance their operations, although corporate debt instruments may also include
bank loans to companies. Notes, bonds, debentures and commercial paper are the
most common types of corporate debt securities, with the primary difference
being their maturities and secured or unsecured status. Commercial paper has the
shortest term and is usually unsecured.
The
broad category of corporate debt securities includes debt issued by domestic or
foreign companies of all kinds, including those with small-, mid- and
large-capitalizations. Corporate debt may be rated investment grade or below
investment grade and may carry fixed, variable, or floating rates of
interest.
Because
of the wide range of types and maturities of corporate debt securities, as well
as the range of creditworthiness of its issuers, corporate debt securities have
widely varying potentials for return and risk profiles. For example, commercial
paper issued by a large established domestic corporation that is rated
investment grade may have a modest return on principal, but carries relatively
limited risk. On the other hand, a long-term corporate note issued by a small
foreign corporation from an emerging market country that has not been rated may
have the potential for relatively large returns on principal, but carries a
relatively high degree of risk.
Corporate
debt securities carry credit risk, interest rate risk and prepayment risk.
Credit risk is the risk that a Fund could lose money if the issuer of a
corporate debt security is unable to pay interest or repay principal when it is
due. Some corporate debt securities that are rated below investment grade are
generally considered speculative because they present a greater risk of loss,
including default, than higher quality debt securities. The credit risk of a
particular issuer’s debt security may vary based on its priority for repayment.
For example, higher ranking (senior or secured) debt securities have a higher
priority than lower ranking (subordinated or unsecured) securities. This means
that the issuer might not make payments on subordinated securities while
continuing to make payments on senior securities. In addition, in the event of
bankruptcy, holders of higher-ranking senior or secured securities may receive
amounts otherwise payable to the holders of more junior or unsecured securities.
Interest
rate risk is the risk that the value of certain corporate debt securities will
tend to fall when interest rates rise. In general, corporate debt securities
with longer terms tend to fall more in value when interest rates rise than
corporate debt securities with shorter terms. Prepayment risk occurs when
issuers may prepay fixed rate debt securities when interest rates fall, forcing
a Fund to invest in securities with lower interest rates. Issuers of debt
securities are also subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors that may restrict the
ability of the issuer to pay, when due, the principal of and interest on its
debt securities. The possibility exists therefore, that, as a result of
bankruptcy, litigation or other conditions, the ability of an issuer to pay,
when due, the principal of and interest on its debt securities may become
impaired.
Asset-Backed
Securities.
Asset-backed securities represent an interest in a pool of assets such as car
loans and credit card receivables. Almost any type of fixed income assets
(including other fixed income securities) may be used to create an asset-backed
security. However, most asset-backed securities involve consumer or commercial
debts with weighted average lives of ten years or less. Asset-backed securities
may have a higher level of default and lower recoveries than mortgage-backed
securities. Some tranches of asset-backed securities have substantial
amounts of credit enhancement in order to seek to help mitigate or minimize the
risk of principal or interest loss as a result of normalized levels of defaults
and recoveries, which may increase their overall credit rating. Asset-backed
securities may have a higher level of default and lower recoveries than
mortgage-backed securities. Asset-backed securities may take the form of
commercial paper or notes, in addition to pass-through certificates or
asset-backed bonds.
Collateralized
Loan Obligations (“CLOs”) are a type of asset-backed security. CLOs are
ordinarily issued by a trust or other special purpose entity and are typically
collateralized by a pool of loans, which may include, among others, domestic and
non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate
loans, including loans that may be rated below investment grade or equivalent
unrated loans, held by such issuer.
Mortgage-Backed
Securities.
Mortgage-Backed Securities generally represent interests in pools of mortgages
on residential or commercial property. Mortgages may have fixed or adjustable
interest rates. Interests in pools of adjustable rate mortgages are known as
ARMs. Mortgage-backed securities come in a variety of forms. Many have
extremely complicated terms. The simplest form of mortgage-backed securities is
a “pass-through certificate.” Holders of pass-through certificates receive a pro
rata share of the payments from the underlying mortgages. Holders also receive a
pro rata share of any prepayments, so they assume all the prepayment risk of the
underlying mortgages. Mortgage-backed securities tend to pay higher yields to
compensate for prepayment risk.
Collateralized
mortgage obligations (“CMOs”) are complicated instruments that allocate payments
and prepayments from an underlying pass-through certificate among holders of
different classes of mortgage-backed securities. This creates different
prepayment and market risks for each CMO class. In addition, CMOs may allocate
interest payments to one class (Interest Only or IOs) and principal payments to
another class (Principal Only or POs). POs increase in value when prepayment
rates increase. In contrast, IOs decrease in value when prepayments increase,
because the underlying mortgages generate less interest payments. However, IOs’
prices tend to increase when interest rates rise (and prepayments fall), making
IOs a useful hedge against market risk.
Residential
mortgage-backed securities include securities that reflect an interest in, and
are secured by, mortgage loans on residential real
property. Residential mortgages may be issued and guaranteed by the
U.S. Government or its agencies, some of which do not have an explicit U.S.
Government guarantee, or by private issuers. Residential mortgages issued or
guaranteed by private issuers typically have more credit risk than those issued
or guaranteed by the U.S. Government or its agencies. Generally, homeowners have
the option to prepay their mortgages at any time without penalty. Homeowners
frequently refinance high rate mortgages when mortgage rates fall. This results
in the prepayment of the mortgages underlying residential mortgage-backed
securities, which deprives holders of the securities of the higher yields.
Conversely, when mortgage rates increase, prepayments due to refinancings
decline. This extends the life of residential mortgage-backed securities with
lower yields. As a result, increases in prepayments of residential
mortgage-backed securities purchased at a premium, or decreases in prepayments
of residential mortgage-backed securities purchased at a discount, may reduce
their yield and price. This relationship between interest rates and
mortgage prepayments makes the price of residential mortgage-backed securities
more volatile than most other types of fixed income securities with comparable
credit risks.
Commercial
mortgage-backed securities include securities that reflect an interest in, and
are secured by, mortgage loans on commercial real property. In addition to
prepayment and extension risk, commercial mortgage-backed securities also
reflect the risks of investing in the real estate securing the underlying
mortgage loans including, the effects of local and other economic conditions on
real estate markets, the ability of the property owner to make loan payments,
the ability of tenants to make lease payments, and the ability of a property to
attract and retain tenants. Commercial mortgage-backed securities may be less
liquid and exhibit greater price volatility than other types of mortgage- or
asset-backed securities.
Municipal
Securities. Municipal
Securities are fixed income securities issued by states, counties, cities and
other political subdivisions and authorities. Although most municipal securities
are exempt from federal income tax, municipalities also may issue taxable
securities. Tax-exempt securities are generally classified by their source of
payment. A Fund’s investments in municipal securities may include tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
general obligation bonds. Tax anticipation notes are issued to finance working
capital needs of municipalities. Generally, tax anticipation notes are issued in
anticipation of future seasonal tax revenues, such as from income, sales, use
and business taxes and are payable from these future revenues. Revenue
anticipation notes are issued
in
expectation of receipt of non-tax revenue, such as that available under Federal
revenue-sharing programs. Bond anticipation notes are securities issued by
municipalities to provide interim financing until long-term bond financing can
be arranged. In most cases, the long-term bonds provide the funds for the
repayment of the bond anticipation notes.
For
general obligation bonds, the issuer has pledged its full faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue
source.
Timely
payments on general obligation bonds depend on the issuer’s credit quality,
ability to raise tax revenues and ability to maintain an adequate tax
base.
Project
Notes.
Project Notes are issued by a state or local housing agency and are sold by the
Department of Housing and Urban Development. While the issuing agency has the
primary obligation with respect to its Project Notes, they are also secured by
the full faith and credit of the U.S. through agreements with the issuing
authority which provide that, if required, the Federal government will lend the
issuer an amount equal to the principal of and interest on the Project
Notes.
Convertible
Securities.
Convertible securities include fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer’s underlying
common stock or other equity security at the option of the holder during a
specified period. Convertible securities entitle the holder to receive interest
paid or accrued on debt or dividends paid or accrued on preferred stock until
the security matures or is redeemed, converted or exchanged. Convertible
securities may take the form of convertible preferred stock, convertible bonds
or debentures, units consisting of “usable” bonds and warrants or a combination
of the features of several of these securities. The investment characteristics
of each convertible security vary widely, which allows convertible securities to
be employed for a variety of investment strategies. Each Fund will exchange or
convert convertible securities into shares of underlying common stock when, in
the opinion of the Adviser, the investment characteristics of the underlying
common stock or other equity security will assist a Fund in achieving its
investment objectives. Each Fund may also elect to hold or trade convertible
securities. In selecting convertible securities, the Adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation.
Contingent
Convertible Securities. Contingent
convertible securities (“CoCos”) are a form of hybrid debt security that are
intended to either convert into equity or have their principal written down upon
the occurrence of certain “triggers.” The triggers are generally linked to
regulatory capital thresholds or regulatory actions calling into question the
issuing banking institution’s continued viability as a going concern. CoCos’
unique equity conversion or principal write-down features are tailored to the
issuing banking institution and its regulatory requirements. Some additional
risks associated with CoCos include, but are not limited to:
•Loss
absorption risk. CoCos have fully discretionary coupons. This means coupons can
potentially be cancelled at the banking institution’s discretion or at the
request of the relevant regulatory authority in order to help the bank absorb
losses.
•Subordinated
instruments. CoCos will, in the majority of circumstances, be issued in the form
of subordinated debt instruments in order to provide the appropriate regulatory
capital treatment prior to a conversion. Accordingly, in the event of
liquidation, dissolution or winding-up of an issuer prior to a conversion having
occurred, the rights and claims of the holders of the CoCos, such as the Funds,
against the issuer in respect of or arising under the terms of the CoCos shall
generally rank junior to the claims of all holders of unsubordinated obligations
of the issuer. In addition, if the CoCos are converted into the issuer’s
underlying equity securities following a conversion event (i.e.,
a “trigger”), each holder will be subordinated due to their conversion from
being the holder of a debt instrument to being the holder of an equity
instrument.
•Market
value will fluctuate based on unpredictable factors. 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.
Zero-Coupon
Securities.
Zero-coupon securities make no periodic interest payments, but are sold at a
deep discount from their face value. The buyer recognizes a rate of return
determined by the gradual appreciation of the security, which is redeemed at
face value on a specified maturity date. The discount varies depending on the
time remaining until maturity, as well as market interest rates, liquidity of
the security, and the issuer’s perceived credit quality. If the issuer defaults,
the holder may not receive any return on its investment. Because zero-coupon
securities bear no interest, their price fluctuates more than other types of
bonds. Since zero-coupon bondholders do not receive interest payments, when
interest rates rise, zero-coupon securities fall more dramatically in value than
bonds paying interest on a current basis. When interest rates fall, zero-coupon
securities rise more rapidly in value because the bonds reflect a fixed rate of
return. An investment in zero-coupon may cause a Fund to recognize income and
make distributions to shareholders before it receives any cash payments on its
investment. Pay-in-kind securities have characteristics similar to those of zero
coupon securities, but interest on such securities may be paid in the form of
obligations of the same type rather than cash.
Unrated
Debt Securities.
Each Fund may also invest in unrated debt securities. Unrated debt, while not
necessarily lower in quality than rated securities, may not have as broad a
market. Because of the size and perceived demand for the issue, among other
factors, certain issuers may decide not to pay the cost of getting a rating for
their bonds. The creditworthiness of the issuer, as well as any financial
institution or other party responsible for payments on the security, will be
analyzed to determine whether to purchase unrated bonds.
Bank
Loans.
Each Fund may invest in bank loans of any seniority. Investing in bank loans
involves risks that are additional to and different from those relating to bonds
and other types of debt securities.
There
is less publicly available, reliable information about most bank loans than is
the case for many other types of debt instruments. In certain circumstances,
these loans may not be deemed to be securities and bank loans are not subject to
many of the rules governing the securities markets, including disclosure
requirements. As a result, bank loan investors may not have the protection of
the anti-fraud provision of the federal securities laws, and must rely instead
on the contractual provisions in the loan agreement and applicable common-law
fraud protections. Traditionally, borrowers under bank loans make non-public
information available to their lenders. However, as the universe of bank loan
market participants has expanded beyond traditional lenders to include dealers,
funds, and other investors who are active in the public securities markets, some
participants choose not to receive such non-public information and make
investment decisions based solely on public information about the borrower. If a
Fund purchases a bank loan and elects not to receive non-public information with
respect to the loan, it may forego information that would be relevant to its
investment decisions.
An
economic downturn generally leads to a higher non-payment rate for bank loans,
and a loan may lose significant value before a default occurs. Moreover, any
specific collateral used to secure a loan may decline in value or become
illiquid, which would adversely affect the loan’s value. In the event of the
bankruptcy of a borrower, a Fund could experience delays or limitations with
respect to its ability to realize the benefits of the collateral securing a
loan. No active trading market may exist for certain loans, which may impair the
ability of a fund to realize full value in the event of the need to sell a loan
and which may make it difficult to value loans. Adverse market conditions may
impair the liquidity of some actively traded loans. To the extent that a
secondary market does exist for certain loans, the market may be subject to
irregular trading activity and wide bid/ask spreads, which may result in limited
liquidity and pricing transparency. In addition, loans may be subject to
restrictions on sales or assignment and generally are subject to extended
settlement periods that may be longer than seven days.
Each
Fund may not be able to unilaterally enforce all rights and remedies under a
bank loan and with regard to any associated collateral. If a bank loan is
acquired through a participation, a Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement, and a Fund may
not directly benefit from the collateral supporting the debt obligation in which
it has purchased the participation. As a result, each Fund will be exposed to
the credit risk of both the borrower and the institution selling the
participation.
Each
Fund may invest in second-lien loans, which are subordinated to claims of senior
secured creditors. Because second-lien loans are subordinated or unsecured and
thus lower in priority of payment to senior loans, they are typically lower
rated and subject to the additional risk that the cash flow of the borrower and
property securing the loan or debt, if any, may be insufficient to meet
scheduled payments after giving effect to the senior secured obligations of the
borrower. Second-lien loans generally have greater price volatility than senior
loans and may be less liquid.
Yankee
Bonds. Each
Fund may invest in Yankee bonds. Yankee bonds are U.S. dollar denominated bonds
typically issued in the U.S. by foreign governments and their agencies and
foreign banks and corporations. Each Fund may also invest in Yankee Certificates
of Deposit (“Yankee CDs”). Yankee CDs are U.S. dollar-denominated certificates
of deposit issued by a U.S. branch of a foreign bank and held in the United
States. These investments involve risks that are different from investments in
securities issued by U.S. issuers, including potential unfavorable political and
economic developments, foreign withholding or other taxes, seizure of foreign
deposits, currency controls,
interest
limitations or other governmental restrictions which might affect and create
increased risk relative to payment of principal or interest.
Variable
and Floating Rate Securities. Variable
and floating rate securities provide for a periodic adjustment in the interest
rate paid on the obligations. The terms of such obligations must provide that
interest rates are adjusted periodically based upon an interest rate adjustment
index as provided in the respective obligations. 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 base rate. The base rate usually is a benchmark that
“floats” or changes to reflect current interest rates, such as (i) the prime
rate offered by one or more major U.S. banks, or (ii) the London Inter-Bank
Offered Rate (“LIBOR”). The applicable benchmark is defined by the terms of an
obligation and will remain the same for the life of such obligation. If the
benchmark interest rate on a floating rate security changes, the rate payable
will, in turn, change at the next scheduled adjustment date.
On
July 27, 2017, the head of the United Kingdom’s Financial Conduct Authority
announced a desire to phase out the use of LIBOR by the end of 2021. .Although
many LIBOR rates will be phased out at the end of 2021 as originally intended, a
selection of widely used USD LIBOR rates will continue to be published until
June 2023 in order to assist with the transition. There remains uncertainty
regarding the effect of the LIBOR transition process and the nature of any
replacement rate. There is no assurance that the composition or characteristics
of any alternative reference rate will be similar to or produce the same value
or economic equivalence as LIBOR or that instruments using an alternative rate
will have the same volume or liquidity. As a result, any impact of a transition
away from LIBOR on the Funds or the instruments in which the Funds invests
cannot yet be determined.
Each
Fund may invest in floating rate debt instruments (“floaters”) and engage in
credit spread trades. 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. The Funds also may invest in inverse floating rate debt
instruments (“inverse floaters”). The interest rate on an inverse floater resets
in the opposite direction from the market rate of interest to which the inverse
floater is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality.
Inflation-Indexed
Securities.
Inflation-indexed securities are debt securities, the principal value of which
is periodically adjusted to reflect the rate of inflation as indicated by the
Consumer Price Index for all Urban Consumers before seasonal adjustment (“CPI”).
Inflation-indexed securities may be issued by the U.S. government, by agencies
and instrumentalities of the U.S. government, and by corporations. The U.S.
Treasury issues Treasury inflation-protected securities (“TIPS”) and some other
issuers use a structure that accrues inflation into the principal value of the
bond. Most other issuers pay out the CPI accruals as part of a semiannual
coupon.
The
periodic adjustment of U.S. inflation-indexed securities is tied to the CPI,
which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI 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 will accurately measure the real rate of inflation in the prices of goods
and services.
Inflation,
which is a general rise in prices of goods and services, erodes the purchasing
power of an investor’s portfolio. For example, if an investment provides a
“nominal” total return of 5% in a given
year
and inflation is 2% during that period, the inflation-adjusted, or real, return
is 3%. Inflation, as measured by the CPI, has occurred in almost each of the
past 50 years, so investors should be conscious of both the nominal and real
returns of their investments. Although inflation-indexed securities
are expected to be protected from long-term inflationary trends, short-term
increases in inflation may lead to a decline in value. If interest rates rise
because of reasons other than inflation (for example, because of changes in
currency exchange rates), investors in these securities may not be protected to
the extent that the increase is not reflected in the bond’s inflation
measure.
If
the periodic adjustment rate measuring inflation (i.e., the CPI) falls, the
principal value of inflation-indexed securities will be adjusted downward, and
consequently the interest payable on these securities (calculated with respect
to a smaller principal amount) will be reduced. Repayment of the original bond
principal upon maturity (as adjusted for inflation) is guaranteed in the case of
TIPS, even during a period of deflation. However, the current market value of
the inflation-indexed securities is not guaranteed, and will fluctuate. Other
inflation-indexed securities include inflation-related bonds, which may or may
not provide a similar guarantee. If a guarantee of principal is not provided,
the adjusted principal value of the bond repaid at maturity may be less than the
original principal.
The
value of inflation-indexed securities should change in response to changes in
real interest rates. Real interest rates, in turn, are tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of
inflation-indexed securities. In contrast, if nominal interest rates increased
at a faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed securities.
Coupon
payments that a Fund receives from inflation-indexed securities are included in
the Fund’s gross income for the period during which they accrue. Any increase in
principal for an inflation-indexed security resulting from inflation adjustments
is considered by Internal Revenue Service (IRS) regulations to be taxable income
in the year it occurs. For direct holders of an inflation-indexed security, this
means that taxes must be paid on principal adjustments, even though these
amounts are not received until the bond matures. By contrast, a Fund holding
these securities distributes both interest income and the income attributable to
principal adjustments each quarter in the form of cash or reinvested shares
(which, like principal adjustments, are taxable to shareholders). It may be
necessary for a Fund to liquidate portfolio positions, including when it is not
advantageous to do so, in order to make required distributions.
U.S.
Government Obligations
Each
Fund may invest in U.S. government obligations. U.S. government obligations
include securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities. Treasury bills, the most
frequently issued marketable government securities, have a maturity of up to one
year and are issued on a discount basis. U.S. government obligations include
securities issued or guaranteed by government-sponsored
enterprises.
Payment
of principal and interest on U.S. government obligations may be backed by the
full faith and credit of the United States or may be backed solely by the
issuing or guaranteeing agency or instrumentality itself. In the latter case,
the investor must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
government would provide financial support to its agencies or instrumentalities,
including government-sponsored enterprises, where it is not obligated to do so
(see “Agency Obligations,” below). In addition, U.S. government obligations are
subject to fluctuations in market value due to fluctuations in market
interest
rates. As a general matter, the value of debt instruments, including U.S.
government obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. government
obligations are subject to fluctuations in yield or value due to their structure
or contract terms.
Agency
Obligations
Each
Fund may invest in agency obligations, such as the Export-Import Bank of the
United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Government National Mortgage Association (“GNMA”), commonly
known as “Ginnie Mae,” Federal National Mortgage Association (“FNMA”), commonly
known as “Fannie Mae,” Federal Home Loan Mortgage Corporation (“FHLMC”),
commonly known as “Freddie Mac,” and the Student Loan Marketing Association
(“SLMA”), commonly known as “Sallie Mae.” Some, such as those of the
Export-Import Bank of United States, are supported only by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA and FHLMC,
are supported by only the discretionary authority of the U.S. government to
purchase the agency’s obligations; still others, such as those of the SLMA, are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. government would provide financial support to U.S.
government-sponsored instrumentalities because they are not obligated by law to
do so. As a result, there is a risk that these entities will default on a
financial obligation. For instance, in September 2008, at the direction of the
U.S. Treasury, FNMA and FHLMC were placed into conservatorship under the Federal
Housing Finance Agency (“FHFA”), a newly created independent
regulator.
Cash
Investments
Each
Fund may invest up to 100% of its assets in high-quality, short-term debt
securities and money market instruments (“Cash Investments”) for (i) temporary
defensive purposes in amounts up to 100% of a Fund’s assets in response to
adverse market, economic, or political conditions and (ii) retaining flexibility
in meeting redemptions, paying expenses, and identifying and assessing
investment opportunities. Cash Investments include shares of other mutual funds,
certificates of deposit, bankers’ acceptances, time deposits, savings
association obligations, commercial paper, short-term notes (including discount
notes), and other obligations.
Each
Fund may hold a substantial position in Cash Investments for long periods of
time, which may result in a Fund not achieving its investment objective. If the
market advances during periods when a Fund is holding a large Cash Investment, a
Fund may not participate to the extent it would have if a Fund had been more
fully invested. To the extent that a Fund uses a money market fund for its Cash
Investment, there will be some duplication of expenses because a Fund would bear
its pro rata portion of such money market fund’s advisory fees and operational
expenses.
Cash
Investments are subject to credit risk and interest rate risk, although to a
lesser extent than longer-term debt securities, due to Cash Investments’
short-term, significant liquidity, and the high credit quality typically
associated with such securities.
Each
Fund may invest in any of the following Cash Investments:
Money
Market Mutual Funds.
Generally, money market mutual funds seek to earn income consistent with the
preservation of capital and maintenance of liquidity. They primarily invest in
high quality money market obligations, including U.S. government obligations,
bank obligations and high-grade corporate instruments. These investments
generally mature within 397 days from the date of
purchase.
An investment in a money market mutual fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any
government agency.
To
the extent that a Fund invests in money market mutual funds, your cost of
investing in a Fund will generally be higher since you will indirectly bear fees
and expenses charged by the underlying money market mutual funds in addition to
a Fund’s direct fees and expenses. Furthermore, investing in money market mutual
funds could affect the timing, amount and character of distributions to you and
therefore may increase the amount of taxes payable by you.
Bank
Certificates of Deposit, Bankers’ Acceptances and Time Deposits.
Each Fund may acquire certificates of deposit, bankers’ acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
monies deposited in a commercial bank for a definite period of time and earning
a specified return. Bankers’ acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are “accepted” by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers’ acceptances acquired by a Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and
foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully
insured by the U.S. government.
In
addition to purchasing certificates of deposit and bankers’ acceptances, to the
extent permitted under the investment objective and policies stated above and in
the Prospectus, a Fund may make interest-bearing time deposits or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
Savings
Association Obligations.
Each Fund may invest in certificates of deposit (interest-bearing time deposits)
issued by savings banks or savings and loan associations that have capital,
surplus and undivided profits in excess of $100 million, based on latest
published reports, or less than $100 million if the principal amount of
such obligations is fully insured by the U.S. government.
Commercial
Paper, Short-Term Notes and Other Corporate Obligations.
Each Fund may invest a portion of its assets in commercial paper, short-term
notes, and other corporate obligations. Commercial paper consists of unsecured
promissory notes issued by corporations. Issues of commercial paper and
short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial
paper and short-term notes will consist of issues rated at the time of purchase
“A‑2” or higher by S&P, “Prime-1” or “Prime-2” by Moody’s, or similarly
rated by another nationally recognized statistical rating organization or, if
unrated, determined by the Adviser to be of comparable quality.
Corporate
obligations include bonds and notes issued by corporations to finance
longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, a Fund may purchase
corporate obligations which have remaining maturities of one year or less from
the date of purchase and which are rated “A” or higher by S&P, “A” or higher
by Moody’s, similarly rated by another nationally recognized statistical rating
organization, or, if unrated, determined by the Adviser to be of comparable
quality.
Illiquid
Investments
The
Funds may purchase illiquid investments, which may include securities that are
not readily marketable and securities that are not registered under the
Securities Act. A Fund may not acquire any illiquid investments if, immediately
after the acquisition, a Fund would have invested more than 15% of its net
assets in illiquid investments that are assets. The term “illiquid investments”
for this purpose means any investment 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, as determined pursuant to the provisions of Rule 22e-4 under the
1940 Act. The Funds may not be able to sell illiquid investments when the
Adviser considers it desirable to do so or may have to sell such investments at
a price that is lower than the price that could be obtained if the investments
were more liquid. In addition, the sale of illiquid investments also may require
more time and may result in higher dealer discounts and other selling expenses
than does the sale of investments that are more liquid. Illiquid investments
also may be more difficult to value due to the unavailability of reliable market
quotations for such investments, and investments in illiquid investments may
have an adverse impact on NAV.
Institutional
markets for restricted securities have developed as a result of the promulgation
of Rule 144A under the Securities Act, which provides a safe harbor from
Securities Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and otherwise meet selection criteria, a Fund may make such
investments. Whether or not such investments are illiquid depends on the market
that exists for the particular investment. It is not possible to predict with
assurance exactly how the market for Rule 144A restricted securities or any
other security will develop. An investment which when purchased enjoyed a fair
degree of marketability may subsequently become illiquid. In such event,
appropriate remedies are considered to minimize the effect on a Fund’s
liquidity.
Investment
Companies
Each
Fund may invest in other investment companies to the extent permitted by the
1940 Act. A Fund generally may purchase or redeem, without limitation, shares of
any affiliated or unaffiliated money market funds, including unregistered money
market funds, so long as a Fund does not pay a sales load or service fee in
connection with the purchase, sale or redemption, or if such fees are paid a
Fund’s investment adviser waives its management fee in an amount necessary to
offset the amounts paid. With respect to other investments in investment
companies, the 1940 Act generally limits a Fund from acquiring (i) more than 3%
of the total outstanding shares of another investment company; (ii) shares
of another investment company having an aggregate value in excess of 5% of the
value of the total assets of a Fund; or (iii) shares of another registered
investment company and all other investment companies having an aggregate value
in excess of 10% of the value of the total assets of a Fund.
Investments
by a Fund in other investment companies will be subject to the limitations of
the 1940 Act (including limitations on sales charges), and the rules and
regulations thereunder. By investing in securities of an investment company, a
Fund’s shareholders will indirectly bear the fees and expenses of that
underlying fund in addition to a Fund’s own fees and expenses.
In
October 2020, the SEC adopted regulatory changes related to the ability of an
investment company to invest in other investment companies in excess of
specified statutory limits. These changes include, among other things,
amendments to Rule 12d1-1, the rescission of Rule 12d1-2, the adoption of new
Rule 12d1-4, and the rescission of certain exemptive relief issued by the SEC
permitting certain fund of funds arrangements. Rule 12d1-4, which became
effective on January 19, 2021, permits the Fund to invest in other investment
companies, including money market funds, beyond the statutory limits, subject to
certain conditions. The rescission of the applicable exemptive orders and the
withdrawal of
the
applicable no-action letters was effective on January 19, 2022. Following this
effectiveness, an investment company is no longer able to rely on these
exemptive orders and no-action letters, and is subject instead to Rule 12d1-4
and other applicable rules under Section 12(d)(1).
Open-End
Mutual Funds. Open-end
mutual funds are investment companies that issue new shares continuously and
redeem shares daily. The risks of investment of open-end mutual funds typically
reflect securities in which the funds invest. The NAV per share of an open-end
fund will fluctuate daily depending upon the performance of the securities held
by a fund. Each open-end fund may have a different investment objective and
strategy and different investment portfolio. Different funds may also be subject
to different risks, volatility and fees and expenses. When a Fund invests in
shares of an open-end fund, shareholders of a Fund bear their proportionate
share of the open-end funds’ fees and expenses, as well as their share of a
Fund’s fees and expenses.
Exchange-Traded
Funds. Exchange-Traded
Funds (“ETFs”)
are
typically open-end investment companies that are bought and sold on a national
securities exchange. When a Fund invests in an ETF, it will bear additional
expenses based on its pro rata share of the ETF’s operating expenses, including
the potential duplication of management fees. The risk of owning an ETF
generally reflects the risks of owning the underlying securities it holds. Many
ETFs seek to replicate a specific benchmark index. However, an ETF may not fully
replicate the performance of its benchmark index for many reasons, including
because of the temporary unavailability of certain index securities in the
secondary market or discrepancies between the ETF and the index with respect to
the weighting of securities or the number of stocks held. Some ETFs are actively
managed and instead of replicating, they seek to outperform a particular index
or basket or price of a commodity or currency. In addition, shares of an ETF may
trade at a market price that is higher or lower than their net asset value and
an active trading market in such shares may not develop or continue. Lack of
liquidity in an ETF could result in an ETF being more volatile than the
underlying portfolio of securities it holds. In addition, because of ETF
expenses, compared to owning the underlying securities directly, it may be more
costly to own an ETF.
If
a Fund invests in shares of an ETF, shareholders will indirectly bear fees and
expenses charged by the underlying ETF in which a Fund invests in addition to a
Fund’s direct fees and expenses. Each Fund also will incur brokerage costs when
it purchases ETFs. Furthermore, investments in other ETFs could affect the
timing, amount and character of distributions to shareholders and therefore may
increase the amount of taxes payable by investors in a Fund.
Exchange-Traded
Notes
Exchange-Traded
Notes (“ETNs”) are senior, unsecured, unsubordinated debt securities whose
returns are linked to the performance of a particular market benchmark or
strategy minus applicable fees. ETNs are traded on an exchange (e.g.,
the New York Stock Exchange) during normal trading hours. However, investors can
also hold the ETN until maturity. At maturity, the issuer pays to the investor a
cash amount equal to the principal amount, subject to the day's market benchmark
or strategy factor. ETNs do not make periodic coupon payments or provide
principal protection. ETNs are subject to credit risk and the value of the ETN
may drop due to a downgrade in the issuer’s credit rating, despite the
underlying market benchmark or strategy remaining unchanged. The value of an ETN
may also be influenced by time to maturity, issuer call options, level of supply
and demand for the ETN, volatility and lack of liquidity in underlying assets,
changes in the applicable interest rates, changes in the issuer’s credit rating,
and economic, legal, political, or geographic events that affect the referenced
underlying asset. When a Fund invests in ETNs it will bear its proportionate
share of any fees and expenses borne by the ETN. A Fund’s decision to sell its
ETN holdings may be limited by the availability of a secondary market. In
addition, although an ETN may be listed on an exchange, the issuer may not be
required to maintain the listing and there can be no assurance that a secondary
market
will exist for an ETN. ETNs are also subject to tax risk. No assurance can be
given that the IRS will accept, or a court will uphold, how a Fund characterizes
and treats ETNs for tax purposes. Further, the IRS and Congress are considering
proposals that would change the timing and character of income and gains from
ETNs. An ETN that is tied to a specific market benchmark or strategy may not be
able to replicate and maintain exactly the composition and relative weighting of
securities, commodities or other components in the applicable market benchmark
or strategy. Some ETNs that use leverage can, at times, be relatively illiquid
and, thus, they may be difficult to purchase or sell at a fair price. Leveraged
ETNs are subject to the same risk as other instruments that use leverage in any
form. The market value of ETN shares may differ from their market benchmark or
strategy. This difference in price may be due to the fact that the supply and
demand in the market for ETN shares at any point in time is not always identical
to the supply and demand in the market for the securities, commodities or other
components underlying the market benchmark or strategy that the ETN seeks to
track. As a result, there may be times when an ETN share trades at a premium or
discount to its market benchmark or strategy.
Repurchase
Agreements
Each
Fund may enter into repurchase agreements. Under such agreements, a Fund agrees
to purchase U.S. government obligations from a counterparty and the counterparty
agrees to repurchase the securities at a mutually agreed upon time and price.
The repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security itself. Such repurchase agreements will be made only with
banks with assets of $500 million or more that are insured by the Federal
Deposit Insurance Corporation or with government securities dealers recognized
by the Federal Reserve Board and registered as broker-dealers with the SEC or
exempt from such registration. A Fund will generally enter into repurchase
agreements of short durations, from overnight to one week, although the
underlying securities generally have longer maturities. A Fund may not enter
into a repurchase agreement with more than seven days to maturity if, as a
result, more than 15% of the value of a Fund’s net assets would be invested in
illiquid investments including such repurchase agreements. To the extent
necessary to facilitate compliance with Section 12(d)(3) of the 1940 Act
and Rule 12d3-1 promulgated thereunder, a Fund will ensure that repurchase
agreements will be collateralized fully to the extent required by Rule
5b-3.
For
purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from a
Fund to the seller of the U.S. government obligations that are subject to the
repurchase agreement. It is not clear whether a court would consider the U.S.
government obligations to be acquired by a Fund subject to a repurchase
agreement as being owned by a Fund or as being collateral for a loan by a Fund
to the seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the U.S. government obligations before
its repurchase under a repurchase agreement, a Fund could encounter delays and
incur costs before being able to sell the underlying U.S. government
obligations. Delays may involve loss of interest or a decline in price of the
U.S. government obligations. If a court characterizes the transaction as a loan
and a Fund has not perfected a security interest in the U.S. government
obligations, a Fund may be required to return the securities to the seller’s
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, a Fund would be at the risk of losing some or all of the principal and
income involved in the transaction. As with any unsecured debt instrument
purchased for a Fund, the Adviser seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the other party, in
this case the seller of the U.S. government security.
Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the U.S. government obligations. However,
a Fund will always receive as collateral
for
any repurchase agreement to which it is a party securities acceptable to the
Adviser, the market value of which is equal to at least 100% of the repurchase
price, and a Fund will make payment against such securities only upon physical
delivery or evidence of book entry transfer to the account of its Custodian. If
the market value of the U.S. government obligations subject to the repurchase
agreement become less than the repurchase price (including interest), a Fund
will direct the seller of the U.S. government obligations to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. It is possible that a Fund
could be unsuccessful in seeking to enforce on the seller a contractual
obligation to deliver additional securities.
Reverse
Repurchase Agreements
Each
Fund may enter into reverse repurchase agreements for temporary purposes with
banks and securities dealers if the creditworthiness of the bank or securities
dealer has been determined by the Adviser to be satisfactory. A reverse
repurchase agreement is a repurchase agreement in which a Fund is the seller of,
rather than the investor in, securities and agrees to repurchase them at an
agreed-upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of securities because it
avoids certain market risks and transaction costs.
Reverse
repurchase agreements are considered a form of borrowing and the use of reverse
repurchase agreements by a Fund creates leverage which increases its investment
risk. If the income and gains on securities purchased with the proceeds of these
transactions exceed the cost, a Fund’s earnings or NAV will increase faster than
otherwise would be the case; conversely, if the income and gains fail to exceed
the cost, earnings or NAV would decline faster than otherwise would be the case.
Each Fund intends to enter into reverse repurchase agreements only if the income
from the investment of the proceeds is expected to be greater than the expense
of the transaction, because the proceeds are invested for a period no longer
than the term of the reverse repurchase agreement.
Dollar
Roll Transactions
“Dollar
roll” transactions consist of the sale by a fund to a bank or broker-dealer (the
“counterparty”) of Ginnie Mae certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date. The counterpart receives all principal
and interest payments, including prepayments, made on the security while it is
the holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different repurchase price and a cash settlement
made at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which a
fund agrees to buy a security on a future date.
The
entry into dollar rolls involves potential risks of loss that are different from
those related to the securities underlying the transactions. For example, if the
counterparty becomes insolvent, a Fund’s right to purchase from the counterparty
might be restricted. In addition, the value of such securities may change
adversely before a Fund is able to purchase them. Similarly, a Fund may be
required to purchase securities in connection with a dollar roll at a higher
price than may otherwise be available on the open market. Since, as noted above,
the counterparty is required to deliver a similar, but not identical, security
to a Fund, the security that a Fund is required to buy under the dollar roll
will provide a return that exceeds the transaction costs.
Securities
Lending
Each
Fund may lend its securities in order to increase the return on its portfolio.
The SEC currently requires that the following conditions must be met whenever a
Fund’s portfolio securities are loaned: (1) a Fund must receive
liquid collateral of at least 102% for domestic securities and 105%
for
foreign securities from the borrower in the form of cash or cash equivalents;
(2) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (3) a Fund must be
able to terminate the loan at any time; (4) a Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities, and any increase in market value; (5) a Fund may
pay only reasonable custodian fees approved by the Board in connection with the
loan; (6) while voting rights on the loaned securities may pass to the
borrower, the Board must terminate the loan and regain the right to vote the
securities if a material event adversely affecting the investment occurs, and
(7) a Fund may not loan its portfolio securities so that the value of the
loaned securities is more than one-third of its total asset value, including
collateral received from such loans. These conditions may be subject to future
modification Such loans will be terminable at any time upon specified
notice.
Each
Fund might experience the risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with a Fund. In
addition, the Funds will not enter into any portfolio security lending
arrangement having a duration of longer than one year. The principal risk of
portfolio lending is potential default or insolvency of the borrower. In either
of these cases, a Fund could experience delays in recovering securities or
collateral or could lose all or part of the value of the loaned securities. As
part of participating in a lending program, a Fund may be required to invest in
collateralized debt or other securities that bear the risk of loss of principal.
In addition, all investments made with the collateral received are subject to
the risks associated with such investments. If such investments lose value, a
Fund will have to cover the loss when repaying the collateral.
The
Board appoints agents to be responsible for monitoring the creditworthiness of
borrowers. To the extent a Fund is participating in securities lending, on a
quarterly basis, the Board reviews a report regarding a Fund’s loans. Such
report includes, among other things, the identity and value of all securities
comprising each loan, the length of time that the loan has been outstanding, the
amount earned by a Fund, the amount of fees paid in connection with the loan and
the ratio of the value of the collateral to the value of the loan.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that a Fund may receive as collateral
will not become part of a Fund’s investment portfolio at the time of the loan
and, in the event of a default by the borrower, a Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which a Fund is permitted to invest. During the time securities
are on loan, the borrower will pay a Fund any accrued income on those
securities, and a Fund may invest the cash collateral and earn income or receive
an agreed-upon fee from a borrower that has delivered cash-equivalent
collateral.
Borrowing
Each
Fund may borrow money in amounts of up to one-third of its total assets
(including the amount borrowed) from banks. This means that the 1940 Act
requires a fund to maintain continuous asset coverage of 300% of the amount
borrowed. In addition, a Fund is authorized to borrow money from time to
time for temporary, extraordinary or emergency purposes or for clearance of
transactions. The use of borrowing by a Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of a Fund’s assets fluctuate in
value, while the interest obligation resulting from a borrowing will be fixed by
the terms of a Fund’s agreement with its lender, the NAV per share of a Fund
will tend to increase more when its portfolio securities increase in value and
to decrease more when its portfolio assets decrease in value than would
otherwise be the case if a Fund did not borrow funds. In addition, interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio
securities
to meet interest or principal payments at a time when fundamental investment
considerations would not favor such sales. To the extent a Fund invests in
similar financing transactions, such as inverse floaters or reverse repurchase
agreements, such investments are also subject to this 300% asset coverage
requirement.
Cybersecurity
Risk
Each
Fund, like all companies, may be susceptible to operational and information
security risks. Cybersecurity failures or breaches of a Fund or its service
providers or the issuers of securities in which a Fund invests have the ability
to cause disruptions and impact business operations, potentially resulting in
financial losses, the inability of Fund shareholders to transact business,
violations of applicable privacy and other laws, regulatory fines, penalties,
reputational damage, reimbursement or other compensation costs, and/or
additional compliance costs. Each Fund and its shareholders could be negatively
impacted as a result.
The
Trust (on behalf of the Funds) has adopted the following restrictions as
fundamental policies, which may not be changed without the favorable “vote of
the holders of a majority of the outstanding voting securities” of a Fund, as
defined under the 1940 Act. Under the 1940 Act, the “vote of the holders of a
majority of the outstanding voting securities” means the vote of the holders of
the lesser of (i) 67% of the shares of a Fund represented at a meeting at
which the holders of more than 50% of its outstanding shares are represented; or
(ii) more than 50% of the outstanding shares of a Fund.
Each
Fund may not:
1. Issue
senior securities, borrow money or pledge its assets,(1)
except that (i) a Fund may borrow from banks in amounts not exceeding
one-third of its total assets (including the amount borrowed) less liabilities
(other than borrowings); and (ii) this restriction shall not prohibit a
Fund from engaging in options transactions, reverse repurchase agreements,
purchasing securities on a when-issued, delayed delivery, or forward delivery
basis, or short sales in accordance with its objectives and
strategies;
2. Underwrite
the securities of other issuers (except that a Fund may engage in transactions
involving the acquisition, disposition or resale of its portfolio securities
under circumstances where it may be considered to be an underwriter under the
Securities Act);
3. Purchase
or sell real estate or interests in real estate, unless acquired as a result of
ownership of securities (although a Fund may purchase and sell securities which
are secured by real estate and securities of companies that invest or deal in
real estate);
4. Purchase
or sell physical commodities except to the extent permitted by the 1940 Act or
other governing statute, by the rules thereunder, or by the SEC or other
regulatory agency with authority over a Fund;
5. Make
loans of money (except for the lending of a Fund’s portfolio securities,
repurchase agreements and purchases of debt securities consistent with the
investment policies of a Fund);
6. Invest
in the securities of any one industry or group of industries if, as a result,
25% or more of a Fund’s total assets would be invested in the securities of such
industry or group of industries, except that the foregoing does not apply to
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities(2);
or
7. For
the High Income Fund, with respect to 75% of the Fund’s total assets, purchase
the securities of any issuer (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities, or, to the extent
permitted by the 1940 Act, the rules and regulations thereunder and any
applicable exemptive relief, securities of other investment companies) if, as a
result, (1) more than 5% of the Fund’s total assets would be invested in the
securities of that issuer; or (2) the Fund would hold more than 10% of the
outstanding voting securities of that issuer.
8. For
the Short Term Fund, with respect to 50% of the Fund’s total assets, purchase
the securities of any issuer (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities, or, to the extent
permitted by the 1940 Act, the rules and regulations thereunder and any
applicable exemptive relief, securities of other investment companies) if, as a
result, (1) more than 5% of the Fund’s total assets would be invested in the
securities of that issuer; or (2) the Fund would hold more than 10% of the
outstanding voting securities of that issuer; or
9. For
the Short Term Fund, under normal market conditions the Fund will invest at
least 80% of its total assets (plus borrowings for investment purposes) in
municipal debt securities, the income from which is exempt from federal regular
individual income tax.
(1)With
respect to the fundamental policy relating to pledging assets set forth in
investment restriction 1 above, a Fund may enter into a secured line of credit
for bank borrowings which requires the pledging of its assets as
collateral.
(2)Although
not part of a Fund's fundamental investment restriction, consistent with SEC
Staff interpretations and guidance, governments or their political subdivisions
that issue tax-exempt municipal securities are not considered by a Fund to be
members of any industry.
Except
with respect to borrowing and investments in illiquid investments, if a
percentage or rating restriction on investment or use of assets set forth herein
or in the Prospectus is adhered to at the time a transaction is effected, later
changes in percentage resulting from any cause other than actions by a Fund will
not be considered a violation. With respect to borrowing, if at any time a
Fund’s borrowings exceed one-third of its total assets (including the amount
borrowed) less liabilities (other than borrowings), such borrowings will be
reduced within three days, (not including Sundays and holidays) or such longer
period as may be permitted by the 1940 Act, to the extent necessary to comply
with the one-third limitation. If at any time a Fund’s illiquid investments are
greater than 15% of its net assets, a Fund will determine how to remediate the
excess illiquid investments in accordance with the 1940 Act and a Fund’s
policies and procedures.
The
management and affairs of the Funds are supervised by the Board. The Board
consists of four individuals. The Trustees are fiduciaries and are governed by
the laws of the State of Delaware in this regard. The Board establishes policies
for the operation of the Funds and appoints the officers who conduct the daily
business of the Funds.
The
Board provides oversight of the management and operations of the Trust. Like all
mutual funds, the day-to-day responsibility for the management and operation of
the Trust is the responsibility of various service providers to the Trust and
its individual series, such as the Adviser; Quasar Distributors, LLC, the Funds’
principal underwriter (the “Distributor”); U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, the Funds’ administrator (the
“Administrator”)
and transfer agent (the “Transfer Agent”); and U.S. Bank N.A., the Funds’
Custodian, each of whom are discussed in greater detail in this SAI. The Board
approves all significant agreements between the Trust and its service providers,
including the agreements with the Adviser, Distributor, Administrator, Custodian
and Transfer Agent. The Board has appointed various individuals of certain of
these service providers as officers of the Trust, with responsibility to monitor
and report to the Board on the Trust’s day-to-day operations. In conducting this
oversight, the Board receives regular reports from these officers and service
providers regarding the Trust’s operations. The Board has appointed a Chief
Compliance Officer (“CCO”) who reports directly to the Board and who administers
the Trust’s compliance program and regularly reports to the Board as to
compliance matters, including an annual compliance review. Some of these reports
are provided as part of formal “Board Meetings,” which are held four times per
year, in person, and such other times as the Board determines is necessary, and
involve the Board’s review of recent Trust operations. From time to time one or
more members of the Board may also meet with Trust officers in less formal
settings, between formal Board Meetings to discuss various topics. In all cases,
however, the role of the Board and of any individual Trustee is one of oversight
and not of management of the day-to-day affairs of the Trust and its oversight
role does not make the Board a guarantor of the Trust’s investments, operations
or activities.
The
Board has structured itself in a manner that it believes allows it to
effectively perform its oversight function. The Board is comprised of four
Trustees that are not considered to be “interested persons” of the Funds as
defined by the 1940 Act (“Independent Trustees”) – Messrs. David A. Massart,
Leonard M. Rush, David M. Swanson and Robert J. Kern. Accordingly, 100% of the
members of the Board are Independent Trustees, who are Trustees that are not
affiliated with the investment adviser to the Funds or its affiliates or other
service providers to the Funds. Prior to July 6, 2020, Mr. Kern was considered
an “interested person” of the Trust as defined in the 1940 Act (“Interested
Trustee”). He was considered an Interested Trustee by virtue of the fact that he
had served as a board member of Quasar Distributors, LLC, which acts as
principal underwriter to many of the Trust’s series and had been an Executive
Vice President of the Administrator.
The
Board has established two standing committees, an Audit Committee and a
Nominating & Governance Committee. The Committees are discussed in greater
detail under “Board Committees” below. Each of the Audit Committee and the
Nominating & Governance Committee are comprised entirely of Independent
Trustees. The Independent Trustees have engaged independent counsel to advise
them on matters relating to their responsibilities in connection with the Trust,
as well as the Funds.
The
Independent Trustees have appointed Leonard M. Rush as Chairman. Prior to July
6, 2020, Mr. Kern served as Chairman of the Trust and Mr. Rush served as lead
Independent Trustee with responsibilities to coordinate activities of the
Independent Trustees, act as a liaison with the Trust’s service providers,
officers, legal counsel, and other Trustees between meetings, help to set Board
meeting agendas, and serve as chair during executive sessions of the Independent
Trustees.
In
accordance with the fund governance standards prescribed by the SEC under the
1940 Act, the Independent Trustees on the Nominating & Governance Committee
select and nominate all candidates for Independent Trustee positions. Each
Trustee was appointed to serve on the Board because of his experience,
qualifications, attributes and skills as set forth in the subsection “Trustee
Qualifications” below.
The
Board reviews its structure regularly in light of the characteristics and
circumstances of the Trust, including: the affiliated or unaffiliated nature of
each investment adviser; the number of funds that
comprise
the Trust; the variety of asset classes that those funds reflect; the net assets
of the Trust; the committee structure of the Trust; and the independent
distribution arrangements of each of the Trust’s series.
The
Board has determined that the inclusion of all Independent Trustees as members
of the Audit Committee and the Nominating & Governance Committee allows all
such Trustees to participate in the full range of the Board’s oversight duties,
including oversight of risk management processes discussed below. Given the
composition of the Board and the function and composition of its various
committees as described above, the Trust has determined that the Board’s
leadership structure is appropriate.
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel, including personnel of the Trust’s service
providers. Because risk management is a broad concept comprised of many elements
(such as, for example, investment risk, issuer and counter-party risk,
compliance risk, operational risk, business continuity risk, etc.) the oversight
of different types of risks is handled in different ways. For example, the CCO
regularly reports to the Board during Board Meetings and meets in executive
session with the Independent Trustees and their legal counsel to discuss
compliance and operational risks. In addition, Mr. Rush, the Independent Trustee
designated as the Audit Committee’s “audit committee financial expert,” meets
with the President, Treasurer and the Funds’ independent registered public
accounting firm to discuss, among other things, the internal control structure
of the Funds’ financial reporting function.
The
full Board receives reports from the investment advisers to the underlying funds
and the portfolio managers as to investment risks.
The
Trustees and officers of the Trust are listed below with their addresses,
present positions with the Trust and principal occupations over at least the
last five years.
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Name,
Address and Year of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other
Directorships Held by Trustee During the Past Five Years |
Independent
Trustees |
Leonard
M. Rush, CPA 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1946 |
Chairman,
Trustee and Audit Committee Chairman |
Indefinite
Term; Since April 2011 |
31 |
Retired
(2011 to present); Chief Financial Officer, Robert W. Baird & Co.
Incorporated, (2000-2011). |
Independent
Trustee, ETF Series Solutions (55 Portfolios) (2012-Present). |
David
A. Massart 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1967
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Trustee |
Indefinite
Term; Since April 2011 |
31 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022);
Co-Founder and Chief Investment Strategist, Next Generation Wealth
Management, Inc. (2005-2021). |
Independent
Trustee, ETF Series Solutions (55 Portfolios)
(2012-Present). |
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David
M. Swanson 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1957
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Trustee
and Nominating & Governance Committee Chairman |
Indefinite
Term; Since April 2011 |
31 |
Founder
and Managing Principal, SwanDog Strategic Marketing, LLC
(2006-present). |
Independent
Trustee, ALPS Variable Investment Trust (7 Portfolios) (2006 to Present);
Independent Trustee, RiverNorth Funds (3 Portfolios) (2018 to Present);
RiverNorth Managed Duration Municipal Income Fund, Inc. (1 Portfolio)
(2019 to Present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1
Portfolio) (2018 to Present); RiverNorth Capital and Income Fund (1
Portfolio) (2018 to Present); RiverNorth Opportunities Fund (1 Portfolio)
(2015 to Present); RiverNorth/DoubleLine Strategic Opportunity Fund, Inc.
(1 Portfolio) (2019 to Present); RiverNorth Flexible Municipal Income
Fund, Inc. (1 Portfolio) (2020 to Present); RiverNorth Flexible Municipal
Income Fund II, Inc. (1 Portfolio) (2021 to Present); RiverNorth Managed
Duration Municipal Income Fund II, Inc. (1 Portfolio) (2022 to
Present). |
Robert
J. Kern 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1958
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Trustee |
Indefinite
Term; Since January 2011 |
31 |
Retired
(2018-present); Executive Vice President, U.S. Bancorp Fund Services, LLC
(1994-2018). |
None |
Officers |
Brian
R. Wiedmeyer 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1973 |
President
and Principal Executive Officer |
Indefinite
Term; Since November 2018 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2005-present). |
N/A |
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Deborah
Ward 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1966 |
Vice
President, Chief Compliance Officer and Anti-Money Laundering
Officer |
Indefinite
Term; Since April 2013 |
N/A |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2004-present). |
N/A |
John
Hadermayer
615
E. Michigan St.
Milwaukee,
WI 53202
Year
of Birth: 1977 |
Secretary |
Indefinite
Term; Since May 2022 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2022-present); Executive
Director, AQR Capital Management, LLC (2013-2022). |
N/A |
Benjamin
Eirich 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1981 |
Treasurer,
Principal Financial Officer and Vice President |
Indefinite Term;
Since August 2019 (Treasurer); Indefinite Term;
Since November 2018 (Vice President) |
N/A |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2008-present). |
N/A |
Sara
J. Bollech
615
E. Michigan St.
Milwaukee,
WI 53202
Year
of Birth: 1977 |
Assistant
Treasurer and Vice President |
Indefinite
Term; Since November 2021 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2007-Present) |
N/A |
Peter
A. Walker, CPA
615
E. Michigan St.
Milwaukee,
WI 53202
Year
of Birth: 1993 |
Assistant
Treasurer and Vice President |
Indefinite
Term; Since November 2021 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2016-Present) |
N/A |
Silanapha
Saycocie
615
E. Michigan St.
Milwaukee,
WI 53202
Year
of Birth: 1998 |
Assistant
Treasurer and Vice President |
Indefinite
Term; Since November 2023 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2020-Present) |
N/A |
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills appropriate to their continued service as Trustees of the
Trust in light of the Trust’s business and structure. The Trustees have
substantial business and professional backgrounds that indicate they have the
ability to critically review, evaluate and assess information provided to them.
Certain of these business and professional experiences are set forth in detail
in the table above. In addition, the Trustees have substantial board experience
and, in their service to the Trust, have gained substantial insight as to the
operation of the Trust. The Board annually conducts a “self-assessment” wherein
the effectiveness of the Board and the individual Trustees is
reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each individual Trustee. The information
provided below, and in the table above, is not all-inclusive. Many of the
Trustees’ qualifications to serve on the Board involve intangible elements, such
as intelligence, integrity, work ethic, the ability to work together, the
ability to communicate effectively, the ability to exercise judgment, the
ability to ask incisive questions, and commitment to shareholder interests.
Mr.
Kern’s trustee attributes include substantial industry experience, including
over 35 years of service with U.S. Bancorp Fund Services, LLC (the fund
accountant (“Fund Accountant”), Administrator, and Transfer Agent to the Trust)
where he managed business development and the mutual fund transfer agent
operation including investor services, account services, legal compliance,
document processing and systems support. He also served as a board member of
U.S. Bancorp Fund Services, LLC, and previously served as a board member of
Quasar Distributors, LLC (the principal underwriter of many of the Trust's
series). The Board believes Mr. Kern’s experience, qualifications, attributes
and skills on an individual basis and in combination with those of the other
Trustees lead to the conclusion that he possesses the requisite skills and
attributes as a Trustee to carry out oversight responsibilities with respect to
the Trust.
Mr.
Massart’s trustee attributes include substantial industry experience, including
over two decades working with high net worth individuals, families, trusts and
retirement accounts to make strategic and tactical asset allocation decisions,
evaluate and select investment managers and manage client relationships. He is
currently the Partner and Managing Director of Beacon Pointe Advisors, LLC.
Previously, he served as Chief Investment Strategist and lead member of the
investment management committee of the SEC registered investment advisory firm
he co-founded. He also previously served as Managing Director of Strong Private
Client and as a Manager of Wells Fargo Investments, LLC. The Board believes Mr.
Massart’s experience, qualifications, attributes and skills on an individual
basis and in combination with those of the other Trustees lead to the conclusion
that he possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
Mr.
Rush’s trustee attributes include substantial industry experience, including
serving in several different senior executive roles at various global financial
services firms. He most recently served as Managing Director and Chief Financial
Officer of Robert W. Baird & Co. Incorporated and several other affiliated
entities, and served as the Treasurer for Baird Funds. He also served as the
Chief Financial Officer for Fidelity Investments’ four broker-dealers and has
substantial experience with mutual fund and investment advisory organizations
and related businesses, including Vice President and Head of Compliance for
Fidelity Investments, a Vice President at Credit Suisse First Boston, a Manager
with Goldman Sachs, & Co. and a Senior Manager with Deloitte & Touche.
Mr. Rush has been determined to qualify as an Audit Committee Financial Expert
for the Trust. The Board believes Mr. Rush’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of
the other Trustees lead to the conclusion that he possesses the requisite skills
and attributes as a Trustee and as the Chairman to carry out oversight
responsibilities with respect to the Trust.
Mr.
Swanson’s trustee attributes include substantial industry experience, including
over 35 years of senior management and marketing experience with over 30 years
dedicated to the financial services industry. He is currently the Founder and
Managing Principal of a marketing strategy boutique serving asset and wealth
management businesses. He has also served as Chief Operating Officer and Chief
Marketing Officer of Van Kampen Investments, President and Chief Executive
Officer of Scudder, Stevens & Clark, Canada, Ltd., Managing Director and
Head of Global Investment Products at Morgan Stanley, Director of Marketing for
Morgan Stanley Mutual Funds, Director of Marketing
for
Kemper Funds, and Executive Vice President and Head of Distribution for Calamos
Investments. The Board believes Mr. Swanson’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of
the other Trustees lead to the conclusion that he possesses the requisite skills
and attributes as a Trustee to carry out oversight responsibilities with respect
to the Trust.
This
discussion of the Trustees’ experience and qualifications is pursuant to SEC
requirements, does not constitute holding out the Board or any Trustee as having
special expertise, and shall not impose any greater responsibility or liability
on any such Trustee or the Board by reason thereof.
The
following table shows the dollar range of High Income Fund shares and shares in
all portfolios of the Trust (including the Funds) beneficially owned by the
Trustees as of the calendar year ended December 31, 2022.
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Range of High Income Fund Shares Beneficially Owned (None, $1-$10,000,
$10,001-$50,000, $50,001-$100,000, Over $100,000) |
Aggregate
Dollar Range of High Income Fund Shares in the Trust |
Independent
Trustees |
David
A. Massart |
None |
None |
Leonard
M. Rush |
None |
None |
David
M. Swanson |
$1-$10,000 |
$50,001-$100,000 |
Robert
J. Kern |
None |
None |
As
of November 30, 2023, the Trustees and Officers of the Trust as a group owned
less than 1% of the outstanding shares of any fund in the Trust.
As
of December 31, 2022, none of the current Independent Trustees or their
immediate family members owned beneficially any class of security of the
Adviser, the Distributor, or any entity (other than a registered investment
company) directly or indirectly controlling, controlled by, or under common
control with the Adviser or the Distributor.
Audit
Committee.
The Trust has an Audit Committee, which is comprised of the Independent
Trustees. The Audit Committee reviews financial statements and other
audit-related matters for the Funds. The Audit Committee also holds discussions
with management and with the Funds’ independent registered public accounting
firm concerning the scope of the audit and the auditor’s independence. The Audit
Committee met twice with respect to the Funds during their fiscal year ended
August 31, 2023.
Nominating
& Governance Committee.
The Trust has a Nominating & Governance Committee, which is comprised of the
Independent Trustees. The Nominating & Governance Committee is responsible
for seeking and reviewing candidates for consideration as nominees for the
position of trustee and meets only as necessary.
The
Nominating & Governance Committee will consider nominees recommended by
shareholders for vacancies on the Board. Recommendations for consideration by
the Nominating & Governance Committee should be sent to the President of the
Trust in writing together with the appropriate
biographical
information concerning each such proposed nominee, and such recommendation must
comply with the notice provisions set forth in the Trust’s Bylaws. In general,
to comply with such procedures, such nominations, together with all required
information, must be delivered to and received by the President of the Trust at
the principal executive office of the Trust no fewer than 120 days, and no
more than 150 days, prior to the shareholder meeting at which any such nominee
would be voted on. Shareholder recommendations for nominations to the Board will
be accepted on an ongoing basis. The Nominating & Governance Committee’s
procedures with respect to reviewing shareholder nominations will be disclosed
as required by applicable securities laws. The Nominating & Governance
Committee met once during the Funds’ fiscal year ended August 31,
2023.
The
Trustees receive an annual retainer of $110,000. The Chairman of the Audit
Committee receives additional compensation of $14,000, the Chairman of the
Nominating & Governance Committee receives additional compensation of $8,000
and the Chairman of the Board of Trustees receives $12,500 annually. Prior to
January 1, 2023, the Trustees received $6,000 for regularly scheduled meetings
and $2,500 for additional meetings. Effective January 1, 2023, the Trustees
receive $8,000 for regularly scheduled meetings and $2,500 for additional
meetings.
The
following table sets forth the compensation received by the Trustees for the
Funds’ fiscal year ended August 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
of Person/Position |
Aggregate
Compensation from the High Income Fund(1) |
Aggregate
Compensation from the Short Term Fund(1) |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from the Funds and the Trust(2)
Paid
to Trustees |
Leonard
M. Rush, Chairman, Trustee and Audit Committee Chairman |
$5,356 |
$5,356 |
None |
None |
$174,500 |
David
A. Massart, Independent Trustee |
$4,545 |
$4,545 |
None |
None |
$148,000 |
David
M. Swanson, Independent Trustee |
$4,790 |
$4,790 |
None |
None |
$156,000 |
Robert
J. Kern, Independent Trustee |
$4,545 |
$4,545 |
None |
None |
$148,000 |
1 Trustee
fees and expenses are allocated among the Funds and any other series comprising
the Trust.
2 The
Trust includes other series in addition to the Funds.
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of the Funds. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of the Funds or acknowledges the existence of control. A controlling
person possesses the ability to control the outcome of matters submitted for
shareholder vote by the Funds. The following tables list the shareholders
considered to be either a control person or a principal shareholder of the Funds
or share class indicated as of November 30, 2023:
High
Income Fund - Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Parent
Company |
Jurisdiction |
Type
of Ownership(1) |
Charles
Schwab & Co. Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1905 |
50.59% |
The
Charles Schwab Corporation |
DE |
Record |
National
Financial Services, LLC For the Exclusive Benefit of our
Customers Attentional Mutual Funds Department, 4th Floor 499
Washington Boulevard Jersey City, NJ 07310-1995 |
35.40% |
Fidelity
Global Brokerage Group, Inc. |
DE |
Record |
RBC
Capital Markets LLC Mutual Fund Omnibus Processing Omnibus Attn
Mutual Fund Ops Manager 250 Nicollet Mall Suite 1200 Ste
1800 Minneapolis, MN 55401-7554 |
6.20% |
N/A |
N/A |
Record |
High
Income Fund - Investor Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Parent
Company |
Jurisdiction |
Type
of Ownership(1) |
|
|
|
| |
Stifel
Nicolaus & Company Inc. 501 North Broadway Saint Louis, Missouri
63102-2137 |
77.71% |
N/A |
N/A |
Record |
Oppenheimer
& Co Inc. FBO Theodore J. Slavin TTEE of the Theodore J. Slavin
Trust No. 1 10560 Wilshire Blve PH B Los Angeles, CA
90024-7315 |
7.64% |
N/A |
N/A |
Record |
High
Income Fund - A Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Parent
Company |
Jurisdiction |
Type
of Ownership(1) |
|
|
|
| |
RBC
Capital Markets LLC Mutual Fund Omnibus Processing Attn: Mutual Fund
Ops Manager 250 Nicollet Mall Ste 1200 Ste 1800 Minneapolis,
Minnesota 55401-7554 |
74.58% |
N/A |
N/A |
Record |
Stifel
Nicolaus & Company Inc. 501 North Broadway Saint Louis, Missouri
63102-2137 |
25.30% |
N/A |
N/A |
Record |
(1)
“Record”
ownership means the shareholder of record, or the exact name of the shareholder
on the account, i.e.,
“ABC Brokerage, Inc.” “Beneficial” ownership refers to the actual pecuniary, or
financial, interest in the security, i.e.,
“Jane Doe Shareholder.”
Short
Term Fund - Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Parent
Company |
Jurisdiction |
Type
of Ownership(1) |
National
Financial Services, LLC For the Exclusive Benefit of our
Customers Attentional Mutual Funds Department, 4th Floor 499
Washington Boulevard Jersey City, NJ 07310-1995 |
51.77% |
Fidelity
Global Brokerage Group, Inc. |
DE |
Record |
Charles
Schwab & Co. Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1905 |
45.81% |
The
Charles Schwab Corporation |
DE |
Record |
Short
Term Fund - Investor Class
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Parent
Company |
Jurisdiction |
Type
of Ownership(1) |
|
|
|
| |
Charles
Schwab & Co. Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1905 |
99.57% |
The
Charles Schwab Corporation |
DE |
Record |
(1)
“Record”
ownership means the shareholder of record, or the exact name of the shareholder
on the account, i.e.,
“ABC Brokerage, Inc.” “Beneficial” ownership refers to the actual pecuniary, or
financial, interest in the security, i.e.,
“Jane Doe Shareholder.”
The
Adviser, Principal Street Partners, LLC, a Delaware limited liability company,
provides investment advisory services to the Funds pursuant to an investment
advisory agreement (the “Advisory Agreement”). The Adviser is majority owned by
Darrell Horn.
Pursuant
to the Advisory Agreement, the Adviser provides the Funds with investment
research and advice and furnishes the Funds with an investment program
consistent with the Funds’ investment objective and policies, subject to the
supervision of the Board. The Adviser determines which portfolio securities will
be purchased or sold, arranges for the placing of orders for the purchase or
sale of portfolio securities, selects brokers or dealers to place those orders,
maintains books and records with respect to the securities transactions and
reports to the Board on the Funds’ investments and performance. The Adviser is
solely responsible for making investment decisions on behalf of the Funds. The
Board will have sole responsibility for selecting, evaluating the performance
of, and replacing as necessary any of the service providers to the Funds,
including the Adviser.
The
Advisory Agreement will continue in effect from year to year, only if such
continuance is specifically approved at least annually by: (i) the Board or the
vote of a majority of the outstanding voting securities of the Funds; and (ii)
the vote of a majority of the Independent Trustees, cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement is
terminable without penalty by the Trust, on behalf of the Funds, upon 60 days’
written notice to the Adviser, when authorized by either: (i) a majority vote of
the Funds’ shareholders; or (ii) by a vote of a majority of the Board or by the
Adviser upon 60 days’ written notice to the Trust. The Advisory Agreement will
automatically terminate in the event of its “assignment,” as defined under the
1940 Act. The Advisory Agreement provides that the Adviser under such
agreement shall not be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for
any
act or omission in the execution of portfolio transactions for the Funds, except
for willful misfeasance, bad faith or negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties
thereunder.
In
consideration of the services provided by the Adviser pursuant to the Advisory
Agreement, the Adviser is entitled to receive from the Funds a management fee
computed daily and paid monthly, based on a percentage of a Fund’s net assets,
as specified in the Prospectus. However, the Adviser may voluntarily agree to
reduce the management fees payable to it on a month-to-month basis, including
additional fees above and beyond any contractual agreement the Adviser may have
to reduce management fees and/or reimburse Fund expenses.
Fund
Expenses.
Each Fund is responsible for its own operating expenses. Pursuant to an
Operating Expenses Limitation Agreement between the Adviser and the Trust, on
behalf of the Funds, the Adviser has agreed to waive its management fees and pay
Fund expenses, as specified in the Prospectus. Fees waived and expenses paid by
the Adviser may be recouped by the Adviser for a period of 36 months following
the month during which such waiver and/or expense payment was made, if such
recoupment can be achieved without exceeding the expense limit in effect at the
time the fee waiver and expense payment occurred and the expense limit in effect
at the time of the recoupment. The Operating Expense Limitation Agreement is
indefinite in term and cannot be terminated through at least one year from the
effective date of the Funds’ Prospectus. Thereafter, the agreement may be
terminated at any time upon 60 days' written notice by the Trust's Board or the
Adviser.
The
total advisory fees paid by the Funds during the fiscal periods ended August 31
were as follows:
High
Income Fund
|
|
|
|
|
|
|
|
|
|
| |
Advisory
Fees Paid During the Fiscal Year Ended |
2023 |
2022 |
2021 |
Advisory
Fees Accrued |
$1,519,505 |
$1,651,481 |
$1,267,543 |
Advisory
Fees (Waived) |
$(118,256) |
$(89,955) |
$(102,942) |
Advisory
Fee Recouped |
$1,993 |
$0 |
$0 |
Total
Advisory Fees Paid to Adviser |
$1,403,242 |
$1,561,526 |
$1,164,601 |
Short
Term Fund
|
|
|
|
|
|
|
|
|
|
| |
Advisory
Fees Paid During the Fiscal Year Ended |
2023 |
2022* |
2021* |
Advisory
Fees Accrued |
$230,317 |
$15,566 |
N/A |
Advisory
Fees Recouped/(Waived) |
$(198,611) |
$(15,566) |
N/A |
Total
Advisory Fees Paid to Adviser |
$31,706 |
$0 |
N/A |
*The
Short Term Fund commenced operations on April 27, 2022.
As
disclosed in the Prospectus, Troy E. Willis, J.D., CFA, and Charlie S. Pulire,
CFA, serve as portfolio managers and are responsible for the day-to-day
management of the Fund (each a “Portfolio Manager,” and together, the “Portfolio
Managers”).
The
following table provides information regarding other accounts, excluding the
Funds, managed by the Portfolio Managers as of August 31, 2023:
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|
|
|
|
|
|
|
|
|
| |
| Registered
Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
| Number
of Accounts |
Total
Assets in the Accounts (in millions) |
Number
of Accounts |
Total
Assets in the Accounts (in millions) |
Number
of Accounts |
Total
Assets in the Accounts (in millions) |
Troy
E. Willis |
0 |
$0 |
2 |
$40 |
39 |
$130 |
Charlie
S. Pulire |
0 |
$0 |
2 |
$40 |
39 |
$130 |
As
of the date of this SAI, the Portfolio Managers did not manage any accounts
pursuant to a performance-based advisory fee.
The
Portfolio Managers’ management of “other accounts” may give rise to potential
conflicts of interest in connection with the management of the Funds’
investments, on the one hand, and the investments of the other accounts, on the
other. Potential conflicts may arise in connection with the Portfolio Managers’
management of the Funds and the management of any other accounts in areas such
as the allocation of investment opportunities and the aggregation and allocation
of trades. The Adviser has developed and implemented policies and procedures
that are designed to ensure that the interests of all Adviser clients are
protected. Policies that are a part of the Adviser’s compliance program address
areas such as trade allocations, cross trading, insider trading and trade
management. Ongoing and annual reviews are conducted to ensure compliance with
the policies and procedures.
The
Portfolio Managers are compensated through a base salary plus a bonus based on
the overall profitability of the strategies managed by the Portfolio Managers
and the firm as a whole. The base salary received by each Portfolio Manager is
intended to be a market competitive salary. The Portfolio Managers are also
equity owners of the Adviser and shares in any profits of the
Adviser.
The
following table indicates the dollar range of Fund shares beneficially owned by
each Portfolio Manager as of August 31, 2023:
|
|
|
|
|
|
|
| |
Portfolio
Manager |
Dollar
Range of Shares Beneficially Owned (None, $1-$10,000; $10,001-$50,000;
$50,001-$100,000; $100,001 - $500,000; $500,001-$1,000,000; Over
$1,000,000) |
| High
Income Fund |
Short
Term Fund |
Troy
E. Willis |
Over
$1,000,000 |
None |
Charlie
S. Pulire |
None |
None |
Pursuant
to an administration agreement (the “Administration Agreement”) between the
Trust and U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global
Fund Services (“Fund Services”), 615 East Michigan Street, Milwaukee, Wisconsin,
53202, acts as the Administrator to the Funds. Fund Services provides certain
administrative services to the Funds, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Funds’ independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust and the Funds with applicable laws and
regulations; arranging for the computation of performance data,
including
NAV per share and yield; responding to shareholder inquiries; and arranging for
the maintenance of books and records of the Funds, and providing, at its own
expense, office facilities, equipment and personnel necessary to carry out its
duties. In this capacity, Fund Services does not have any responsibility or
authority for the management of the Funds, the determination of investment
policy, or for any matter pertaining to the distribution of Fund shares.
Pursuant to the Administration Agreement, for its services, Fund Services
receives from the Funds a fee computed daily and payable monthly based on each
Fund’s average daily net assets, subject to an annual minimum fee.
Fund
Services also acts as Fund Accountant, Transfer Agent and dividend disbursing
agent under separate agreements with the Trust.
Each
Fund paid fund administration and fund accounting fees to Fund Services during
the fiscal periods ended August 31, as follows:
|
|
|
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
2021 |
High
Income Fund |
$340,407 |
$332,372 |
$245,663 |
Short
Term Fund |
$149,810 |
$52,231 |
N/A* |
*The
Short Term Fund commenced operations on April 27, 2022.
Pursuant
to a custody agreement between the Trust and U.S. Bank N.A. (“U.S. Bank”), an
affiliate of Fund Services, U.S. Bank serves as the custodian of the Funds’
assets (the “Custodian”). For its services, the Custodian receives a monthly fee
based on a percentage of a Fund's assets, in addition to certain transaction
based fees, and is reimbursed for out-of-pocket expenses. The Custodian’s
address is 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212.
The Custodian does not participate in decisions relating to the purchase and
sale of securities by the Funds. U.S. Bank and its affiliates may participate in
revenue sharing arrangements with service providers of mutual funds in which a
Fund may invest.
Stradley
Ronon Stevens & Young, LLP, 2005 Market Street, Suite 2600, Philadelphia,
Pennsylvania 19103, serves as counsel to the Trust and as independent legal
counsel to the Board.
Cohen
& Company, Ltd., 342 North Water Street, Suite 830, Milwaukee, Wisconsin
53202, serves as the independent registered public accounting firm for the
Funds. Its services include auditing the Funds’ financial statements and the
performance of related tax services.
The
Trust has entered into a distribution agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC (the “Distributor”), 111 East Kilbourn Avenue,
Suite 2200, Milwaukee, Wisconsin 53202, pursuant to which the Distributor acts
as the Funds’ principal underwriter, provides certain administrative services
and promotes and arranges for the sale of a Fund’s shares on a best efforts
basis. The offering of a Fund’s shares is continuous. The Distributor,
Administrator, Fund Accountant, and Custodian are affiliated companies. The
Distributor is a registered broker-dealer and member of the Financial Industry
Regulatory Authority, Inc. (“FINRA”).
The
Distribution Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by vote of a majority of
a Fund’s outstanding voting securities and, in either case, by a majority of the
Independent Trustees. The Distribution Agreement is terminable without penalty
by the Trust, on behalf of the Funds, on 60 days’ written notice when
authorized either by a majority vote of a Fund’s shareholders or by vote of a
majority of the Board, including a
majority
of the Trustees who are not “interested persons” (as defined under the
1940 Act) of the Trust, or by the Distributor on 60 days’ written
notice, and will automatically terminate in the event of its “assignment,” as
defined in the 1940 Act.
The
High Income Fund has adopted a distribution plan for Investor Class shares
pursuant to Rule 12b-1 under the 1940 Act (the “12b-1 Plan”). Under the 12b-1
Plan, the High Income Fund pays a fee to the Distributor for distribution and/or
shareholder services (the “Distribution and Servicing Fee”) at an annual rate of
0.50% of the High Income Fund’s average daily NAV of Investor Class shares. The
12b-1 Plan provides that the Distributor may use all or any portion of the High
Income Fund’s Distribution and Servicing Fee to finance any activity that is
principally intended to result in the sale of Fund’s shares, subject to the
terms of the 12b-1 Plan, or to provide certain shareholder services. The 12b-1
Plan is intended to benefit the High Income Fund by increasing its assets and
thereby reducing the High Income Fund’s expense ratio.
The
Investor Class of the High Income Fund paid $135,251 in 12b-1 fees during the
period ended August 31, 2023.
|
|
|
|
| |
| Investor
Class |
Advertising/Marketing |
$0 |
Printing/Postage |
$0 |
Payment
to distributor |
$0 |
Payment
to dealers |
$135,251 |
Compensation
to sales personnel |
$0 |
Other |
$0 |
Total |
$135,251 |
The
Short Term Fund has adopted a distribution plan for Investor Class shares
pursuant to Rule 12b-1 under the 1940 Act (the “12b-1 Plan”). Under the 12b-1
Plan, the Short Term Fund pays a fee to the Distributor for distribution and/or
shareholder services (the “Distribution and Servicing Fee”) at an annual rate of
0.25% of the Fund’s average daily NAV of Investor Class shares. The 12b-1 Plan
provides that the Distributor may use all or any portion of the Short Term
Fund’s Distribution and Servicing Fee to finance any activity that is
principally intended to result in the sale of the Short Term Fund’s shares,
subject to the terms of the 12b-1 Plan, or to provide certain shareholder
services. The 12b-1 Plan is intended to benefit the Short Term Fund by
increasing its assets and thereby reducing the Short Term Fund’s expense
ratio.
The
Investor Class of the Short Term Fund carried over $123 in 12b-1 fees during the
period ended August 31, 2023.
|
|
|
|
| |
| Investor
Class |
Advertising/Marketing |
$0 |
Printing/Postage |
$0 |
Payment
to distributor |
$0 |
Payment
to dealers |
$123 |
Compensation
to sales personnel |
$0 |
Other |
$0 |
Total |
$123 |
The
Distribution and Servicing Fee is payable to the Distributor regardless of the
distribution-related expenses actually incurred. Because the Distribution and
Servicing Fee is not directly tied to expenses, the amount of distribution fees
paid by Investor Class shares during any year may be more or less than actual
expenses incurred pursuant to the 12b-1 Plan. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as a
“compensation” plan.
The
Distributor may use the Distribution and Servicing Fee to pay for services
covered by the 12b-1 Plan including, but not limited to, advertising;
compensating underwriters, dealers and selling personnel engaged in the
distribution of Fund shares; the printing and mailing of prospectuses,
statements of additional information, and reports; the printing and mailing of
sales literature pertaining to the Funds; and obtaining whatever information,
analyses, and reports with respect to marketing and promotional activities that
the Funds may, from time to time, deem advisable.
The
12b-1 Plan provides that it will continue from year to year upon approval by the
majority vote of the Board, including a majority of the Independent Trustees
cast in person at a meeting called for that purpose, provided that such trustees
have made a determination that there is a reasonable likelihood that the 12b-1
Plan will benefit a Fund and its shareholders. It is also required that the
Independent Trustees, select and nominate all other trustees who are not
“interested persons” of a Fund. The 12b-1 Plan and any related agreements may
not be amended to materially increase the amounts to be spent for distribution
expenses without approval of shareholders holding a majority of a Fund’s shares
outstanding. All material amendments to the 12b-1 Plan or any related agreements
must be approved by a vote of a majority of the Board and the Independent
Trustees, cast in person at a meeting called for the purpose of voting on any
such amendment.
The
12b-1 Plan requires that the Distributor provide to the Board, at least
quarterly, a written report on the amounts and purpose of any payment made under
the 12b-1 Plan. The Distributor is also required to furnish the Board with such
other information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the 12b-1 Plan should be
continued.
As
noted above, the 12b-1 Plan provides for the ability to use Fund assets to pay
financial intermediaries (including those that sponsor mutual fund supermarkets
(as discussed below) and affiliates of the Adviser), plan administrators, and
other service providers to finance any activity that is principally intended to
result in the sale of Fund shares (distribution services) and for the provision
of personal services to shareholders. The payments made by a Fund to financial
intermediaries are based primarily on the dollar amount of assets invested in a
Fund through the financial intermediaries. These financial intermediaries may
pay a portion of the payments that they receive from a Fund to their investment
professionals. In addition to the ongoing asset-based fees paid to these
financial intermediaries under the 12b-1 Plan, a Fund may, from time to time,
make payments under the 12b-1 Plan that help defray the expenses incurred by
these intermediaries for conducting training and educational meetings about
various aspects of a Fund for their employees. In addition, a Fund may
make
payments under the 12b-1 Plan for exhibition space and otherwise help defray the
expenses these financial intermediaries incur in hosting client seminars where a
Fund is discussed.
In
addition, a Fund may participate in various “mutual fund supermarkets” in which
a mutual fund supermarket sponsor (usually a broker-dealer) offers many mutual
funds to the sponsor’s customers without charging the customers a sales charge.
In connection with its participation in such platforms, the Distributor may use
all or a portion of the Distribution and Servicing Fee to pay one or more
supermarket sponsors a negotiated fee for distributing a Fund’s shares. In
addition, in its discretion, the Adviser may pay additional fees to such
intermediaries from its own assets.
Pursuant
to the Advisory Agreement, the Adviser determines which securities are to be
purchased and sold by a Fund and which broker-dealers are eligible to execute a
Fund’s portfolio transactions. Purchases and sales of securities on an exchange
are effected through brokers that charge a commission while purchases and sales
of securities in the OTC market will generally be executed directly with the
primary “market-maker” unless, in the opinion of the Adviser, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom a Fund
purchases or to whom a Fund sells is acting on its own behalf (and not as the
agent of some other party, such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. The price of securities purchased from underwriters includes a
disclosed fixed commission or concession paid by the issuer to the underwriter,
and prices of securities purchased from dealers serving as market makers
reflects the spread between the bid and asked price. The price of OTC securities
usually includes an undisclosed commission or markup.
Purchases
of portfolio securities for a Fund will be effected through broker-dealers
(including banks) that specialize in the types of securities that a Fund will be
holding, unless better executions are available elsewhere. Dealers usually act
as principal for their own accounts. Purchases from dealers will include a
spread between the bid and the asked price. If the execution and price offered
by more than one dealer are comparable, the order may be allocated to a dealer
that has provided research or other services as discussed below.
In
placing portfolio transactions, the Adviser will use reasonable efforts to
choose broker-dealers capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and quality of
services, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm’s risk in positioning a
block of securities, and other factors available, will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker-dealer can offer the services needed to obtain the most
favorable price and execution available, consideration may be given to those
broker-dealers that furnish or supply research and statistical information to
the Adviser that it may lawfully and appropriately use in its investment
advisory capacities, as well as provide other brokerage services incidental to
execution services. Research and statistical information may include reports
that are common in the industry such as industry research reports and
periodicals, quotation systems, software for portfolio management and formal
databases. Typically, the research will be used to service all of the Adviser’s
accounts, although a particular client may not benefit from all the research
received on each occasion. The Adviser considers research information, which is
in addition to and not in lieu of the services required to be performed by it
under its Advisory Agreement with the Funds, to be useful in varying degrees,
but of indeterminable value.
While
it is each Fund’s general policy to first seek to obtain the most favorable
price and execution available in selecting a broker-dealer to execute portfolio
transactions for a Fund, weight is also given to the ability of a broker-dealer
to furnish brokerage and research services to a Fund or to the Adviser, even if
the specific services are not directly useful to a Fund and may be useful to the
Adviser in advising other clients. In negotiating commissions with a broker or
evaluating the spread to be paid to a dealer, a Fund may therefore pay a higher
commission or spread than would be the case if no weight were given to the
furnishing of these supplemental services, provided that the amount of such
commission or spread has been determined in good faith by the Adviser to be
reasonable in relation to the value of the brokerage and/or research services
provided by such broker-dealer. The standard of reasonableness is to be measured
in light of the Adviser’s overall responsibilities to a Fund.
Investment
decisions for each Fund are made independently from those of the Adviser’s other
client accounts. Nevertheless, it is possible that at times identical securities
will be acceptable for both the Funds and one or more of such client accounts.
In such event, the position of a Fund and such client account(s) in the same
issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts seek to acquire the same security as a Fund at the same
time, a Fund may not be able to acquire as large a portion of such security as
it desires, or it may have to pay a higher price or obtain a lower yield for
such security. Similarly, a Fund may not be able to obtain as high a price for,
or as large an execution of, an order to sell any particular security at the
same time. If one or more of such client accounts simultaneously purchases or
sells the same security that a Fund is purchasing or selling, each day’s
transactions in such security will be allocated between a Fund and all such
client accounts in a manner deemed equitable by the Adviser, taking into account
the respective sizes of the accounts and the amount being purchased or sold. It
is recognized that in some cases this system could have a detrimental effect on
the price or value of the security insofar as a Fund is concerned. In other
cases, however, it is believed that the ability of a Fund to participate in
volume transactions may produce better executions for a Fund. Notwithstanding
the above, the Adviser may execute buy and sell orders for accounts and take
action in performance of its duties with respect to any of its accounts that may
differ from actions taken with respect to another account, so long as the
Adviser shall, to the extent practical, allocate investment opportunities to
accounts, including the Funds, over a period of time on a fair and equitable
basis and in accordance with applicable law.
Portfolio
transactions may be placed with broker-dealers who sell shares of the Funds
subject to rules adopted by FINRA and the SEC. Portfolio transactions may also
be placed with broker-dealers in which the Adviser has invested on behalf of the
Funds and/or client accounts.
The
following table sets forth the amount of brokerage commissions paid by the Funds
during the fiscal periods ended August 31:
|
|
|
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
2021 |
High
Income Fund |
$0 |
$0 |
$0 |
Short
Term Fund |
$0 |
$0 |
N/A* |
*The
Short Term Fund commenced operations on April 27, 2022.
Although
the Funds generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser, investment considerations warrant such
action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the
securities
in a Fund’s portfolio, with the exception of securities whose maturities at the
time of acquisition were one year or less, were sold and either repurchased or
replaced within one year. A high rate of portfolio turnover (100% or more)
generally leads to above-average transaction costs and could generate capital
gains that must be distributed to shareholders as short-term capital gains taxed
at ordinary income rates (currently as high as 37%). To the extent that a Fund
experiences an increase in brokerage commissions due to a higher portfolio
turnover rate, the performance of a Fund could be negatively impacted by the
increased expenses incurred by a Fund and may result in a greater number of
taxable transactions. The following table shows each Fund’s portfolio turnover
rate for the fiscal years ended August 31:
|
|
|
|
|
|
|
| |
| 2023 |
2022* |
High
Income Fund |
21% |
53% |
Short
Term Fund* |
75% |
24% |
*The
Short Term Fund commenced operations on April 27, 2022.
The
Trust, the Adviser and the Distributor have each adopted Codes of Ethics under
Rule 17j-1 of the 1940 Act. These codes permit, subject to certain conditions,
personnel of the Trust, Adviser, and Distributor to invest in securities that
may be purchased or held by the Funds.
The
Board has adopted proxy voting policies and procedures (“Proxy Policies”)
wherein the Trust has delegated to the Adviser the responsibility for voting
proxies relating to portfolio securities held by each Fund as part of the
Adviser’s investment advisory services, subject to the supervision and oversight
of the Board. Notwithstanding this delegation of responsibilities, however, each
Fund retains the right to vote proxies relating to its portfolio securities. The
fundamental purpose of the Proxy Policies is to ensure that each vote will be in
a manner that reflects the best interest of a Fund and its shareholders, taking
into account the value of a Fund’s investments. The Adviser has adopted proxy
voting guidelines to determine how to vote Fund proxies. The Adviser utilizes
Broadridge to vote proxies. The Adviser has a proxy voting committee which meets
when a vote does not fall within the guidelines. The Adviser tests its proxy
voting quarterly to ensure that proxy voting guidelines are being followed.
The
actual voting records relating to portfolio securities during the most recent
12-month period ended June 30 are available without charge, upon request, by
calling toll-free, (800) SEC-0330 or by accessing the SEC’s website at
www.sec.gov.
The
Trust has established an Anti-Money Laundering Compliance Program (the
“Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”). To ensure compliance with this law, the Trust’s Program provides
for the development of internal practices, procedures and controls, designation
of anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the Program. Ms.
Deborah Ward has been designated as the Trust’s Anti-Money Laundering Compliance
Officer.
Procedures
to implement the Program include, but are not limited to: determining that the
Distributor and the Transfer Agent have established proper anti-money laundering
procedures; reporting suspicious and/or fraudulent activity; checking
shareholder names against designated government
lists,
including Office of Foreign Asset Control (“OFAC”), and a complete and thorough
review of all new opening account applications. The Funds will not transact
business with any person or legal entity whose identity and beneficial owners,
if applicable, cannot be adequately verified under the provisions of the USA
PATRIOT Act.
As
a result of the Program, the Funds may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity or
if certain account information matches information on government lists of known
terrorists or other suspicious persons, or the Funds may be required to transfer
the account or proceeds of the account to a governmental agency.
The
Trust, on behalf of each Fund, has adopted portfolio holdings disclosure
policies (“Portfolio Holdings Policies”) that govern the timing and
circumstances of disclosure of portfolio holdings of the Funds. Information
about a Fund’s portfolio holdings will not be distributed to any third party
except in accordance with these Portfolio Holdings Policies. The Board has
considered the circumstances under which a Fund’s portfolio holdings may be
disclosed under the Portfolio Holdings Policies. The Board has also considered
actual and potential material conflicts that could arise in such circumstances
between the interests of a Fund’s shareholders and the interests of the Adviser,
Distributor, or any other affiliated person of a Fund. After due consideration,
the Board has determined that a Fund has a legitimate business purpose for
disclosing portfolio holdings to persons described in the Portfolio Holdings
Policies. The Board also authorized its CCO to consider and authorize
dissemination of portfolio holdings information to additional parties, after
considering the best interests of a Fund’s shareholders and potential conflicts
of interest in making such disclosures.
The
Board exercises continuing oversight of the disclosure of a Fund’s portfolio
holdings by (1) overseeing the implementation and enforcement of the
Portfolio Holdings Policies, codes of ethics and other relevant policies of a
Fund and its service providers by the CCO, (2) by considering reports and
recommendations by the CCO concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act), and (3) by considering whether to
approve any amendment to these Portfolio Holdings Policies. The Board reserves
the right to amend the Portfolio Holdings Policies at any time without prior
notice in its sole discretion.
Disclosure
of each Fund’s complete holdings is required to be made quarterly within 60 days
of the end of each fiscal quarter, in the annual and semi-annual reports to Fund
shareholders, and in the quarterly holdings report on Form N-PORT. These
reports will be made available, free of charge, on the EDGAR database on the
SEC’s website at www.sec.gov. A Fund may provide separately to any person,
including rating and ranking organizations such as Lipper and Morningstar, a
Fund’s holdings commencing the day after the information is first published on
the Funds’ website. In addition, a Fund may provide its complete portfolio
holdings at the same time that it is filed with the SEC. Each Fund also
discloses its top ten portfolio holdings and sector allocation on the Funds’
website at https://principalstreetfunds.com/ within approximately 15 calendar
days after each month end. Each Fund’s holdings will remain posted on the
website until next updated with the following month’s holdings.
In
the event of a conflict between the interests of a Fund and its shareholders and
the interests of the Adviser or an affiliated person of the Adviser, the CCO of
the Adviser, in consultation with the Trust’s CCO, shall make a determination in
the best interests of a Fund and its shareholders, and shall report such
determination to the Board at the end of the quarter in which such determination
was made. Any employee of the Adviser who suspects a breach of this obligation
must report the matter immediately to the Adviser’s CCO or to his or her
supervisor.
In
addition, material non-public holdings information may be provided without lag
as part of the normal investment activities of a Fund to each of the following
entities which, by explicit agreement or by virtue of their respective duties to
a Fund, are required to maintain the confidentiality of the information
disclosed: the Administrator; the Fund Accountant; the Custodian; the Transfer
Agent; the Funds’ independent registered public accounting firm; counsel to the
Funds or the Board (current parties are identified in this SAI); broker-dealers
(in connection with the purchase or sale of securities or requests for price
quotations or bids on one or more securities); and regulatory authorities.
Portfolio holdings information not publicly available with the SEC or on the
Funds’ website may only be provided to additional third parties, in accordance
with the Portfolio Holdings Policies, when a Fund has a legitimate business
purpose, and the third party recipient is subject to a confidentiality
agreement. Such portfolio holdings disclosure must be approved under the
Portfolio Holdings Policies by the Trust’s CCO.
In
no event shall the Adviser, its affiliates or employees, or the Funds receive
any direct or indirect compensation in connection with the disclosure of
information about a Fund’s portfolio holdings.
There
can be no assurance that the Portfolio Holdings Policies and these procedures
will protect the Funds from potential misuse of Fund information by individuals
or entities to which it is disclosed.
The
NAV of a Fund’s shares will fluctuate and is determined by the Fund Accountant
as of the close of trading on the New York Stock Exchange (the “NYSE”)
(generally 4:00 p.m., Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial
Day, Juneteenth National Independence Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, the NYSE may close on days not
included in that announcement.
The
NAV of each class of shares is computed by determining the “Net Assets” of each
class and dividing by the total number of shares outstanding of each class at
such time. The Net Assets of each class are calculated by (1) taking the value
of all assets, less liabilities, held by a Fund and allocating such value to
each share class based on the number of shares outstanding in each share class;
(2) subtracting “Class Expenses” from each respective share class as defined and
approved by the Board and a majority of the Independent Trustees under the
Trust’s Rule 18f-3 Multiple-Class Plan; and (3) subtracting from each share
class non-class specific “Other Expenses” that are allocated to each class based
on the NAV of each class relative to the NAV of a Fund or the Trust, as the case
may be.
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| |
Net
Assets Per Share Class |
= |
NAV
Per Share Class |
Shares
Outstanding Per Share Class |
Each
Fund’s assets are generally valued at their market price on the valuation date
and are based on valuations provided by independent pricing services consistent
with the Trust’s valuation policies. Pursuant to Rule 2a-5 under the 1940 Act,
the Adviser has been designated by the Board as the valuation designee for the
Funds and has been delegated responsibility for making good faith, fair value
determinations with respect to each Fund’s portfolio securities. When market
prices are not readily available or believed by the Adviser to be unreliable, a
security or other asset is valued at its fair value by the Adviser as determined
under fair value pricing procedures approved by the Board. The Board reviews, no
less frequently than annually, the adequacy of the Fund’s policies and
procedures and the effectiveness of their implementation. These fair value
pricing procedures will also be used to price a security when corporate events,
events in the securities market and/or world
events
cause the Adviser to believe that a security’s last sale price may not reflect
its actual market value. The intended effect of using fair value pricing
procedures is to ensure that the Fund is accurately priced. The Board will
regularly evaluate whether the Trust’s fair value pricing procedures continue to
be appropriate in light of the specific circumstances of the Fund and the
quality of prices obtained through the application of such
procedures.
Debt
securities, including short-term debt instruments having a maturity of 60 days
or less, are valued at the evaluated mean between the closing bid and asked
prices provided by a pricing service (“Pricing Service”). If the closing bid and
asked prices are not readily available, fair value will be
determined.
Each
security owned by a Fund that is listed on a securities exchange is valued at
its last sale price on that exchange on the date as of which assets are valued.
Where the security is listed on more than one exchange, a Fund will use the
price of the exchange that a Fund generally considers to be the principal
exchange on which the security is traded. If no sale is reported, the security
is valued at the mean between the last available bid and asked
price.
Portfolio
securities primarily traded on the NASDAQ Stock Market (“NASDAQ”) shall be
valued using the NASDAQ Official Closing Price (“NOCP”), which may not
necessarily represent the last sale price. If the NOCP is not available, such
securities shall be valued at the last sale price on the day of valuation, or if
there has been no sale on such day, at the mean between the bid and asked
prices. OTC securities that are not traded on NASDAQ shall be valued at the most
recent trade price.
Shares
of a Fund are sold in a continuous offering and shares may be purchased or
redeemed on any business day that a Fund calculates its NAV. Each Fund may also
authorize one or more financial intermediaries to accept purchase and redemption
orders on its behalf (“Authorized Intermediaries”). Authorized Intermediaries
are authorized to designate other Authorized Intermediaries to accept orders on
a Fund’s behalf. An order is deemed to be received when a Fund or an Authorized
Intermediary accepts the order.
Orders
received by a Fund or an Authorized Intermediary by the close of trading on the
NYSE (generally 4:00 p.m., Eastern Time) on a business day will be effected at
the applicable price per share determined as of the close of trading on the NYSE
on that day. Otherwise, the orders will be processed based on the next
determined NAV.
Orders
received by financial intermediaries that are not Authorized Intermediaries will
be processed at the applicable
price next
calculated after the Transfer Agent receives the order from the financial
intermediary.
Purchase
Requests Must be Received in Good Order
“Good
order” means that your purchase request includes:
•The
name of the Fund;
•The
class of shares to be purchased
•The
dollar amount of shares to be purchased;
•Your
account application or investment stub; and
•A
check or wire transfer payable to the name of the Fund.
Shares
of the Funds have not been registered for sale outside of the United States. The
Funds generally do not sell shares to investors residing outside the United
States, even if they are United
States
citizens or lawful permanent residents, except to investors with United States
military APO or FPO addresses or in certain other circumstances where the CCO
and Anti-Money Laundering Officer for the Trust conclude that such sale is
appropriate and is not in contravention of United States law.
Redemption
Requests Must be Received in Good Order
Your
share price will be based on the next NAV per share calculated after the
Transfer Agent or an Authorized Intermediary receives your redemption request in
good order. A redemption request will be deemed in “good order” if it
includes:
•The
shareholder’s name;
•The
name of the Fund;
•The
class of shares to be redeemed;
•The
account number;
•The
share or dollar amount to be redeemed; and
•Signatures
by all shareholders on the account (with signature(s) guaranteed, if
applicable).
Unless
you instruct the Transfer Agent otherwise, redemption proceeds will be sent to
the address of record. The Funds will not be responsible for interest lost on
redemption amounts due to lost or misdirected mail.
A
signature guarantee of each owner is required in the following
situations:
•If
ownership is changed on your account;
•When
redemption proceeds are payable or sent to any person, address or bank account
not on record;
•When
a redemption is received by the Transfer Agent and the account address has
changed within the last 15 calendar days; or
•For
all redemptions in excess of $100,000 from any shareholder account.
Non-financial
transactions, including establishing or modifying certain services on an
account, may require a signature guarantee, signature verification from a
Signature Validation Program member, or other acceptable form of authentication
from a financial institution source. Signature guarantees, from either a
Medallion program member or a non-Medallion program member, can be obtained from
banks and securities dealers, but not from a notary public.
Each
Fund may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Funds and
the Transfer Agent reserve the right to amend these standards at any time
without notice.
Redemption-in-Kind
Under
normal circumstances, a Fund does not intend to redeem shares in any form except
cash. The Trust, however, has filed a notice of election under Rule 18f-1 of the
1940 Act that allows a Fund to redeem in-kind redemption requests during any
90-day period in excess of the lesser of $250,000 or 1% of the net assets of a
Fund, valued at the beginning of such period. If a Fund pays your redemption
proceeds by a distribution of securities, you could incur brokerage or other
charges in converting the securities to cash, and will bear any market risks
associated with such securities until they are converted into cash.
Cancellations
and Modifications
A
Fund will not accept a request to cancel or modify a written transaction once
processing has begun.
The
following discussion is a summary of certain U.S. federal income tax
considerations affecting a Fund and its shareholders. The discussion reflects
applicable U.S. federal income tax laws of the United States as of the date of
this SAI, which tax laws may be changed or subject to new interpretations by the
courts or the Internal Revenue Service (the “IRS”), possibly with retroactive
effect. No attempt is made to present a detailed explanation of all U.S. federal
income, estate or gift, or state, local or foreign tax concerns affecting a Fund
and its shareholders (including shareholders owning large positions in a Fund).
The discussion set forth herein does not constitute tax advice. Investors are
urged to consult their own tax advisers to determine the tax consequences to
them of investing in a Fund.
Each
series of the Trust is treated as a separate entity for federal income tax
purposes. Each Fund, a series of the Trust, intends to qualify and elect to be
treated as a regulated investment company (“RIC”) under Subchapter M of the
Code, provided it complies with all applicable requirements regarding the source
of its income, diversification of its assets and timing of distributions, as
discussed below.
If
for any taxable year a Fund fails to qualify for the special federal income tax
treatment afforded to RICs, all of its taxable income will be subject to federal
income tax at the corporate income tax rate (without any deduction for
distributions to a Fund’s shareholders) and its income available for
distribution will be reduced.
As
long as a Fund meets certain requirements that govern a Fund’s source of income,
diversification of assets and distribution of earnings to its shareholders, a
Fund will not be subject to U.S. federal income tax on income distributed (or
treated as distributed, as described below) to its shareholders. With respect to
the source of income requirement, a Fund must derive in each taxable year at
least 90% of its gross income (including tax-exempt interest) from (i)
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of investing
in such shares, securities or currencies and (ii) net income derived from
interests in qualified publicly traded partnerships (“QPTP”). A QPTP is
generally defined as a publicly traded partnership under Section 7704 of the
Code, but does not include a publicly traded partnership if 90% or more of its
income is described in (i) above.
With
respect to the diversification of assets requirement, a Fund must diversify its
holdings so that, at the end of each quarter of each taxable year, (i) at least
50% of the value of a Fund’s total assets is represented by cash and cash items,
U.S. government securities, the securities of other RICs and other securities,
with such other securities limited for purposes of such calculation, in respect
of any one issuer, to an amount not greater than 5% of the value of a Fund’s
total assets and not more than 10% of the outstanding voting securities of such
issuer and (ii) not more than 25% of the value of a Fund’s total assets is
invested in the securities of any one issuer (other than U.S. government
securities or the securities of other RICs), the securities (other than the
securities of other RICs) of any two or more issuers that a Fund controls and
that are determined to be engaged in the same, similar or related trades or
businesses, or the securities of one or more QPTPs.
In
addition, pursuant to the Code, a Fund may invest no more than 25% of its total
assets in the securities of MLPs and other entities treated as QPTPs. A Fund
will not be required to reduce a position due solely to market value
fluctuations in order to comply with the 25% limitation in publicly traded
partnerships, inclusive of MLP investments, but will not be able to purchase
additional MLP securities unless a Fund is in compliance with the restriction.
Each
Fund’s policy is to distribute to its shareholders all of its net investment
company taxable income and any net realized long‑term capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that a Fund will not be subject to any federal income or excise taxes
based on net income. However, a Fund can give no assurances that its anticipated
distributions will be sufficient to eliminate all taxes.
Additionally,
if a Fund does not qualify as a RIC, it would be taxed as a corporation and, in
such case, it would be more beneficial for a shareholder to directly own a
Fund’s underlying investments rather than indirectly owning the underlying
investments through a Fund. If a Fund fails to distribute (or be deemed to have
distributed) by December 31 of each calendar year (i) at least 98% of
its ordinary income for such year, (ii) at least 98.2% of the excess of its
realized capital gains over its realized capital losses for the 12-month period
ending on October 31 during such year and (iii) any amounts from the
prior calendar year that were not distributed and on which a Fund paid no
federal income tax, a Fund will be subject to a 4% excise tax.
Each
Fund intends to qualify each year to pay exempt-interest dividends by satisfying
the requirement that at the close of each quarter of a Fund’s taxable year at
least 50% of a Fund’s total assets consists of municipal securities, which are
exempt from federal income tax. Distributions from a Fund will constitute
exempt-interest dividends to the extent of a Fund’s tax-exempt interest income
(net of allocable expenses and amortized bond premium). Exempt-interest
dividends distributed to shareholders of a Fund are excluded from gross income
for federal income tax purposes. However, shareholders required to file a
federal income tax return will be required to report the receipt of
exempt-interest dividends on their returns. Moreover, while exempt-interest
dividends are excluded from gross income for federal income tax purposes, they
may be subject to alternative minimum tax (“AMT”) in certain circumstances and
may have other collateral tax consequences as discussed below.
Net
investment income generally consists of interest, dividends, and short-term
capital gains, less expenses. Net realized capital gains for a fiscal period are
computed by taking into account any capital loss carryforward of a
Fund.
Distributions
of net investment income may be taxable to shareholders as ordinary income. For
individual shareholders, a portion of the distributions paid by a Fund may
consist of qualified dividends eligible for taxation at the rate applicable to
long-term capital gains to the extent a Fund designates the amount distributed
as a qualified dividend and the shareholder meets certain holding period
requirements with respect to his or her Fund shares. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent that a Fund designates the amount
distributed as eligible for deduction and the shareholder meets certain holding
period requirements with respect to its Fund shares. The aggregate amount so
designated to either individuals or corporate shareholders cannot, however,
exceed the aggregate amount of such dividends received by a Fund for its taxable
year. In view of a Fund’s investment policies, it is expected that part of the
distributions by a Fund may be eligible for the qualified dividend income
treatment for individual shareholders and the dividends‑received deduction for
corporate shareholders. Any distributions to you in excess of a Fund’s
investment company taxable income and net capital gains will be treated by you,
first, as a tax-deferred return of capital, which is applied against and will
reduce the adjusted tax basis of your shares and, after such adjusted tax basis
is reduced to zero, will generally constitute capital gains.
Any
long-term capital gain distributions are taxable to shareholders as long-term
capital gains regardless of the length of time shares have been held. Net
capital gains distributions are not eligible
for
the qualified dividend income treatment or the dividends‑received deduction
referred to in the previous paragraph.
Any
distributions to you in excess of a Fund’s investment company taxable income and
net capital gains will be treated by you, first, as a tax-deferred return of
capital, which is applied against and will reduce the adjusted tax basis of your
shares and, after such adjusted tax basis is reduced to zero, will generally
constitute capital gains to you.
Any
gain or loss from the sale or other disposition of a tax-exempt security
generally is treated as either long-term or short-term capital gain or loss,
depending upon its holding period, and is fully taxable. However, gain
recognized from the sale or other disposition of a tax-exempt security purchased
after April 30, 1993, will be treated as ordinary income to the extent of the
accrued market discount on such security. Distributions by a Fund of ordinary
income and capital gains will be taxable to shareholders.
AMT
is imposed in addition to, but only to the extent it exceeds, the regular tax
and is computed at a maximum rate of 28% for non-corporate taxpayers on the
excess of the taxpayer’s alternative minimum taxable income (“AMTI”) over an
exemption amount. Exempt-interest dividends derived from certain “private
activity” municipal securities issued after Aug. 7, 1986 generally will
constitute an item of tax preference includable in AMTI for non-corporate
taxpayers. However, tax-exempt interest on private activity bonds issued in 2009
and 2010 is not an item of tax preference for purposes of the AMT.
Exempt-interest
dividends must be taken into account in computing the portion, if any, of social
security or railroad retirement benefits that must be included in an individual
shareholder’s gross income subject to federal income tax. Further, a shareholder
of a Fund is denied a deduction for interest on indebtedness incurred or
continued to purchase or carry shares of a Fund. Moreover, a shareholder who is
(or is related to) a “substantial user” of a facility financed by industrial
development bonds held by a Fund will likely be subject to tax on dividends paid
by a Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies and foreign corporations engaged in a trade or
business in the United States.
To
the extent that exempt-interest dividends are derived from interest on
obligations of a state or its political subdivisions, or from interest on
qualifying US territorial obligations (including qualifying obligations of
Puerto Rico, the U.S. Virgin Islands, and Guam), they also may be exempt from
that state’s personal income taxes. Most states do not grant tax-free treatment
to interest on state and municipal securities of other states.
Failure
of the issuer of a tax-exempt security to comply with certain legal or
contractual requirements relating to a municipal security could cause interest
on the municipal security, as well as Fund distributions derived from this
interest, to become taxable, perhaps retroactively to the date the municipal
security was issued. In such a case, a Fund may be required to report to the IRS
and send to shareholders amended Forms 1099 for a prior taxable year in order to
report additional taxable income. This, in turn, could require shareholders to
file amended federal and state income tax returns for such prior year to report
and pay tax and interest on their pro rata share of the additional amount of
taxable income.
Distributions
of any net investment income and net realized capital gains will be taxable as
described above, whether received in shares or in cash. Shareholders who choose
to receive distributions in the
form
of additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the NAV of a share on the reinvestment date.
Distributions are generally taxable when received. However, distributions
declared in October, November or December to shareholders of record on a date in
such a month and paid the following January are taxable as if received on
December 31. Distributions are includable in alternative minimum taxable
income in computing a noncorporate shareholder’s liability for the alternative
minimum tax.
A
redemption of Fund shares may result in recognition of a taxable gain or loss.
Any loss realized upon a redemption of shares within six months from the date of
their purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gains received on those
shares. Any loss realized upon a redemption may be disallowed under certain wash
sale rules to the extent Fund shares are purchased (through reinvestment of
distributions or otherwise) within 30 days before or after the
redemption.
Each
Fund is required to report to you and the IRS annually on Form 1099-B the cost
basis of shares purchased or acquired. However, cost basis reporting is not
required for certain shareholders, including shareholders investing in a Fund
through a tax-advantaged retirement account, such as a 401(k) plan or an
individual retirement account. Each Fund will calculate cost basis using a
Fund’s default method, unless you instruct a Fund to use a different calculation
method. For additional information regarding a Fund’s available cost basis
reporting methods, including its default method, please contact the Fund. If you
hold your Fund shares through a broker (or other nominee), please contact that
broker (nominee) with respect to reporting of cost basis and available elections
for your account.
Except
in the case of certain exempt shareholders, if a shareholder does not furnish a
Fund with its correct Taxpayer Identification Number and certain certifications
or a Fund receives notification from the IRS requiring back-up withholding, a
Fund is required by federal law to withhold federal income tax from the
shareholder’s distributions and redemption proceeds currently at a rate of 24%
for U.S. residents.
Gain
or loss recognized by a Fund on the sale or other disposition of portfolio
investments will be a capital gain or loss. Such capital gain and loss may be
long-term or short-term depending, in general, upon the length of time a
particular investment position is maintained and, in some cases, upon the nature
of the transaction. Property held for more than one year generally will be
eligible for long-term capital gain or loss treatment. The application of
certain rules described below may serve to alter the manner in which the holding
period for a security is determined or may otherwise affect the characterization
as long-term or short-term, and also the timing of the realization and/or
character, of certain gains or losses.
If
a Fund holds, directly or indirectly, one or more “tax credit bonds” (including
build America bonds, clean renewable energy bonds and qualified tax credit
bonds) on one or more applicable dates during a taxable year, a Fund may elect
to permit its shareholders to claim a tax credit on their income tax returns
equal to each shareholder’s proportionate share of tax credits from the
applicable bonds that otherwise would be allowed to a Fund. In such a case,
shareholders must include in gross income (as interest) their proportionate
share of the income attributable to their proportionate share of those
offsetting tax credits. A shareholder’s ability to claim a tax credit associated
with one or more tax credit bonds may be subject to certain limitations imposed
by the Code. Under 2017 legislation commonly known as the Tax Cuts and Jobs Act,
the build America bonds, clean renewable energy bonds and certain other
qualified bonds may no longer be issued after December 31, 2017. Even if a Fund
is eligible to pass through tax credits to shareholders, the Fund may choose not
to do so.
Income
earned on certain U.S. government obligations is exempt from state and local
personal income taxes if earned directly by you. States also grant tax-free
status to dividends paid to you from interest earned on direct obligations of
the U.S. government, subject in some states to minimum investment or reporting
requirements that must be met by a Fund. Income on investments by a Fund in
certain other obligations, such as repurchase agreements collateralized by U.S.
government obligations, commercial paper and federal agency-backed obligations
(e.g.,
Ginnie Mae or Fannie Mae obligations), generally does not qualify for tax-free
treatment. The rules on exclusion of this income are different for corporations.
Gain recognized on the disposition of a debt obligation purchased by a fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount
that accrued during the period of time the fund held the debt obligation unless
the fund made a current inclusion election to accrue market discount into income
as it accrues. If a fund purchases a debt obligation (such as a zero coupon
security or payment-in-kind security) that was originally issued at a discount,
the fund generally is required to include in gross income each year the portion
of the original issue discount that accrues during such year. Therefore, a
fund’s investment in such securities may cause the fund to recognize income and
make distributions to shareholders before it receives any cash payments on the
securities. To generate cash to satisfy those distribution requirements, a fund
may have to sell portfolio securities that it otherwise might have continued to
hold or to use cash flows from other sources such as the sale of fund
shares.
Tax
rules are not entirely clear about issues such as whether and to what extent a
fund should recognize market discount on a debt obligation, when a fund may
cease to accrue interest, original issue discount or market discount, when and
to what extent a fund may take deductions for bad debts or worthless securities
and how a fund should allocate payments received on obligations in default
between principal and income. These and other related issues will be addressed
by a fund in order to ensure that it distributes sufficient income to preserve
its status as a regulated investment company.
While
securities are loaned out by a fund, the fund generally will receive from the
borrower amounts equal to any dividends or interest paid on the borrowed
securities. For federal income tax purposes, payments made "in lieu of"
dividends are not considered dividend income. These distributions will neither
qualify for the reduced rate of taxation for individuals on qualified dividends
nor the 50% dividends-received deduction for corporations.
Foreign
taxpayers (including nonresident aliens) are generally subject to a flat
withholding rate, currently 30% on U.S. source income. This withholding rate may
be lower under the terms of a tax convention.
This
discussion and the related discussion in the Prospectus have been prepared by
Fund management, and counsel to the Funds has expressed no opinion in respect
thereof.
This
section is not intended to be a full discussion of federal tax laws and the
effect of such laws on you. There may be other federal, state, foreign or local
tax considerations to a particular investor. You are urged to consult your own
tax advisor.
Each
Fund will receive income in the form of dividends and interest earned on its
investments in securities. This income, less the expenses incurred in its
operations, is a Fund’s net investment income, substantially all of which will
be distributed to a Fund’s shareholders.
The
amount of a Fund’s distribution is dependent upon the amount of net investment
income received by a Fund from its portfolio holdings, is not guaranteed, and is
subject to the discretion of the Board. Each Fund does not pay “interest” or
guarantee any fixed rate of return on an investment in its shares.
Each
Fund may also derive capital gains or losses in connection with sales or other
dispositions of its portfolio securities. Any net gain a Fund may realize from
transactions involving investments held less than the period required for
long-term capital gain or loss recognition or otherwise producing short-term
capital gains and losses (to the extent not offset by any capital loss
carryovers), although a distribution from capital gains, will be distributed to
shareholders with and as a part of the distributions of net investment income
giving rise to ordinary income. If during any year a Fund realizes a net gain on
transactions involving investments held for the period required for long-term
capital gain or loss recognition or otherwise producing long-term capital gains
and losses, a Fund will have a net long-term capital gain. After deduction of
the amount of any net short-term capital loss, the balance (to the extent not
offset by any capital losses carried over from the eight previous taxable years)
will be distributed and treated as long-term capital gains in the hands of the
shareholders regardless of the length of time a Fund’s shares may have been held
by the shareholders. For more information concerning applicable capital gains
tax rates, see your tax advisor.
Any
distribution paid by a Fund reduces the Fund’s NAV per share on the date paid by
the amount of the distribution per share. Accordingly, a distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes.
Distributions
will be made in the form of additional shares of a Fund unless the shareholder
has otherwise indicated. Investors have the right to change their elections with
respect to the reinvestment of distributions by notifying the Transfer Agent in
writing or by telephone. However, any such change will be effective only as to
distributions for which the record date is five or more calendar days after the
Transfer Agent has received the request.
Each
Fund’s annual
report
to shareholders for the fiscal year ended August 31, 2023 is a separate document
and the financial statements, accompanying notes and report of the independent
registered public accounting firm appearing therein are incorporated by
reference into this SAI.