ck0001141819-20230831
Statement
of Additional Information
Dated:
December 29, 2023
PMC
Funds
PMC
Core Fixed Income Fund
Advisor
Class Shares: (PMFIX)
Institutional
Class Shares: (PMFQX)
PMC
Diversified Equity Fund
Advisor
Class Shares: (PMDEX)
Institutional
Class Shares: (PMDQX)
This
Statement of Additional Information (“SAI”) provides general information about
the PMC Core Fixed Income Fund (the “Core Fixed Income Fund”) and the PMC
Diversified Equity Fund (the “Diversified Equity Fund”) (each, a “Fund,” and
collectively, the “Funds” or “PMC Funds”), each a series of Trust for
Professional Managers (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, which is
incorporated herein by reference. The audited financial statements of the PMC
Funds for the fiscal year ended August 31, 2023 are incorporated herein by
reference to the Funds’ 2023 Annual
Report to Shareholders.
To obtain a free copy of the Prospectus and/or the Funds’ 2023 Annual Report to
Shareholders, please write or call the Funds at the address or telephone number
below, or visit the Funds’ website at http://www.investpmc.com/investment
solutions/funds.html.
PMC
Funds
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
WI 53201-0701
(866)
PMC‑7338
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TABLE
OF CONTENTS
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The
Trust
The
Trust is a Delaware statutory trust organized on May 29, 2001, and is registered
with the Securities and Exchange Commission (the “SEC”) as an open-end
management investment company. Each Fund is one series of the Trust. Each Fund
is a 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 Trust may register additional series and offer shares of a new fund or
share class under the Trust at any time.
The
Trust is authorized to issue an unlimited number of interests (or shares).
Interests in the Funds are represented by shares of beneficial interest each
with a par value of $0.001. Each share of the Trust has equal voting rights and
liquidation rights, and is voted in the aggregate and not by the series or class
of shares 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 interests of a particular series or class of shares. 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.
Shares of each series or class generally vote together, except when required
under federal securities laws to vote separately on matters that only affect a
particular class. The Trust does not normally hold annual meetings of
shareholders. The Trust’s Board of Trustees (the “Board” or the “Board of
Trustees”) shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any trustee when requested to do so in
writing by shareholders holding 10% or more of the Trust’s outstanding
shares.
Each
share of a Fund represents an equal proportionate interest in the assets and
liabilities belonging to that Fund and is entitled to such distributions out of
the income belonging to the Fund as are declared by the Board of Trustees. The
Board of Trustees 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 so
long as the proportionate beneficial interests in the assets belonging to that
series and the rights of shares of any other series are in no way affected.
Additionally, in case of any liquidation of a series, the shareholders 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 are borne by that series or class. Any general expenses
of the Trust not readily identifiable as belonging to a particular series or
class are allocated by, or under the direction of, the Board of Trustees on the
basis of relative net assets, the number of shareholders or another equitable
method. No shareholder is liable to further calls or to assessment by the Trust
without his or her express consent.
With
respect to the Funds, the Trust may offer more than one class of shares. Each
share of a series or class represents an equal proportionate interest in that
series or class with each other share of that series or class. The Trust, on
behalf of the Funds, has adopted a multiple class plan under Rule 18f-3 under
the 1940 Act, detailing the attributes of each Fund’s share classes. The Funds
offer two classes of shares: Institutional Class shares and Advisor Class
shares.
The
assets of a Fund received for the issue or sale of its shares, and all income,
earnings, profits and proceeds thereof, subject only to the rights of creditors,
shall constitute the underlying assets of the Fund. In the event of the
dissolution or liquidation of a Fund, the shareholders of that Fund are entitled
to share pro rata in the net assets of the Fund available for distribution to
shareholders.
Envestnet
Asset Management, Inc. (the “Adviser”) serves as the Funds’ investment adviser.
The Adviser also serves as investment adviser to the ActivePassive Core Bond
ETF, ActivePassive Intermediate Municipal Bond ETF, ActivePassive International
Equity ETF and ActivePassive U.S. Equity ETF, each a separate series of the
Trust.
Investment
Policies, Strategies and Associated Risks
Investment
Objectives
The
investment objective of the Diversified Equity Fund is long-term capital
appreciation. The investment objective of the Core Fixed Income Fund is to
provide current income consistent with low volatility of principal. Each Fund’s
investment objective may be changed without the approval of the Fund’s
shareholders upon 60 days’ written notice to shareholders. Each Fund will not
change its investment policy of investing at least 80% of its net assets
according to its investment strategies without first changing the Fund’s name
and providing shareholders with at least 60 days’ prior written
notice.
There
is no assurance that a Fund will achieve its investment objective. The following
discussion supplements the description of the Funds’ investment objectives and
principal investment strategies set forth in the Prospectus. Except for the
fundamental investment restrictions listed below (see “Investment
Restrictions”), the Funds’ investment objectives, strategies and policies are
not fundamental and may be changed by action of the Board of Trustees, without
shareholder approval. While the Funds are permitted to hold securities and
engage in various strategies as described hereafter, they are not obligated to
do so.
Diversification
The
Funds are diversified. Under applicable federal laws, to qualify as a
diversified fund, a Fund, with respect to 75% of its total assets, may not
invest more than 5% of its total assets in any one issuer and may not hold more
than 10% of the securities of one issuer. The remaining 25% of a Fund’s total
assets does not need to be “diversified” and may be invested in securities of a
single issuer, subject to other applicable laws. The diversification of a Fund’s
holdings is measured at the time the fund purchases a security. However, if a
Fund purchases a security and holds it for a period of time, the security may
become a larger percentage of the Fund’s total assets due to movements in the
financial markets. If the market affects several securities held by a Fund, the
Fund may have a greater percentage of its assets invested in securities of fewer
issuers.
Whenever
an investment policy or investment restriction states a maximum percentage of a
Fund’s assets that may be invested in any security, or other asset, or sets
forth a policy regarding quality standards, such standard or percentage
limitation will be determined immediately after and as a result of the Fund’s
acquisition of such security or other asset. Accordingly, 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
investment restrictions set forth herein or in the Prospectus. 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 the Fund would not, or could not, buy. If this happens, the
Fund will sell such investments as soon as practicable while trying to maximize
the return to Fund shareholders. Please note, however, that the guidance
referenced in the first two sentences of this paragraph does not apply to each
Fund’s limitation on borrowing of money or holding illiquid
investments..
Equity
Securities
Equity
securities (such as a stock, partnership interest or other beneficial interest
in an issuer) represent 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. Common
stock and preferred stock are examples of equity securities. Preferred stock are
equity securities that often pay dividends at a specific rate and have a
preference over common stock in dividend payments and liquidation of assets.
Some preferred stock may be convertible into common stock. Convertible
securities are securities (such as debt securities or preferred stock) that may
be converted into or exchanged for a specified amount of common stock of the
same or different issuer within a particular period of time at a specified price
or formula.
The
risks of investing in companies in general include business failure and reliance
on erroneous reports. To the extent a Fund is invested in the equity securities
of small- or medium-size companies, directly or
indirectly,
it will be exposed to the risks of smaller sized companies. Small- and
medium-size companies often have narrower markets for their goods and/or
services and more limited managerial and financial resources than larger, more
established companies. Furthermore, those companies often have limited product
lines or services, markets or financial resources, or are dependent on a small
management group. In addition, because these securities are not well-known to
the investing public, do not have significant institutional ownership and are
followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is
available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the
value and liquidity of securities held by the Funds. As a result, their
performance can be more volatile and they face greater risk of business failure,
which could increase the volatility of a Fund’s portfolio. Alternately, larger,
more established companies may be unable to respond quickly to new competitive
challenges and may be unable to attain high growth rates.
When-Issued
Securities.
The Funds may purchase securities on a when-issued basis. These transactions
involve a commitment by the Funds to purchase or sell particular securities with
payment and delivery taking place at a future date, and permit the Funds to lock
in a price or yield on a security it owns or intends to purchase, regardless of
future changes in interest rates or market action. No income accrues to the
purchaser of a security on a when-issued basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Purchasing a security on a
when-issued basis can involve a risk that the market price at the time of
delivery may be lower than the agreed-upon purchase price, in which case there
could be an unrealized loss at the time of delivery. The Funds will only make
commitments to purchase securities on a when-issued basis with the intention of
actually acquiring the securities but may sell them before the settlement date
if it is deemed advisable.
Preferred
Stock
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. Preferred stock has
preference over common stock in the receipt of dividends and in any residual
assets after payment to creditors should the issuer be dissolved. Although the
dividend is set at a fixed annual rate, in some circumstances it can be changed
or omitted by the issuer.
Fixed
Income Securities
The
Core Fixed Income Fund may invest in a wide range of fixed income securities,
which may include obligations of any rating or maturity.
The
Core Fixed Income Fund may invest in investment grade corporate debt securities
and lower-rated corporate debt securities (commonly known as “junk bonds”).
Lower-rated or high yield debt securities include corporate high yield debt
securities, zero-coupon securities, payment-in kind securities and strips.
Investment grade corporate bonds are those rated BBB- or better by Standard
& Poors (“S&P”) or Baa3 or better by Moody’s Investors Service, Inc.
(“Moody’s”), or if unrated or split rated, securities deemed by the Adviser or a
sub-adviser to be of comparable quality). Securities rated BBB- by S&P are
considered investment grade, but Moody’s considers securities rated Baa3 to have
speculative characteristics. The Core Fixed Income Fund may also invest in
unrated securities.
High-Yield
Bonds.
High-yield bonds (also known as “junk bonds”) generally offer a higher current
yield than that available for higher-grade issues. However, lower-rated
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. In
addition, the market for lower-rated debt securities
has
expanded rapidly in recent years, and its growth paralleled a long economic
expansion. At times in recent years, the prices of many lower-rated debt
securities declined substantially, reflecting an expectation that many issuers
of such securities might experience financial difficulties. As a result, the
yields on lower-rated debt securities rose dramatically, but such higher yields
did not reflect the value of the income stream that holders of such securities
expected, but rather, 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 declines will not
recur. The market for lower-rated debt issues generally is thinner and less
active than that for higher quality securities, which may limit the Core Fixed
Income 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 lower-rated securities, especially in a thinly traded
market. Changes by recognized rating services in their rating of a fixed income
security may affect the value of these investments. The Core Fixed Income Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase. However, the Adviser and sub-adviser will
monitor the investment to determine whether continued investment in the security
will assist in meeting the Core Fixed Income 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 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 both credit risk and interest rate 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) debt securities have a higher priority than lower ranking
(subordinated) 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
securities may receive amounts otherwise payable to the holders of more junior
securities. Ratings agencies provide ratings on debt securities based on their
analyses of information they deem relevant. Ratings are essentially opinions or
judgments of the credit quality of an issuer and may prove to be inaccurate. In
addition, there may be a delay between events or circumstances adversely
affecting the ability of an issuer to pay interest and or repay principal and an
agency’s decision to downgrade a security. 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.
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 and compound semiannually at the rate fixed at the
time of issuance, their value generally is more volatile than the value of other
fixed income securities. 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 and
delayed interest securities may cause the applicable Fund to recognize income
and make required distributions to shareholders before it receives any cash
payments on its investment. As a result, such Fund may have to dispose of its
portfolio investments under disadvantageous circumstances in order to generate
sufficient cash to satisfy the distribution requirements for maintaining its
status as a regulated investment company (“RIC”) under Section 851 of the
Internal Revenue Code of 1986, as amended (the “Code”).
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
obtaining 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.
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 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.
The 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. A 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. In evaluating these matters with respect to a
particular convertible security, the Adviser considers numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer’s
profits, and the issuer’s management capability and practices. Convertible
securities are senior to common stock in an issuer’s capital structure, but are
subordinated to any senior debt securities. Consequently, the issuer’s
convertible securities generally may be viewed as having more risk than its
senior debt securities but less risk than its common stock.
Warrants
The
Funds may invest in warrants. A warrant gives the holder a right to purchase at
any time during a specified period a predetermined number of shares of common
stock at a fixed price. Unlike convertible debt securities or preferred stock,
warrants do not pay a fixed coupon or dividend. Investments in warrants involve
certain risks, including the possible lack of a liquid market for resale of the
warrants, potential price fluctuations as a result of speculation or other
factors and failure of the price of the underlying security to reach or have
reasonable prospects of reaching a level at which the warrant can be prudently
exercised (in which event the warrant may expire without being exercised,
resulting in a loss of a Fund’s entire investment therein).
Exchange-Traded
Funds
The
Funds may invest in exchange-traded funds (“ETFs”) as a principal investment
strategy. Each share of an ETF represents an undivided ownership interest in the
portfolio of securities held by that ETF. An ETF is an investment company that
offers investors a proportionate share in a portfolio of stocks, bonds,
commodities, currencies or other securities. Like individual equity securities,
ETFs are traded on a stock exchange and can be bought and sold throughout the
day.
Passive
ETFs attempt to achieve the same investment return as that of a particular
market index. To mirror the performance of a market index, an ETF invests either
in all of the securities in a particular index in the same proportion that is
represented in the index itself or in a representative sample of securities in a
particular index in a proportion meant to track the performance of the entire
index. Such ETFs generally do not buy or sell securities, except to the extent
necessary to conform their portfolios to the corresponding index. Because such
ETFs have operating expenses and transaction costs, while a market index does
not, they typically will be unable to match the performance of the index
exactly. Alternatively, some ETFs use active investment strategies instead of
tracking broad market indices and, as a result, may incur greater operating
expenses and transactions costs than traditional ETFs. Investments in ETFs are
investments in other investment companies. See “Other Investment Companies”
below.
ETFs
generally do not sell or redeem their shares for cash, and most investors do not
purchase or redeem shares directly from an ETF at all. Instead, the ETF issues
and redeems its shares in large blocks (typically 50,000 of its shares) called
“creation units.” Creation units are issued to anyone who deposits a specified
portfolio of the ETF’s underlying securities, as well as a cash payment
generally equal to accumulated dividends on the securities (net of expenses) up
to the time of deposit, and creation units are redeemed in kind for a portfolio
of the underlying securities (based on the ETF’s net asset value) together with
a cash payment generally equal to accumulated dividends as of the date of
redemption. Most ETF investors, however, purchase and sell ETF shares in the
secondary trading market on a securities exchange, in lots of any size, at any
time during the trading day. ETF investors generally must pay a brokerage fee
for each purchase or sale of ETF shares, including purchases made to reinvest
dividends.
Because
ETF shares are created from the securities of an underlying portfolio and can be
redeemed into the securities of an underlying portfolio on any day, arbitrage
traders may move to profit from any discrepancies between the market price of
the ETF’s shares in the secondary market and the net asset value per share of
the ETF’s portfolio, which helps to close the price gap between the two. Of
course, because of the forces of supply and demand and other market factors,
there may be times when an ETF share trades at a premium or discount to its net
asset value.
The
Funds will invest in ETF shares only if the ETF is registered as an investment
company (see “Other Investment Companies” below) under the 1940 Act. If an ETF
in which a Fund invests ceases to be a registered investment company, the Fund
will dispose of the securities of the ETF as soon as practicable while trying to
maximize the return to the Fund’s shareholders. Furthermore, in connection with
its investment in ETF shares, a Fund will incur various costs. A Fund may also
realize capital gains when ETF shares are sold, and the purchase and sale of the
ETF shares may include a brokerage commission that may result in costs. In
addition, the Funds are subject to other fees as an investor in ETFs. Generally,
those fees include, but are not limited to, director/trustee fees, operating
expenses, licensing fees, registration fees and marketing expenses, each of
which will be reflected in the net asset value of ETFs and therefore the shares
representing a beneficial interest therein.
There
is a risk that the underlying ETFs in which the Funds invest may terminate due
to extraordinary events that may cause any of the service providers to the ETFs,
such as the trustee or sponsor, to close or otherwise fail to perform their
obligations to the ETF. Also, because the ETFs in which the Funds may
principally invest are each granted licenses by agreement to use the indices as
a basis for determining their compositions
and/or
otherwise to use certain trade names, the ETFs may terminate if such license
agreements are terminated. In addition, an ETF may terminate if its entire net
asset value falls below a certain amount.
Other
Investment Companies
Each
Fund may invest in shares of other investment companies, including money market
mutual funds, other mutual funds or ETFs. The Funds limit their investments in
securities issued by other investment companies in accordance with the 1940 Act.
With certain exceptions, Section 12(d)(1) of the 1940 Act precludes the Funds
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 (such limits do not apply to investments in money market
funds). The Funds may from time to time rely on Section 12(d)(1)(F) of the 1940
Act with respect to their investments in other investment companies, including
exchange-traded funds (“ETFs”) and money market funds. Section 12(d)(1)(F) of
the 1940 Act provides that the provisions of paragraph 12(d)(1) shall not apply
to securities purchased or otherwise acquired by a Fund if (i) immediately after
such purchase or acquisition not more than 3% of the total outstanding shares of
such investment company is owned by a Fund and all affiliated persons of a Fund;
and (ii) a Fund has not offered or sold, and is not proposing to offer or sell
its shares through a principal underwriter or otherwise at a public or offering
price that includes a sales load of more than 1 1/2%. The Funds’ investments in
money market funds may be used for cash management purposes and to maintain
liquidity in order to satisfy redemption requests or pay unanticipated
expenses.
If
a Fund invests in investment companies, including ETFs, pursuant to Section
12(d)(1)(F), it must comply with the following voting restrictions: when such
Fund exercises voting rights, by proxy or otherwise, with respect to investment
companies owned by the Fund, the Fund will either seek instruction from the
Fund’s shareholders with regard to the voting of all proxies and vote in
accordance with such instructions, or vote the shares held by the Fund in the
same proportion as the vote of all other holders of such security. In addition,
an investment company purchased by a Fund pursuant to Section 12(d)(1)(F) shall
not be required to redeem its shares in an amount exceeding 1% of such
investment company’s total outstanding shares in any period of less than thirty
days. In addition to the advisory and operational fees the Funds bear directly
in connection with their own operation, the Funds also bear their pro rata
portion of the advisory and operational expenses incurred indirectly through
investments in other investment companies.
A
Fund may also rely on Rule 12d1-4 of the 1940 Act which provides an exemption
from Section 12(d)(1) that allows a Fund to invest all of its assets in other
registered funds, including ETFs, if the Fund satisfies certain conditions
specified in the Rule, including, among other conditions, that the Fund and its
advisory group will not control (individually or in the aggregate) an acquired
fund (e.g., hold more than 25% of the outstanding voting securities of an
acquired fund that is a registered open-end management investment company).
Foreign
Investments and Currencies
The
Funds may invest in securities of foreign issuers that are not publicly traded
in the United States. The Funds may also invest in American depositary receipts
(“ADRs”), European depositary receipts (“EDRs”) and Global depositary receipts
(“GDRs”), foreign securities traded on a national securities market, and may
purchase and sell foreign currency on a spot basis and enter into forward
currency contracts (see “Forward Currency Contracts,” below). In considering
whether to invest in the securities of a foreign company, the Adviser considers
such factors as the characteristics of the particular company, differences
between economic trends and the performance of securities markets within the
U.S. and those within other countries, and also factors relating to the general
economic, governmental and social conditions of the country or countries where
the company is located. The extent to which the Fund will be invested in foreign
companies and countries and depositary receipts will fluctuate from time to time
within the limitations described in the Prospectus, depending on the Adviser’s
assessment of prevailing market, economic and other conditions.
Depositary
Receipts.
The Funds may invest their assets in securities of foreign issuers in the form
of depositary receipts, including ADRs, EDRs and GDRs, which are securities
representing securities of foreign issuers. A purchaser of unsponsored
depositary receipts may not have unlimited voting rights and may not receive as
much information about the issuer of the underlying securities as with a
sponsored depositary receipt. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. For purposes of the Funds’
investment policies, ADRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR representing ownership of
common stock will be treated as common stock.
Risks
of Investing in Foreign Securities.
Investments in foreign securities involve certain inherent risks, including the
following:
Political
and Economic Factors.
Individual foreign economies of certain countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency,
diversification and balance of payments position. Governments in certain foreign
countries also continue to participate to a significant degree, through
ownership interest or regulation, in their respective economies. Action by these
governments could include restrictions on foreign investment, nationalization,
expropriation of goods or imposition of taxes, and could have a significant
effect on market prices of securities and payment of interest. The economies of
many foreign countries are heavily dependent upon international trade and are
accordingly affected by the trade policies and economic conditions of their
trading partners. Enactment by these trading partners of protectionist trade
legislation could have a significant adverse effect upon the securities markets
of such countries.
There
is still market uncertainty regarding the potential consequences of “Brexit”
(the United Kingdom’s (UK) withdrawal from the European Union (EU)) including
Brexit’s long-term ramifications. The range of possible political, regulatory,
economic and market outcomes are difficult to predict. The uncertainty
surrounding the UK’s economy may cause disruption in securities markets,
including increased volatility and illiquidity, as well as currency fluctuations
in the British pound’s exchange rate against the U.S. dollar.
The
Russian invasion of Ukraine has resulted in an ongoing military conflict and
economic sanctions against certain Russian individuals and companies; this
conflict may expand and military attacks could occur elsewhere in Europe. This
conflict could also drive a rise in traditional and cyber terrorism in Europe
and other parts of the world. Further, sanctions against Russian individuals and
companies could adversely affect the price and availability of certain
commodities.
Currency
Fluctuations.
The Funds may invest in securities denominated in foreign currencies.
Accordingly, a change in the value of any such currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of a Fund’s
assets denominated in that currency. Such changes will also affect a Fund’s
income. The value of a Fund’s assets may also be affected significantly by
currency restrictions and exchange control regulations enacted from time to
time.
Market
Characteristics.
Many foreign securities in which the Funds may invest could be purchased in
over-the-counter (“OTC”) markets or on exchanges located in the countries in
which the principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign exchanges and markets may
be more volatile than those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets, and the Funds’ foreign
securities may be less liquid and more volatile than U.S. securities. Moreover,
settlement practices for transactions in foreign markets may differ from those
in U.S. markets, and may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving securities
settlement where Fund assets may be released
prior
to receipt of payment or securities, may expose the Funds to increased risk in
the event of a failed trade or the insolvency of a foreign
broker-dealer.
Legal
and Regulatory Matters.
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, and less financial information available from
issuers, than is available in the United States. Additionally, issuers of
foreign securities may not be required to provide operational or financial
information that is as timely or reliable as those required for issuers of U.S.
securities.
Taxes.
The interest and dividends payable on certain of the Funds’ foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to Fund shareholders.
Costs.
To the extent that a Fund invests in foreign securities, its expense ratio is
likely to be higher than those of investment companies investing only in
domestic securities, because the cost of maintaining the custody of foreign
securities is higher.
Emerging
Markets.
Some of the securities in which the Funds may invest may be located in
developing or emerging markets, which entail additional risks, including: less
social, political and economic stability; smaller securities markets and lower
trading volume, which may result in less liquidity and greater price volatility;
national policies that may restrict a Fund’s investment opportunities, including
restrictions on investments in issuers or industries, or expropriation or
confiscation of assets or property; and less developed legal structures
governing private or foreign investment.
Many
emerging markets have histories of political instability and abrupt changes in
policies. As a result, their governments may be more likely to take actions that
are hostile or detrimental to private enterprise or foreign investment than
those of more developed countries, including expropriation of assets,
confiscatory taxation or unfavorable diplomatic developments. Some emerging
countries have pervasive corruption and crime that may hinder investments.
Certain emerging markets may also face other significant internal or external
risks, including the risk of war, and ethnic, religious and racial conflicts. In
addition, governments in many emerging market countries participate to a
significant degree in their economies and securities markets, which may impair
investment and economic growth. National policies that may limit a Fund’s
investment opportunities include restrictions on investment in issuers or
industries deemed sensitive to national interests.
Emerging
markets may also have differing legal systems and the existence or possible
imposition of exchange controls, custodial restrictions or other laws or
restrictions applicable to investments differ from those found in more developed
markets. Sometimes, they may lack, or be in the relatively early development of,
legal structures governing private and foreign investments and private property.
In addition to withholding taxes on investment income, some emerging market
countries may impose different capital gains taxes on foreign
investors.
Practices
in relation to settlement of securities transactions in emerging market
countries involve higher risks than those in developed markets, in part because
a Fund will need to use brokers and counterparties that are less well
capitalized, and custody and registration of assets in some countries may be
unreliable. The possibility of fraud, negligence, and/or undue influence being
exerted by the issuer or refusal to recognize ownership exists in some emerging
markets, and, along with other factors, could result in ownership registration
being completely lost. A Fund would absorb any loss resulting from such
registration problems and may have no successful claim for compensation. In
addition, communications between parties in the U.S. and parties in emerging
market countries may be unreliable, increasing the risk of delayed settlements
or losses of security certificates.
Forward
Currency Contracts.
The Funds may enter into forward currency contracts in anticipation of changes
in currency exchange rates. A forward currency contract is an obligation to
purchase or sell a specific currency
at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
For example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
In
considering whether to invest in the securities of a foreign company, the
Adviser considers such factors as the characteristics of the particular company,
differences between economic trends and the performance of securities markets
within the U.S. and those within other countries, and also factors relating to
the general economic, governmental and social conditions of the country or
countries where the company is located. The extent to which the Funds will be
invested in foreign companies and countries and depositary receipts will
fluctuate from time to time within the limitations described in the Prospectus,
depending on the Adviser’s assessment of prevailing market, economic and other
conditions.
Borrowing
As
a non-principal investment strategy, the Funds may borrow money for investment
purposes, which is a form of leveraging, to the extent permitted by the 1940
Act. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing investment
opportunity. Leverage will magnify changes in a Fund’s net asset value and on a
Fund’s investments. Although the principal of such borrowings will be fixed, a
Fund’s assets may change in value during the time the borrowing is outstanding.
Leverage also creates interest expenses for the Funds. To the extent the income
derived from securities purchased with borrowed funds exceeds the interest the
Funds will have to pay, the Funds’ net income will be greater than it would be
if leverage were not used. Conversely, if the income from the assets obtained
with borrowed funds is not sufficient to cover the cost of leveraging, the net
income of the Funds will be less than it would be if leverage were not used, and
therefore the amount available for distribution to shareholders as dividends
will be reduced. The use of derivatives in connection with leverage creates the
potential for significant loss.
The
Funds may also borrow funds to meet redemptions or for other emergency purposes.
Such borrowings may be on a secured or unsecured basis at fixed or variable
rates of interest. The 1940 Act requires the Funds to maintain continuous asset
coverage of not less than 300% with respect to all borrowings. If such asset
coverage should decline to less than 300% due to market fluctuations or other
reasons, a Fund may be required to dispose of some of its portfolio holdings
within three days in order to reduce the Fund’s debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
dispose of assets at that time.
The
Funds also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit. Either of these requirements would increase the cost of borrowing over
the stated interest rate.
Borrowing
by the Funds creates an opportunity for increased net income, but at the same
time, creates special risk considerations. For example, leveraging may
exaggerate the effect on net asset value of any increase or decrease in the
market value of a Fund’s portfolio.
Securities
Lending
As
a non-principal strategy, each Fund may lend securities from its portfolio to
brokers, dealers and financial institutions (but not individuals) in order to
increase the return on its portfolio. The value of the loaned securities may not
exceed one-third of a Fund’s total assets and loans of portfolio securities are
fully collateralized based on values that are marked-to-market daily. 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. The Funds may pay
reasonable administrative and custodial fees in connection with loans of
portfolio securities and may pay a portion of the interest or fee earned thereon
to the borrower or a placing broker. For loans secured by cash, the Funds retain
the interest earned on cash collateral, but the Funds are required to pay the
borrower a rebate for the use of the cash collateral.
In
determining whether or not to lend a security to a particular broker, dealer or
financial institution, the Adviser considers all relevant facts and
circumstances, including the size, creditworthiness and reputation of the
broker, dealer or financial institution. 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 the
Fund’s investment portfolio at the time of the loan and, in the event of a
default by the borrower, the Fund will, if permitted by law, dispose of such
collateral except for such part thereof that is a security in which the Fund is
permitted to invest. During the time securities are on loan, the borrower will
pay the applicable Fund any accrued income on those securities (although any fee
income representing dividend payments will not qualify as “qualified dividend”
income), and the Fund may invest the cash collateral and earn income or receive
an agreed-upon fee from a borrower that has delivered cash-equivalent
collateral. The Fund will be responsible for the risks associated with the
investment of the cash collateral, including the risk that the Fund may lose
money on the investment or may fail to earn sufficient income to meet its
obligation to the borrower. While a Fund does not have the right to vote
securities on loan, it would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
See
the information under “Securities Lending Activity” for information about the
Funds’ securities lending activity during the fiscal year ended August 31,
2023.
Real
Estate Investment Trusts (“REITs”)
Equity
REITs invest primarily in real property and earn rental income from leasing
those properties. They also may realize gains or losses from the sale of
properties. Equity REITs generally exercise some degree of control over the
operational aspects of their real estate investments, lease terms and property
maintenance and repair. Mortgage REITs invest primarily in mortgages and similar
real estate interests and receive interest payments from the owners of the
mortgaged properties and are paid interest by the owners of the financed
properties. Hybrid REITs invest both in real property and in
mortgages.
A
REIT generally is not taxed on income distributed to its shareholders if it
complies with certain federal income tax requirements relating primarily to its
organization, ownership, assets and income and, further, if it distributes at
least 90% of its taxable income to shareholders each year. Consequently, REITs
tend to focus on income-producing real estate investments.
The
Funds’ investments in REITs may be adversely affected by deteriorations of the
real estate rental market, in the case of REITs that primarily own real estate,
or by deteriorations in the creditworthiness of property owners and changes in
interest rates in the case of REITs that primarily hold mortgages. Equity and
mortgage REITs also are dependent upon specialized management skills, may not be
diversified in their holdings and are subject to the risks of financing
projects. REITs also may be subject to heavy cash flow dependency, defaults by
borrowers and self-liquidation. Under certain circumstances, a REIT may fail to
qualify for pass-through treatment for tax purposes, which would subject the
REIT to federal income taxes and adversely affect a Fund’s return on its
investment in the REIT.
In
general, qualified REIT dividends that an investor receives directly from a REIT
are automatically eligible for the 20% qualified business income deduction. The
IRS has issued final Treasury Regulations that permit a dividend or part of a
dividend paid by a RIC and reported as a “section 199A dividend” to be treated
by the recipient as a qualified REIT dividend for purposes of the 20% qualified
business income deduction, if certain holding period and other requirements have
been satisfied by the recipient with respect to its Fund shares.
Options,
Futures and Other Strategies
General.
As a non-principal strategy, the Funds may use certain options (both traded on
an exchange and OTC), futures contracts (sometimes referred to as “futures”) and
options on futures contracts (collectively, “Financial Instruments”) as a
substitute for a comparable market position in the underlying security, to
attempt to hedge or limit the exposure of a Fund’s position, to create a
synthetic money market position, for certain tax-related purposes and to effect
closing transactions.
The
Funds’ use of Financial Instruments is subject to applicable regulations of the
SEC (including Rule 18f-4 under the 1940 Act, the several exchanges upon which
they are traded and the Commodity Futures Trading Commission (the “CFTC”). In
addition, the Funds’ ability to use Financial Instruments will be limited by tax
considerations (see “Federal Income Tax Matters”). On October 28, 2020, the SEC
adopted new regulations governing the use of derivatives by registered
investment companies as Rule 18f-4 under the 1940 Act (“Rule 18f-4”). Rule 18f-4
imposes limits on the amount of derivatives a fund can enter into, eliminates
the asset segregation and cover framework arising from prior SEC guidance for
covering derivatives and certain financial instruments currently used by funds
to comply with Section 18 of the 1940 Act and treats derivatives as senior
securities. Under Rule 18f-4 a fund’s derivatives exposure is limited through a
value-at-risk test. Funds whose use of derivatives is more than a limited
specified exposure amount are required to establish and maintain a comprehensive
derivatives risk management program, subject to oversight by a fund’s board of
trustees, and appoint a derivatives risk manager. The Core Fixed Income Fund
limits its derivatives exposure to 10% of its net assets and qualifies as a
“limited derivatives user” for purposes of Rule 18f-4. The Diversified Equity
Fund is a non-derivatives user.
In
addition to the instruments, strategies and risks described below and in the
Prospectus, the Adviser may discover additional opportunities in connection with
Financial Instruments and other similar or related techniques. These new
opportunities may become available as the Adviser develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. The Adviser may utilize
these opportunities to the extent that they are consistent with the Funds’
investment objective and permitted by the Funds’ investment limitations and
applicable regulatory authorities. The Prospectus or this SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
Special
Risks.
The use of Financial Instruments involves special considerations and risks,
certain of which are described below. Risks pertaining to particular Financial
Instruments are described in the sections that follow.
(1)Successful
use of most Financial Instruments depends upon the Adviser’s ability to predict
movements of the overall securities markets, which requires different skills
than predicting changes in the prices of individual securities. The ordinary
spreads between prices in the cash and futures markets, due to the differences
in the natures of those markets, are subject to distortion. Due to the
possibility of distortion, a correct forecast of stock market trends by the
Adviser may still not result in a successful transaction. The Adviser may be
incorrect in its expectations as to the extent of market movements or the time
span within which the movements take place, which, thus, may result in the
strategy being unsuccessful.
(2)Options
and futures prices can diverge from the prices of their underlying instruments.
Options and futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument and the time remaining until expiration of the contract, which may
not affect security prices the same way. Imperfect or no correlation also may
result from differing levels of demand in the options and futures markets and
the securities markets, from structural differences in how options and futures
and securities are traded and from imposition of daily price fluctuation limits
or trading halts.
(3)As
described below, a Fund might be required to maintain assets as “cover,”
maintain segregated accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (e.g.,
Financial Instruments other than purchased options). If a Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair a Fund’s ability to
sell a portfolio security or make an investment when it would otherwise be
favorable to do so or require that the Fund sell a portfolio security at a
disadvantageous time. A Fund’s ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction (the “counter-party”) to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to the
Funds.
(4)Losses
may arise due to unanticipated market price movements, lack of a liquid
secondary market for any particular instrument at a particular time or due to
losses from premiums paid by a Fund on options transactions.
Cover.
Transactions using Financial Instruments, other than purchased options, expose
the Funds to an obligation to another party. The Funds will not enter into any
such transactions unless they own either (1) an offsetting (“covered”) position
in securities or other options or futures contracts or (2) cash and liquid
assets with a value, marked-to-market daily, sufficient to cover their potential
obligations to the extent not covered as provided in (1) above. The Funds will
set aside cash or liquid assets in an account with their custodian, U.S. Bank
National Association (the “Custodian”), in the prescribed amount as determined
daily to provide cover for these instruments if obligated contractually or
otherwise to do so.
Assets
used as cover or held in an account cannot be sold while the position in the
corresponding Financial Instrument is open, unless they are replaced with other
appropriate assets. As a result, the commitment of a large portion of a Fund’s
assets to cover accounts could impede portfolio management or the Fund’s ability
to meet redemption requests or other current obligations.
Options.
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment and general market conditions. Options that expire unexercised have
no value. Options currently are traded on the Chicago Board Options Exchange,
the NYSE Amex and other exchanges, as well as the OTC markets.
By
buying a call option on a security, a Fund has the right, in return for the
premium paid, to buy the security underlying the option at the exercise price.
By writing (selling) a call option and receiving a premium, a Fund becomes
obligated during the term of the option to deliver securities underlying the
option at the exercise price if the option is exercised. By buying a put option,
a Fund has the right, in return for the premium, to sell the security underlying
the option at the exercise price. By writing a put option, a Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price.
Because
options premiums paid or received by the Funds are small in relation to the
market value of the investments underlying the options, buying and selling put
and call options can be more speculative than investing directly in
securities.
A
Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option. This is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option. This is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
Risks
of Options on Securities.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between a Fund and its counter-party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when a Fund purchases an OTC option, it relies on the counter-party from
whom it purchased the option to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counter-party to do so
would result in the loss of any premium paid by a Fund as well as the loss of
any expected benefit of the transaction.
A
Fund’s ability to establish and close out positions in exchange-traded options
depends on the existence of a liquid market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counter-party or
by a transaction in the secondary market if any such market exists. There can be
no assurance that a Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency of
the counter-party, a Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If
a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options
on Indices.
An index fluctuates with changes in the market values of the securities included
in the index. Options on indices give the holder the right to receive an amount
of cash upon exercise of the option. Receipt of this cash amount will depend
upon the closing level of the index upon which the option is based being greater
than (in the case of a call) or less than (in the case of put) the exercise
price of the option. Some stock index options are based on a broad market index
such as the S&P 500®
Index, the NYSE Composite Index or the NYSE Arca Index or on a narrower index
such as the Philadelphia Stock Exchange Over-the-Counter Index.
Each
of the exchanges has established limitations governing the maximum number of
call or put options on the same index that may be bought or written by a single
investor, whether acting alone or in concert with others (regardless of whether
such options are written on the same or different exchanges or are held or
written on one or more accounts or through one or more brokers). Under these
limitations, option positions of all investment companies advised by the Adviser
are combined for purposes of these limits. Pursuant to these limitations, an
exchange may order the liquidation of positions and may impose other sanctions
or restrictions. These positions limits may restrict the number of listed
options that a Fund may buy or sell.
Puts
and calls on indices are similar to puts and calls on securities or futures
contracts except that all settlements are in cash and gain or loss depends on
changes in the index in question rather than on price movements in individual
securities or futures contracts. When a Fund writes a call on an index, it
receives a premium and agrees that, prior to the expiration date, the purchaser
of the call, upon exercise of the call, will receive from the Fund an amount of
cash if the closing level of the index upon which the call is based is greater
than the exercise price of the call. The amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
call times a specified multiple (“multiplier”), which determines the total value
for each point of such difference. When a Fund buys a call on an index, it pays
a premium and has the same rights to such call as are indicated above. When a
Fund buys a put on an index, it pays a premium and has the right, prior to the
expiration date, to require the seller of the put, upon the Fund’s exercise of
the put, to deliver to the Fund an amount of cash if the closing level of the
index upon which the put is based is less than the exercise price of the put,
which amount of cash is determined by the multiplier, as described above for
calls. When a Fund writes a put on an index, it receives a premium and the
purchaser of the put has the right, prior to the expiration date, to require the
Fund to deliver to it an amount of cash equal
to
the difference between the closing level of the index and the exercise price
times the multiplier if the closing level is less than the exercise
price.
Risks
of Options on Indices.
If a Fund has purchased an index option and exercises it before the closing
index value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, a Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
OTC
Options.
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size and strike price, the
terms of OTC options (options not traded on exchanges) generally are established
through negotiation with the other party to the option contract. While this type
of arrangement allows a Fund great flexibility to tailor the option to its
needs, OTC options generally involve greater risk than exchange-traded options,
which are guaranteed by the clearing organization of the exchanges where they
are traded.
Futures
Contracts and Options on Futures Contracts.
A futures contract obligates the seller to deliver (and the purchaser to take
delivery of) the specified security on the expiration date of the contract. An
index futures contract obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific index at the close of the last trading day of
the contract and the price at which the agreement is made. No physical delivery
of the underlying securities in the index is made.
When
a Fund writes an option on a futures contract, it becomes obligated, in return
for the premium paid, to assume a position in the futures contract at a
specified exercise price at any time during the term of the option. If a Fund
writes a call, it assumes a short futures position. If it writes a put, it
assumes a long futures position. When a Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put).
Whether
a Fund realizes a gain or loss from futures activities depends upon movements in
the underlying security or index. The extent of a Fund’s loss from an unhedged
short position in futures contracts or from writing unhedged call options on
futures contracts is potentially unlimited. The Funds only purchase and sell
futures contracts and options on futures contracts that are traded on a U.S.
exchange or board of trade.
No
price is paid upon entering into a futures contract. Instead, at the inception
of a futures contract a Fund is required to deposit “initial margin” in an
amount generally equal to 10% or less of the contract value. Margin also must be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent
“variation margin” payments are made to and from the futures commission merchant
daily as the value of the futures position varies, a process known as
“marking-to-market.” Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund’s obligations to or from a futures
commission merchant. When a Fund purchases an option on a futures contract, the
premium paid plus transaction costs is all that is at risk. In contrast, when a
Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be substantial
in the event of
adverse
price movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Purchasers
and sellers of futures contracts and options on futures can enter into
offsetting closing transactions, similar to closing transactions in options, by
selling or purchasing, respectively, an instrument identical to the instrument
purchased or sold. Positions in futures and options on futures contracts may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under
certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day’s settlement price. Once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If
a Fund were unable to liquidate a futures contract or an option on a futures
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses, and the Fund would continue to
be subject to market risk with respect to the position. In addition, except in
the case of purchased options, a Fund would continue to be required to make
daily variation margin payments and might be required to maintain cash or liquid
assets in an account.
The
Funds may use futures solely for the purpose of equitizing cash positions.
Futures will not be used for speculative purpose. The Funds will hold amounts of
cash equivalents equal to the excess of the notional amount of the contract over
the amount deposited as collateral upon purchasing a futures
contract.
Risks
of Futures Contracts and Options Thereon.
The ordinary spreads between prices in the cash and futures markets (including
the options on futures markets), due to differences in the natures of those
markets, are subject to the following factors, which may create distortions.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationships between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions.
Combined
Positions.
The Funds may purchase and write options in combination with each other. For
example, a Fund may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Commodity
Pool Operator Exclusion.
The Adviser operates the Funds in compliance with the requirements of Rule 4.5
under the Commodity Exchange Act (the “CEA”). As a result, the Funds are not
deemed to be “commodity pools” under the CEA and will be limited in their
ability to use futures and options on futures or commodities or engage in swap
transactions other than for bona fide hedging purposes. Provided the Funds
operate within the limits of Rule 4.5, the Adviser will be excluded from
registration with the National Futures Association and regulation under the CEA
and the Adviser will not be deemed to be a “commodity pool
operator”
with respect to the operations of the Funds. If the Funds were no longer able to
claim the exclusion, the Funds and the Adviser, to the extent trading in
commodity interests, would be subject to regulation and registration under the
CEA.
To
the extent the Adviser can no longer rely on the Rule 4.5 exclusion, the impact
on the Funds of CFTC requirements is uncertain. CFTC-mandated disclosure,
reporting and recordkeeping obligations, which have been “harmonized” with the
overlapping SEC obligations, will apply with respect to the Funds. The effects
of these regulatory changes could reduce investment returns or limit a Fund’s
ability to implement its investment strategy. Investors in the Funds and their
financial advisers should consider whether a Fund’s potential status as a
“commodity pool” impacts their operations or status under the CEA in deciding
whether to invest in the Funds.
Short
Sales
The
Funds may seek to hedge investments or realize additional gains through short
sales. Short sales are transactions in which a Fund sells a security it does not
own in anticipation of a decline in the value of that security relative to the
long positions held by the Fund. To complete such a transaction, a Fund must
borrow the security to make delivery to the buyer. That Fund then is obligated
to replace the security borrowed by purchasing it at the market price at or
prior to the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the applicable Fund. Until the
security is replaced, the Fund is required to repay the lender any dividends or
interest that accrues during the period of the loan. To borrow the security, a
Fund also may be required to pay a premium, which would increase the cost of the
security sold. The net proceeds of the short sale will be retained by the broker
(or by the Funds’ custodian in a special custody account), to the extent
necessary to meet margin requirements, until the short position is closed out.
The Funds also will incur transaction costs in effecting short
sales.
A
Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. Short sales may, however, protect the Funds
against the risk of losses in the value of their portfolio securities because
any unrealized losses with respect to such portfolio securities should be wholly
or partially offset by a corresponding gain in the short position. However, any
potential gains in such portfolio securities should be wholly or partially
offset by a corresponding loss in the short position. The extent to which such
gains or losses are offset will depend upon the amount of securities sold short
relative to the amount a Fund owns, either directly or indirectly, and, in the
case where the Fund owns convertible securities, changes in the conversion
premium. There can be no assurance that a Fund will be able to close out a short
position at any particular time or at an acceptable price.
The
Funds also must segregate liquid assets equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) the value of the collateral deposited with the broker in connection with the
short sale (not including the proceeds from the short sale). While the short
position is open, a Fund must maintain segregated assets at such a level that
the amount segregated plus the amount deposited with the broker as collateral
equal the current market value of the securities sold short.
Interest
Rate Swaps
The
Core Fixed Income Fund may enter into swap agreements for purposes of attempting
to gain exposure to the price movements of debt securities for changes in
interest rates without actually purchasing those securities. Swap agreements are
two-party contracts entered into primarily by institutional investors for
periods ranging from a day to more than one year. In a standard “swap”
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or “swapped” between the parties
are calculated with respect to a “notional amount,” i.e.,
the return on or increase in value of a particular dollar amount invested in a
“basket” of securities representing a particular index.
Most
swap agreements entered into by the Core Fixed Income Fund calculate the
obligations of the parties to the agreement on a “net basis.” Consequently, the
Fund’s current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
“net amount”). Payments may be made at the conclusion of a swap agreement or
periodically during its term.
Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, if a swap is entered into on a net basis, if the other party to a
swap agreement defaults, the Core Fixed Income Fund’s risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any.
The
net amount of the excess, if any, of the Fund’s obligations over its
entitlements with respect to a swap agreement entered into on a net basis will
be accrued daily and an amount of cash or liquid asset having an aggregate net
asset value at least equal to the accrued excess will be maintained in an
account with the Fund’s custodian. The Fund will also establish and maintain
such accounts with respect to its total obligations under any swaps that are not
entered into on a net basis. Obligations under swap agreements so covered will
not be construed to be “senior securities” for purposes of the Fund’s investment
restriction concerning senior securities.
Because
they are two-party contracts and because they may have terms of greater than
seven days, swap agreements may be considered to be illiquid for the Funds’
illiquid investment limitations. The Funds will not enter into any swap
agreement unless the Adviser believes that the other party to the transaction is
creditworthy. The Core Fixed Income Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counter-party.
Temporary
and Cash Investments
For
temporary defensive purposes, the Adviser may invest up to 100% of a Fund’s
total assets in high-quality, short-term debt securities and money market
instruments. These short-term debt securities and money market instruments
include shares of other mutual funds, commercial paper, certificates of deposit,
bankers’ acceptances, U.S. Government securities and repurchase agreements.
Taking a temporary defensive position may result in a Fund not achieving its
investment objective.
For
longer periods of time, a Fund may hold a substantial cash position. If the
market advances during periods when the Fund is holding a large cash position,
the Fund may not participate to the extent it would have if the Fund had been
more fully invested, which may result in the Fund not achieving its investment
objective during that period.
To
the extent that a Fund uses a money market fund for its cash position, there
will be some duplication of expenses because the Fund would bear its pro rata
portion of such money market fund’s advisory fees and operational
expenses.
The
Funds may invest in any of the following securities and
instruments:
Money
Market Mutual Funds.
The Funds may invest in money market mutual funds in connection with their
management of daily cash positions or as a temporary defensive measure.
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 securities issued or guaranteed
by the U.S. Government or its agencies and instrumentalities, 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. The Funds’ investments in money
market mutual funds may be used for cash management purposes and to maintain
liquidity in order to satisfy redemption requests or pay
unanticipated
expenses. The Funds limit their investments in securities issued by money market
mutual funds in accordance with the 1940 Act. Please see “Other Investment
Companies” above.
Your
cost of investing in the Funds will generally be higher than the cost of
investing directly in the underlying money market mutual fund shares. You will
indirectly bear fees and expenses charged by the underlying money market mutual
funds in addition to the Funds’ direct fees and expenses. Furthermore, the use
of this strategy 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.
The Funds 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 the Funds 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.
Domestic
banks and foreign banks are subject to different governmental regulations with
respect to the amount and types of loans that may be made and interest rates
that may be charged. In addition, the profitability of the banking industry
depends largely upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operations of
the banking industry.
As
a result of federal and state laws and regulations, domestic banks are, among
other things, required to maintain specified levels of reserves, limited in the
amount which they can loan to a single borrower and subject to other regulations
designed to promote financial soundness. However, such laws and regulations do
not necessarily apply to foreign bank obligations that the Funds may
acquire.
In
addition to purchasing certificates of deposit and bankers’ acceptances, to the
extent permitted under the investment objectives and policies stated above and
in the Prospectus, the Funds may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
Savings
Association Obligations.
The Funds 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.
The Funds may invest a portion of their assets in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper and short-term notes will
normally have maturities of less than nine months and fixed rates of return,
although such instruments may have maturities of up to one year.
Commercial
paper and short-term notes 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, will be determined by the Adviser or sub-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, the Funds 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 or
“A” or higher by Moody’s.
U.S.
Government Obligations
The
Core Fixed Income Fund may invest in various types of 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, such as the U.S. Treasury. 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. As a result, there is a risk
that these entities will default on a financial obligation. For instance,
securities issued by the Government National Mortgage Association or “Ginnie
Mae” (“GNMA”) are supported by the full faith and credit of the U.S. government.
Securities issued by the Federal National Mortgage Association or “Fannie Mae”
(“FNMA”) and the Federal Home Loan Mortgage Corporation or “Freddie Mac”
(“FHLMC”) are supported only by the discretionary authority of the U.S.
government. See “Mortgage-Backed Securities” below. Securities issued by the
Student Loan Marketing Association or “Sallie Mae” are supported only by the
credit of that agency.
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.
Asset-Backed
Securities
The
Core Fixed Income Fund may invest in certain types of asset-backed securities.
Asset-backed securities are securities issued by trusts and special purpose
entities that are backed by pools of assets, such as automobile and credit-card
receivables and home equity loans, which pass through the payments on the
underlying obligations to the security holders (less servicing fees paid to the
originator or fees for any credit enhancement). Typically, the originator of the
loan or accounts receivable paper transfers it to a specially created trust,
which repackages it as securities with a minimum denomination and a specific
term. The securities are then privately placed or publicly offered. Examples
include certificates for automobile receivables and so-called plastic bonds,
backed by credit card receivables.
The
value of an asset-backed security is affected by, among other things, changes in
the market’s perception of the asset backing the security, the creditworthiness
of the servicing agent for the loan pool, the originator of the loans and the
financial institution providing any credit enhancement. Payments of principal
and interest passed through to holders of asset-backed securities are frequently
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or by having a priority to certain of
the borrower’s other assets. The degree of credit enhancement varies, and
generally applies to only a portion of the asset-backed security’s par value.
Value is also affected if any credit enhancement has been
exhausted.
Mortgage-Backed
Securities
The
Core Fixed Income Fund may invest in mortgage-backed securities, including
commercial mortgage-backed securities and residential mortgage-backed
securities. A mortgage-backed security is a type of pass-through security, which
is a security representing pooled debt obligations repackaged as interests that
pass income through an intermediary to investors. In the case of mortgage-backed
securities, the ownership
interest
is in a pool of mortgage loans.
Mortgage-backed
securities are most commonly issued or guaranteed by the GNMA, FNMA, FHLMC or
Federal Home Loan Banks (“FHLB”), but may also be issued or guaranteed by other
private issuers. GNMA is a government-owned corporation that is an agency of the
U.S. Department of Housing and Urban Development. It guarantees, with the full
faith and credit of the United States, full and timely payment of all monthly
principal and interest on its mortgage-backed securities. FNMA is a publicly
owned, government-sponsored corporation that mostly packages mortgages backed by
the Federal Housing Administration, but also sells some non-governmentally
backed mortgages. Pass-through securities issued by FNMA are generally
guaranteed as to timely payment of principal and interest only by FNMA. The
FHLMC is a publicly chartered agency that buys qualifying residential mortgages
from lenders, re-packages them and provides certain guarantees. Pass-through
securities issued by the FHLMC are generally guaranteed as to timely payment of
principal and interest only by the FHLMC. However, in September 2008, at the
direction of the U.S. Treasury, FNMA and FHLMC were placed into conservatorship
under the Federal Housing Finance Agency. The U.S. government also took steps to
provide additional financial support to FNMA and FHLMC. However, there is no
assurance that such actions will be successful.
Some
of these obligations are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency’s obligations; still others are supported only
by the credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
Mortgage-backed
securities issued by private issuers, whether or not such obligations are
subject to guarantees by the private issuer, may entail greater risk than
obligations directly or indirectly guaranteed by the U.S. Government. The
average life of a mortgage-backed security is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested far in advance of
the maturity of the mortgages in the pool.
Collateralized
mortgage obligations (“CMOs”) are debt obligations collateralized by mortgage
loans or mortgage pass-through securities (collateral collectively hereinafter
referred to as “Mortgage Assets”). Multi-class pass-through securities are
interests in a trust composed of Mortgage Assets and all references in this
section to CMOs include multi-class pass-through securities. Principal
prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been paid. Interest
is paid or accrues on all classes of the CMOs on a monthly, quarterly or
semiannual basis. The principal and interest payments on the Mortgage Assets may
be allocated among the various classes of CMOs in several ways. Typically,
payments of principal, including any prepayments, on the underlying mortgages
are applied to the classes in the order of their respective stated maturities or
final distribution dates, so that no payment of principal is made on CMOs of a
class until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped
mortgage-backed securities (“SMBS”) are derivative multi-class mortgage
securities. The Fund will only invest in SMBS whose mortgage assets are U.S.
Government obligations and are backed by the full faith and credit of the U.S.
Government. SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of mortgage
assets. A common type of SMBS will be structured so that one class receives some
of the interest and most of the principal from the mortgage assets, while the
other class receives most of the interest and the remainder of the principal. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund may fail to fully recoup its initial investment in these
securities. The market value of any class which consists primarily or entirely
of principal payments is generally unusually volatile in response to changes in
interest rates.
Investment
in mortgage-backed securities poses several risks, including among others,
prepayment, market and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment’s average life and perhaps its yield. Whether a mortgage loan is
prepaid is almost entirely controlled by the borrower. Borrowers are most likely
to exercise prepayment options at the time when it is least advantageous to
investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions. Market risk reflects the risk that the price of a security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and the Core Fixed Income Fund, to the extent that
it is invested in such securities and desires to sell them, may find it
difficult to find a buyer, which may in turn decrease the price at which they
may be sold. Credit risk reflects the risk that a Fund may not receive all or
part of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. Government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. Government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions. With respect to GNMA certificates,
although GNMA guarantees timely payment even if homeowners delay or default,
tracking the “pass-through” payments may, at times, be difficult.
Restricted
Securities
The
Funds may invest in securities that are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the “Securities Act”). These securities are sometimes referred to as
private placements. Although securities that may be resold only to “qualified
institutional buyers” in accordance with the provisions of Rule 144A under the
Securities Act are technically considered “restricted securities,” the Funds may
purchase Rule 144A securities without regard to the limitation on investments in
illiquid investments described below in the “Illiquid Investments” section,
provided that a determination is made that such securities have a readily
available trading market. The Funds may also purchase certain commercial paper
issued in reliance on the exemption from regulations in Section 4(2) of the
Securities Act (“4(2) Paper”). The Adviser will determine the liquidity of Rule
144A securities and 4(2) Paper under the supervision of the Board of Trustees.
The liquidity of Rule 144A securities and 4(2) Paper will be monitored by the
Adviser, and if as a result of changed conditions it is determined that a Rule
144A security or 4(2) Paper is no longer liquid, the Funds’ holdings of illiquid
investments will be reviewed to determine what, if any, action is required to
assure that a Fund does not exceed its applicable percentage limitation for
investments in illiquid investments.
Limitations
on the resale of restricted securities may have an adverse effect on the
marketability of portfolio securities and the Funds might be unable to dispose
of restricted securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemption requirements. The Funds might also
have to register such restricted securities in order to dispose of them,
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
Repurchase
Agreements
The
Funds may enter into repurchase agreements. Under such agreements, the seller of
the security agrees to repurchase it 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. The Funds will generally enter into repurchase
agreements of short durations, from overnight to one week, although the
underlying
securities
generally have longer maturities. The Funds 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.
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 security that is subject to the
repurchase agreement. It is not clear whether a court would consider the U.S.
Government security acquired by a Fund subject to a repurchase agreement as
being owned by the Fund or as being collateral for a loan by the 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 security before its repurchase
under a repurchase agreement, a Fund could encounter delays and incur costs
before being able to sell the security. Delays may involve loss of interest or a
decline in price of the U.S. Government security. If a court characterizes the
transaction as a loan and a Fund has not perfected a security interest in the
U.S. Government security, the Fund may be required to return the security 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 and sub-adviser seek 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 security. However, each 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 amount invested by the Fund plus accrued interest, and
the 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 security subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Fund will
direct the seller of the U.S. Government security 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 the
Funds could be unsuccessful in seeking to enforce on the seller a contractual
obligation to deliver additional securities.
Reverse
Repurchase Agreements
The
Funds may borrow by entering into reverse repurchase agreements with the same
parties with whom they may enter into repurchase agreements. Under a reverse
repurchase agreement, a Fund sells securities and agrees to repurchase them at a
mutually agreed to price. At the time a Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing liquid high-grade securities, marked-to-market daily,
having a value not less than the repurchase price (including accrued interest).
Reverse repurchase agreements involve the risk that the market value of
securities retained in lieu of sale by a Fund may decline below the price of the
securities the Fund has sold but is obliged to repurchase. If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce a Fund’s obligation to repurchase the
securities. During that time, a Fund’s use of the proceeds of the reverse
repurchase agreement effectively may be restricted. Reverse repurchase
agreements create leverage, a speculative factor, and are considered borrowings
for the purpose of the Funds’ limitations on borrowing.
Illiquid
Investments
In
accordance with Rule 22e-4 (the “Liquidity Rule”) under the 1940 Act, each Fund
may invest up to 15% of its net assets in “illiquid investments.” For these
purposes, “illiquid investments” are investments that cannot reasonably be
expected to 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.
Each
portfolio investment must be classified at least monthly into one of four
liquidity categories (highly liquid, moderately liquid, less liquid and
illiquid), which are defined pursuant to the Liquidity Rule. Such classification
is to be made using information obtained after reasonable inquiry and taking
into account
relevant
market, trading and investment-specific considerations. Moreover, in making such
classification determinations, a Fund determines whether trading varying
portions of a position in a particular portfolio investment or asset class, in
sizes that the Fund would reasonably anticipate trading, is reasonably expected
to significantly affect its liquidity, and if so, the Fund takes this
determination into account when classifying the liquidity of that investment.
The Funds may be assisted in classification determinations by one or more
third-party service providers. Assets classified according to this process as
“illiquid investments” are those subject to the 15% limit on illiquid
investments.
Cybersecurity
Risks
With
the increasing use of the Internet and technology in connection with the Funds’
operations, the Funds are susceptible to greater operational and information
security risks through breaches in cybersecurity. Cybersecurity breaches
include, without limitation, infection by computer viruses and unauthorized
access to the Funds’ systems through “hacking” or other means for the purpose of
misappropriating assets or sensitive information, corrupting data, or causing
operations to be disrupted. Cybersecurity breaches may also occur in a manner
that does not require gaining unauthorized access, such as denial-of-service
attacks or situations where authorized individuals intentionally or
unintentionally release confidential information stored on the Funds’ systems. A
cybersecurity breach may cause disruptions and impact the Funds’ business
operations, which could potentially result in financial losses, inability to
determine the Funds’ NAV, violation of applicable law, regulatory penalties
and/or fines, compliance and other costs. The Funds and their shareholders could
be negatively impacted as a result. In addition, because the Funds work closely
with third-party service providers (e.g.,
custodians), indirect cybersecurity breaches at such third-party service
providers may subject Fund shareholders to the same risks associated with direct
cybersecurity breaches. Further, indirect cybersecurity breaches at an issuer of
securities in which the Funds invest may similarly negatively impact Fund
shareholders because of a decrease in the value of these securities. While the
Funds have established risk management systems designed to reduce the risks
associated with cybersecurity breaches, there can be no assurances that such
measures will be successful particularly since the Funds do not control the
cybersecurity systems of issuers or third-party service providers.
Investment
Restrictions
Fundamental
Investment Restrictions
The
Trust (on behalf of the Funds) has adopted the following restrictions as
fundamental policies, which may not be changed without the affirmative vote of
the holders of a “majority of the outstanding voting securities” of the
applicable Fund. Under the 1940 Act, the vote of the holders of a “majority of
the outstanding voting securities” means the vote of the holders of the lesser
of (i) 67% of the shares of a Fund represented at a meeting at which the
holders of more than 50% of its outstanding shares are represented or
(ii) more than 50% of the outstanding shares of a Fund.
Each
Fund may not:
1.Issue
senior securities, borrow money or pledge its assets, except that: (i) a
Fund may borrow from banks in amounts not exceeding one-third of its total
assets (including the amount borrowed); and (ii) this restriction shall not
prohibit a Fund from engaging in options transactions or short sales in
accordance with its objective and strategies;
2.Act
as underwriter (except to the extent a Fund may be deemed to be an underwriter
in connection with the sale of securities in its investment
portfolio);
3.Invest
more than 25% of its net assets, calculated at the time of purchase and taken at
market value, in securities of issuers in any one industry (other than U.S.
Government securities);
4.Purchase
or sell real estate unless acquired as a result of ownership of securities
(although the Funds may purchase and sell securities which are secured by real
estate and securities of companies that invest or deal in real
estate);
5.Purchase
or sell commodities, unless acquired as a result of ownership of securities or
other instruments and provided that this restriction does not prevent the Funds
from engaging in transactions involving currencies and futures contracts and
options thereon or investing in securities or other instruments that are secured
by commodities;
6.Make
loans of money (except for the lending of its portfolio securities, purchases of
debt securities consistent with the investment policies of the Funds and except
for repurchase agreements); or
7.With
respect to 75% of its total assets, invest 5% or more of its total assets in
securities of a single issuer or hold 10% or more of the voting securities of
such issuer. (Does not apply to investments in the securities of the U.S.
Government, its agencies or instrumentalities).
Non-Fundamental
Investment Restrictions
The
following non-fundamental investment restrictions can be changed by the Board of
Trustees, but the change will only be effective after notice is given to
shareholders of a Fund.
Each
Fund may not:
1.Invest
more than 15% of the value of its net assets, computed at the time of
investment, in illiquid investments(1);
and
2.Change
its investment policy of investing at least 80% of its net assets according to
its investment strategies without first changing the Fund’s name and proving
shareholders with at least 60 days’ prior written notice.
(1)The
term “illiquid investment” is defined as a security that the 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 security.
Management
of the Funds
Board
of Trustees
The
management and affairs of the Funds are supervised by the Board of Trustees. The
Board of Trustees consists of seven individuals. The Trustees are fiduciaries
for the Funds’ shareholders and are governed by the laws of the State of
Delaware in this regard. The Board of Trustees establishes policies for the
operation of the Funds and appoints the officers who conduct the daily business
of the Funds.
Trustees
and Officers
The
Trustees and the 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 the Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other
Directorships Held by Trustee During the Past Five Years |
Independent
Trustees |
Michael
D. Akers, Ph.D. 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1955 |
Trustee |
Indefinite
Term; Since August 22, 2001 |
31 |
Professor
Emeritus, Department of Accounting (June 2019-present), Professor,
Department of Accounting (2004-2019), Marquette University.
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Independent
Trustee, USA MUTUALS (an open-end investment company)
(2001-2021).
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Gary
A. Drska 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1956 |
Trustee |
Indefinite
Term; Since August 22, 2001 |
31 |
Retired;
Former Pilot, Frontier/Midwest Airlines, Inc. (airline company)
(1986-2021).
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Independent
Trustee, USA MUTUALS (an open-end investment company)
(2001-2021).
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Vincent
P. Lyles 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1961 |
Trustee |
Indefinite
Term; Since April 6, 2022 |
31 |
Executive
Director, Milwaukee Succeeds (education advocacy organization)
(2023-present); System Vice President of Community Relations, Advocate
Aurora Health Care (health care provider) (2019-2022); President and Chief
Executive Officer, Boys & Girls Club of Greater Milwaukee
(2012-2018).
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Independent
Director, BMO Funds, Inc. (an open-end investment company)
(2017-2022). |
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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 the Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other
Directorships Held by Trustee During the Past Five Years |
Erik
K. Olstein 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1967 |
Trustee
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Indefinite
Term; Since April 6, 2022 |
31 |
Retired;
President and Chief Operating Officer (2000-2020), Vice President of Sales
and Chief Operating Officer (1995-2000), Olstein Capital Management, L.P.
(asset management firm); Secretary and Assistant Treasurer, The Olstein
Funds (1995-2018).
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Trustee,
The Olstein Funds (an open-end investment company)
(1995-2018). |
Lisa
Zúñiga Ramírez 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1969 |
Trustee
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Indefinite
Term; Since April 6, 2022 |
31 |
Retired;
Principal and Senior Portfolio Manager, Segall, Bryant & Hamill, LLC
(asset management firm) (2018-2020); Partner and Senior Portfolio Manager,
Denver Investments LLC (asset management firm) (2009-2018).
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Director,
Peoples Financial Services Corp. (a publicly-traded bank holding company)
(2022-present). |
Gregory
M. Wesley 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1969 |
Trustee
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Indefinite
Term; Since April 6, 2022 |
31 |
Senior
Vice President of Strategic Alliances and Business Development, Medical
College of Wisconsin (2016-present).
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N/A |
Interested
Trustee and Officers |
John
P. Buckel* 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1957 |
Chairperson,
Trustee, President and Principal Executive Officer
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Indefinite
Term; Chairperson and Trustee (since January 19, 2023); President and
Principal Executive Officer (since January 24, 2013)
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31 |
Vice
President, U.S. Bancorp Fund Services, LLC (2004-present).
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N/A |
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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 the Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other
Directorships Held by Trustee During the Past Five Years |
Jennifer
A. Lima 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1974 |
Vice
President, Treasurer and Principal Financial and Accounting
Officer
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Indefinite
Term; Since January 24, 2013 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2002-present). |
N/A |
Deanna
B. Marotz 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1965 |
Chief
Compliance Officer, Vice President and Anti-Money Laundering
Officer |
Indefinite
Term; Since October 21, 2021 |
N/A |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2021-present); Chief
Compliance Officer, Keeley-Teton Advisors, LLC and Teton Advisors, Inc
(2017-2021).
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N/A |
Jay
S. Fitton 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1970 |
Secretary |
Indefinite
Term; Since July 22, 2019 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2019-present); Partner,
Practus, LLP (2018-2019).
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N/A |
Kelly
A. Strauss 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1987
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Assistant
Treasurer |
Indefinite
Term; Since April 23, 2015 |
N/A |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC
(2011-present).
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N/A |
Laura
A. Carroll 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1985
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Assistant
Treasurer |
Indefinite
Term; Since August 20, 2018 |
N/A |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC
(2007-present).
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N/A |
Shannon
Coyle 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1990 |
Assistant
Treasurer |
Indefinite
Term; Since August 26, 2022 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2015-present). |
N/A |
*Mr.
Buckel is deemed to be an “interested person” of the Trust as defined by the
1940 Act due to his position and material business relationship with the
Trust.
Role
of the Board
The
Board of Trustees provides oversight of the management and operations of the
Trust. Like all 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, Distributor, Custodian,
and the Funds’ administrator and transfer agent, each of which are discussed in
greater detail in this SAI. The Board approves all significant agreements with
the Adviser, Distributor, Custodian, and the Funds’ administrator 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 generally held five times
per year, and at 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.
Board
Leadership Structure
The
Board has structured itself in a manner that it believes allows it to perform
its oversight function effectively. The Board is composed of six Independent
Trustees – Dr. Michael D. Akers, Gary A. Drska, Vincent P. Lyles, Erik K.
Olstein, Lisa Zúñiga Ramírez and Gregory M. Wesley – and one Trustee who is an
“interested person” (as defined by the 1940 Act) of the Trust (the “Interested
Trustee”) – John P. Buckel. Accordingly, more than 85% of the members of the
Board are Independent Trustees, Trustees who are not affiliated with the Adviser
or its affiliates, or any other investment adviser or service provider to the
Trust or any underlying fund. The Board of Trustees has established two standing
committees, an Audit Committee and a Nominating Committee, which are discussed
in greater detail under “Board Committees” below. Each of the Audit Committee
and the Nominating Committee is composed entirely of Independent Trustees. The
Independent Trustees have engaged their own independent counsel to advise them
on matters relating to their responsibilities in connection with the
Trust.
The
Trust’s Chairperson, Mr. Buckel, is deemed to be an “interested person” of the
Trust, as defined by the 1940 Act, due to his position and material business
relationship with the Trust. Mr. Buckel also serves as a Vice President of U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
(“Fund Services”), the Funds’ administrator. The Trust has not appointed a lead
Independent Trustee.
In
accordance with the fund governance standards prescribed under the 1940 Act, the
Independent Trustees on the Nominating Committee select and nominate all
candidates for Independent Trustee positions. Each Trustee was appointed to
serve on the Board of Trustees because of his or her 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 unaffiliated nature of each investment
adviser and the funds managed by such 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 underlying funds.
The
Board has determined that the function and composition of the Audit Committee
and the Nominating Committee are appropriate to address any potential conflicts
of interest that may arise from the Chairperson’s status as an Interested
Trustee. In addition, the inclusion of all Independent Trustees as members of
the
Audit
Committee and the Nominating Committee allows these Trustees to participate in
the full range of the Board’s oversight duties, including oversight of risk
management processes discussed below. Given the specific characteristics and
circumstances of the Trust as described above, the Trust has determined that the
Board’s leadership structure is appropriate.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel, including personnel of the Trust’s service
providers. Because risk management is a broad concept composed of many elements
(such as, for example, investment risk, issuer and counterparty risk, compliance
risk, operational risks, business continuity risks, 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, the Independent Trustee
designated as the Audit Committee’s “audit committee financial expert” meets
with the Treasurer and the Funds’ independent registered public accounting firm
to discuss, among other things, the internal control structure of the Trust’s
financial reporting function. The full Board receives reports from the
investment advisers to the underlying funds and the portfolio managers as to
investment risks as well as other risks that may be discussed during Audit
Committee meetings.
Trustee
Qualifications
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills appropriate to his or her continued service as a Trustee
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. In
conducting its annual self-assessment, the Board has determined that the
Trustees have the appropriate attributes and experience to continue to serve
effectively as Trustees of the Trust.
Michael
D. Akers, Ph.D., CPA.
Dr. Akers has served as an Independent Trustee of the Trust since 2001. Dr.
Akers previously served as an independent trustee of USA Mutuals, an open-end
investment company, from 2001 to June 2021. Dr. Akers has been a Professor
Emeritus, Department of Accounting at Marquette University since June 2019, was
Professor, Department of Accounting at Marquette University from 2004 to May
2019, was Chair of the Department of Accounting at Marquette University from
2004 to 2017, and was Associate Professor, Department of Accounting at Marquette
University from 1996 to 2004. Dr. Akers is a certified public accountant, a
certified fraud examiner, a certified internal auditor and a certified
management accountant. Through his experience as an investment company trustee
and his employment experience, Dr. Akers is experienced with financial,
accounting, regulatory and investment matters.
Gary
A. Drska.
Mr. Drska has served as an Independent Trustee of the Trust since 2001. Mr.
Drska previously served as an independent trustee of USA Mutuals from 2001 to
June 2021. Mr. Drska previously
served
as a Pilot of Frontier/Midwest Airlines, Inc., an airline company, from 1986 to
September 2021. Through his experience as an investment company trustee, Mr.
Drska is experienced with financial, accounting, regulatory and investment
matters.
Vincent
P. Lyles. Mr.
Lyles has served as an Independent Trustee of the Trust since 2022. Mr. Lyles
has served as Executive Director of Milwaukee Succeeds since January 2023. He
previously served as System Vice President of Community Relations at Advocate
Aurora Health Care from 2019 to 2022. He served as an Independent Director of
BMO Funds, Inc., an open-end investment company, from 2017 to 2022. Mr. Lyles is
a board member and finance committee member of Badger Mutual Insurance Company
and a Trustee and member of the Committee of Student Experience & Mission on
the Board of Trustees at Marquette University. Mr. Lyles previously served as
President and Chief Executive Officer of the Boys & Girls Club of Greater
Milwaukee from 2012 to 2018, President of M&I Community Development
Corporation from 2006 to 2011, and as a Director of Public Finance of Robert W.
Baird & Co. from 1995 to 2006. He received his Juris Doctor degree from the
University of Wisconsin-Madison Law School in 1987. Through his experience as an
investment company trustee and his employment experience, Mr. Lyles is
experienced with legal, financial, accounting, regulatory and investment
matters.
Erik
K. Olstein. Mr.
Olstein has served as an Independent Trustee of the Trust since 2022. Mr.
Olstein served as President and Chief Operating Officer from 2000 to 2020 and
Vice President of Sales and Chief Operating Officer from 1995 to 2000 at Olstein
Capital Management, L.P., an asset management firm he co-founded. During his
time at Olstein Capital Management, L.P., Mr. Olstein was responsible for
fiduciary oversight and management of The Olstein Funds, an open-end investment
company, where he served as Trustee, Secretary and Assistant Treasurer from 1995
to 2018. Mr. Olstein currently serves as President and Trustee of the Board of
Trustees of the Trinity-Pawling School and has previously held Board positions
with the American Friends of the National Museum of the Royal Navy, National
Maritime Historical Society and U.S. Naval Service Personal Education Assistance
Fund. Through his experience as an investment company trustee and his employment
experience, Mr. Olstein is experienced with financial, accounting, regulatory
and investment matters.
Lisa
Zúñiga Ramírez, CFA®,
FSA.
Ms. Ramírez has served as an Independent Trustee of the Trust since 2022. Ms.
Ramírez has served on the Board of Directors of Peoples Financial Services
Corp., a publicly-traded bank holding company, since 2022. Ms. Ramírez served as
Senior Portfolio Manager at Segall Bryant & Hamill, LLC, an asset management
firm, from 2018 to 2020. She served as Partner and Senior Portfolio Manager from
2009 to 2018, Partner and Senior Equity Analyst from 2002 to 2009 and Equity
Analyst from 1997 to 2002 at Denver Investments, LLC, an asset management firm
that was acquired by Segall Bryant & Hamill, LLC in 2018. Ms. Ramírez
currently serves as an Independent Director on the Bow River Capital Advisory
Board, an asset management firm, and is a Director of the Denver Employees
Retirement Plan. In addition, she serves on the boards of The Denver Foundation,
NACD (National Association of Corporate Directors) Colorado Chapter, Latinas
First Foundation and Vuela for Health. Ms. Ramírez is a CFA® charterholder
(CFA®
is a registered trademark owned by the CFA Institute) and holds the Fundamentals
of Sustainability Accounting (FSA) credential from the Sustainability Accounting
Standards Board. Through her employment experience, Ms. Ramírez is experienced
with financial, accounting, ESG (environmental, social and governance),
regulatory and investment matters.
Gregory
M. Wesley. Mr.
Wesley has served as an Independent Trustee of the Trust since 2022. Mr. Wesley
has served as Senior Vice President of Strategic Alliances and Business
Development at the Medical College of Wisconsin since 2016. Prior to his current
role at the Medical College of Wisconsin, he was a Partner at MWH Law Group LLP,
a law firm during 2016, and a Partner at Gonzalez, Saggio & Harlan LLP, a
law firm from 2002 to 2016. Mr. Wesley serves on the Board of Directors of the
Metropolitan Milwaukee Association
of
Commerce, MHS Health Wisconsin, Versiti, Inc., and the Greater Milwaukee
Committee. He also serves on the Board of Trustees of the Johnson Foundation at
Wingspread and the Greater Milwaukee Foundation. He previously sat on the Board
of Trustees of the Medical College of Wisconsin from 2009 to 2016 and the Board
of Directors of Park Bank Milwaukee from 2015 to 2020. Mr. Wesley received his
Juris Doctor degree from the University of Wisconsin-Madison Law School in 1997.
Through his sustained employment and board experience, Mr. Wesley is experienced
with legal, financial, accounting, regulatory and investment
matters.
John
P. Buckel. Mr.
Buckel has served as a Trustee of the Trust since 2023 and has served as
President of the Trust since 2013. Mr. Buckel has served as a Vice President of
Fund Services, a multi-line service provider to investment companies, since
2004. Through his experience as an investment company trustee and his employment
experience, Mr. Buckel is experienced with financial, accounting, regulatory and
investment matters.
Trustee
Ownership of Fund Shares
As
of December 31, 2022, no Trustee or officer of the Trust beneficially owned
shares of the Funds or any other series of the Trust.
Furthermore,
as of December 31, 2022, neither the Trustees who are not “interested” persons
of the Funds, nor members of their immediate families, owned securities
beneficially, or of record, in the Adviser, the Distributor or any of their
affiliates. Accordingly, neither the Trustees who are not “interested” persons
of the Funds nor members of their immediate families, have a direct or indirect
interest, the value of which exceeds $120,000, in the Adviser, the Distributor
or any of their affiliates. In addition, during the two most recently completed
calendar years, neither the Independent Trustees nor members of their immediate
families have had a direct or indirect interest, the value of which exceeds
$120,000 in (i) the Adviser, the Distributor or any of their affiliates, or (ii)
any transaction or relationship in which such entity, a Fund, any officer of the
Trust, or any of their affiliates was a party.
Board
Committees
Audit
Committee.
The Trust has an Audit Committee, which is composed of the Independent Trustees,
Dr. Michael D. Akers, Mr. Gary A. Drska, Mr. Vincent P. Lyles, Mr. Erik K.
Olstein, Ms. Lisa Zúñiga Ramírez and Mr. Gregory M. Wesley. 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 auditor concerning the scope of the audit and the auditor’s
independence. Dr. Akers is designated as the Audit Committee chairman and serves
as the Audit Committee’s “audit committee financial expert,” as stated in the
annual reports relating to the series of the Trust. During the past fiscal year,
the Audit Committee met three times with respect to the Funds.
Nominating
Committee.
The Trust has a Nominating Committee, which is composed of the Independent
Trustees, Dr. Michael D. Akers, Mr. Gary A. Drska, Mr. Vincent P. Lyles, Mr.
Erik K. Olstein, Ms. Lisa Zúñiga Ramírez and Mr. Gregory M. Wesley. The
Nominating Committee is responsible for seeking and reviewing candidates for
consideration as nominees for the position of trustee and meets only as
necessary. As part of this process, the Nominating Committee considers criteria
for selecting candidates sufficient to identify a diverse group of qualified
individuals to serve as trustees.
The
Nominating Committee will consider nominees recommended by shareholders for
vacancies on the Board of Trustees. Recommendations for consideration by the
Nominating 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
Nominating
Committee Charter. 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 not later
than 60 days prior to the shareholder meeting at which any such nominee would be
voted on. Shareholder recommendations for nominations to the Board of Trustees
will be accepted on an ongoing basis and such recommendations will be kept on
file for consideration when there is a vacancy on the Board of Trustees. The
Nominating Committee met twice during the Funds’ prior fiscal year.
Trustee
Compensation
The
Independent Trustees received from the Trust a retainer fee of
$65,000(1)
per year, $4,500 for each regular Board meeting attended and $1,000 for each
special Board meeting attended, as well as reimbursement for expenses incurred
in connection with attendance at Board meetings(2).
Members of the Audit Committee receive $2,000 for each meeting of the Audit
Committee attended. The chairman of the Audit Committee receives an annual
retainer of $5,000(3).
Interested Trustees do not receive any compensation for their service as
Trustee. For the fiscal year ended August 31, 2023, the Trustees received the
following compensation from the Funds:
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Name
of Person/Position |
Aggregate
Compensation From the Core Fixed Income Fund(1) |
Aggregate
Compensation From the Diversified Equity Fund(1) |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from Funds and the Trust(2)(3)
Paid
to Trustees |
Dr.
Michael D. Akers,
Independent
Trustee(4)(5) |
$3,624 |
$3,624 |
None |
None |
$88,000 |
Gary
A. Drska,
Independent
Trustee(4) |
$3,464 |
$3,464 |
None |
None |
$84,250 |
Vincent
P. Lyles
Independent
Trustee(4) |
$3,464 |
$3,464 |
None |
None |
$84,250 |
Erik
K. Olstein
Independent
Trustee(4) |
$3,464 |
$3,464 |
None |
None |
$84,250 |
Lisa
Zúñiga Ramírez
Independent
Trustee(4) |
$3,464 |
$3,464 |
None |
None |
$84,250 |
Gregory
M. Wesley
Independent
Trustee(4) |
$3,464 |
$3,464 |
None |
None |
$84,250 |
John
P. Buckel Interested Trustee |
None |
None |
None |
None |
None |
(1)Effective
January 1, 2024, the annual retainer fee will increase to $100,000 for each
Independent Trustee.
(2)Trustees’
fees and expenses are allocated among the Funds and any other series comprising
the Trust.
(3) There
are currently twenty-nine other series comprising the Trust.
(4) Audit
Committee member.
(5) Audit
Committee chairman.
Control
Persons and Principal Shareholders
A
principal shareholder is any person who owns of record or beneficially owns 5%
or more of the outstanding shares of either Fund. 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 control
person possesses the ability to control the outcome of matters submitted for
shareholder vote by the Funds. As of November 30, 2023, no person was a control
person of either Fund, and all Trustees and
officers
as a group owned beneficially (as the term is defined in Section 13(d)
under the Securities and Exchange Act of 1934) less than 1% of shares of each
Fund. As of November 30, 2023, the following shareholders were considered to be
principal shareholders of the Funds:
|
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| |
Principal
Shareholders of the Core Fixed Income Fund - Advisor Class |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
National
Financial Services LLC 200 Liberty Street New York, NY
10281-1015
|
43.43% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1901
|
30.03% |
Record |
The
Charles Schwab Corporation |
DE |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ
07399-0002
|
16.74% |
Record |
N/A |
N/A |
|
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|
|
|
|
|
|
|
|
|
|
|
| |
Principal
Shareholders of the Core Fixed Income Fund - Institutional
Class |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
National
Financial Services LLC 200 Liberty Street New York, NY
10281-1015 |
94.86% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Principal
Shareholders of the Diversified Equity Fund - Advisor Class |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
National
Financial Services LLC 200 Liberty Street New York, NY
10281-1015
|
54.99% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1901
|
20.62% |
Record |
The
Charles Schwab Corporation |
DE |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07399-0002 |
15.87% |
Record |
N/A |
N/A |
|
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|
|
|
|
|
|
|
|
|
|
| |
Principal
Shareholders of the Diversified Equity Fund - Institutional
Class |
Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
National
Financial Services LLC 200 Liberty Street New York, NY
10281-1015
|
93.36% |
Record |
Fidelity
Global Brokerage Group, Inc. |
DE |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07399-0002 |
5.68% |
Record |
N/A |
N/A |
Investment
Adviser
As
stated in the Prospectus, investment advisory services are provided to the Funds
by Envestnet Asset Management, Inc., One North Wacker Drive, Suite 1925,
Chicago, Illinois 60606, pursuant to an investment advisory agreement (the
“Advisory Agreement”) between the Adviser and the Trust, on behalf of the Funds.
As of the date of this SAI, the Adviser is a wholly owned subsidiary of
Envestnet, Inc., a Delaware corporation who, through its affiliated companies,
provides technology-enabled, Web-based investment solutions and services to
financial advisers. Subject to such policies as the Board of Trustees may
determine, the Adviser is ultimately responsible for investment decisions for
the Funds and performing oversight of the Funds’ sub-advisers as described
below. Pursuant to the terms of the Advisory Agreement, the Adviser provides the
Funds with such investment advice and supervision, as it deems necessary for the
proper supervision of the Funds’ investments.
The
Advisory Agreement continues in effect from year to year, only if such
continuance is specifically approved at least annually by: (i) the Board of
Trustees or the vote of a majority of the outstanding voting securities of each
Fund; and (ii) the vote of a majority of the trustees who are not parties to the
Advisory Agreement or interested persons of any such party, at a meeting called
for the purpose of voting on the Advisory Agreement. The Advisory Agreement is
terminable without penalty by the Trust, on behalf of a Fund, upon 60 days’
written notice to the Adviser when authorized either by: (i) a majority vote of
the outstanding voting securities of the Fund; or (ii) by a vote of a majority
of the Board of Trustees, or by the Adviser upon 60 days’ written notice to the
Trust, and the Advisory Agreement will automatically terminate in the event of
its “assignment” (as defined in 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 Core Fixed Income Fund a
management fee computed daily and paid monthly. The table below illustrates the
base fees paid to the Adviser along with reduced fees paid on assets in excess
of certain levels (breakpoints):
|
|
|
|
|
|
|
|
|
|
| |
Advisory
Fee (as a percentage of average daily net assets) |
Fund |
$2.5
billion or less |
More
than $2.5 billion but less than $5 billion |
$5
billion or more |
Core
Fixed Income Fund |
0.650% |
0.625% |
0.600% |
In
consideration of the services provided by the Adviser pursuant to the Advisory
Agreement, the Adviser is entitled to receive from the Diversified Equity Fund a
management fee computed daily and paid monthly, based on a rate equal to 0.530%
of the Fund’s average daily net assets.
However,
the Adviser may voluntarily agree to waive a portion of 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 waive management fees
and/or reimburse Fund expenses.
The
tables below set forth, for the fiscal years ended August 31, 2023, 2022 and
2021, the advisory fees accrued by the Funds under the Advisory Agreement, the
amounts of the advisory fees waived or recouped by the Adviser, and the total
advisory fees paid by the Funds to the Adviser under the Advisory
Agreement:
|
|
|
|
|
|
|
|
|
|
| |
Core
Fixed Income Fund |
Fiscal
Year Ended |
Advisory
Fee |
(Waiver) |
Advisory
Fee after Waiver |
August
31, 2023 |
$2,589,631 |
$(1,216,182) |
$1,373,449 |
August
31, 2022 |
$3,011,835 |
$(1,309,991) |
$1,701,844 |
August
31, 2021 |
$2,994,279 |
$(1,255,760) |
$1,738,519 |
|
|
|
|
|
|
|
|
|
|
| |
Diversified
Equity Fund |
Fiscal
Year Ended |
Advisory
Fee |
Recoupment |
Advisory
Fee after Recoupment |
August
31, 2023 |
$4,898,995 |
$0 |
$4,898,995 |
August
31, 2022 |
$5,567,167 |
$0 |
$5,567,167 |
August
31, 2021 |
$5,396,364 |
$64,044 |
$5,460,408 |
Fund
Expenses.
Each Fund is responsible for its own operating expenses. However, pursuant to an
operating expense limitation agreement between the Adviser and the Trust, the
Adviser has contractually agreed to waive management fees payable to it by the
Funds and/or to reimburse Fund operating expenses to the extent necessary to
limit the Funds’ aggregate annual operating expenses (exclusive of front-end or
contingent deferred loads, 12b-1 plan fees, shareholder servicing plan fees,
taxes, leverage (i.e. any expenses incurred in connection with borrowings made
by the Fund), interest, brokerage commissions, expenses incurred in connection
with any merger or reorganization, acquired fund fees and expenses or
extraordinary expenses such as litigation) to the limit set forth in the Funds’
Prospectus. The Adviser may request recoupment of previously waived fees and
paid expenses from a Fund for up to three years from the date such fees and
expenses were waived or paid, subject to the operating expense limitation
agreement, if such reimbursements will not cause the Funds’ expense ratio, after
recoupment has been taken into account, to exceed the lesser of: (1) the expense
limitation in place at the time of the waiver and/or expense payment; or (2) the
expense limitation in place at the time of the recoupment. Any such waiver is
also contingent upon the Board of Trustees’ subsequent review and ratification
of the reimbursed amounts.
Sub-Adviser
Neuberger
Berman Investment Advisers LLC (“NBIA”) serves as a sub-adviser to the Core
Fixed Income Fund (the “Sub-Adviser”). It is the Adviser’s responsibility to
select sub-advisers for the Fund that have distinguished themselves in their
areas of expertise in asset management and to review the Sub-Adviser’s
performance.
The
Adviser provides investment management evaluation services by performing initial
due diligence on each Sub-Adviser and thereafter monitoring the Sub-Adviser’s
performance for compliance with the Core Fixed Income Fund’s investment
objective and strategies, as well as adherence to its investment style. The
Adviser also conducts performance evaluations through in-person, telephonic and
written consultations. In evaluating the Sub-Adviser, the Adviser considers,
among other factors: their level of expertise; relative performance and
consistency of performance over a minimum period of time; level of adherence to
investment discipline or philosophy; personnel, facilities and financial
strength; and quality of service and client communications.
The
Adviser has the responsibility for communicating performance expectations and
evaluations to the Sub-Adviser and ultimately recommending to the Board of
Trustees whether its sub-advisory agreement should be renewed, modified or
terminated. The Adviser provides written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. The Trust
applied for, and the SEC has granted, an exemptive order with respect to the
Core Fixed Income Fund that permits the Adviser, subject to certain conditions,
to hire new sub-advisers or to continue the employment of the existing
Sub-Adviser after events that would otherwise cause an automatic termination of
a sub-advisory agreement. This arrangement has been approved by the Board of
Trustees and the Fund’s initial shareholder. Within 90 days of retaining a new
sub-adviser, shareholders of the Fund will receive notification of the
change.
The
Adviser pays the Sub-Adviser on a monthly basis, an annual fee of the net assets
of the Core Fixed Income Fund allocated to the Sub-Adviser by the Adviser which
the Adviser will pay out of the advisory fee paid to the Adviser pursuant to the
Advisory Agreement. In determining the compensation structure for Sub-Adviser,
the Adviser employs the following general criteria: (i) the type of asset class
managed by the Sub-Adviser; (ii) the current market rate; (iii) the
Sub-Adviser’s standard compensation rate for similar programs; and (iv) the
anticipated asset flow for the Fund. The Fund is not responsible for the payment
of the sub-advisory fees. The Adviser is also responsible for conducting all
operations of the Fund, except those operations contracted to the Sub-Adviser,
the Custodian, the Administrator or the Fund’s transfer agent. Although the
Sub-Adviser’s activities are subject to oversight by the Board of Trustees and
the officers of the Trust, the Board of Trustees, the officers and the Adviser
do not evaluate the investment merits of the Sub-Advisers’ individual security
selections. The Sub-Adviser has complete discretion to purchase, manage and sell
portfolio securities for the portions of the Fund’s portfolios that it manages,
subject to the Fund’s investment objective, policies and limitations. The Fund’s
portfolio is managed by several portfolio managers (each, a “Portfolio Manager”)
as discussed in the Fund’s prospectus.
Information
regarding the Sub-Adviser and the biographies of its Portfolio Manager(s) are
set forth in the prospectus.
The
manager of managers exemptive order received by the Trust permits the Fund to
disclose, in aggregate, the sub-advisory fees paid to the Sub-Adviser by the
Adviser. The exemptive order does not apply with respect to any sub-adviser that
is an affiliated person of the Trust or the Adviser. The following table
illustrates the aggregate sub-advisory fees paid by the Adviser on behalf of the
Core Fixed Income Fund to NBIA, a non-affiliated sub-adviser, for the fiscal
years ended August 31, 2023, 2022 and 2021:
|
|
|
|
|
|
|
| |
Core
Fixed Income Fund |
Fiscal
Year Ended |
Sub-Advisory
Fee (total dollar amount) |
Sub-Advisory
Fee (as a percentage of net assets managed) |
August
31, 2023 |
$610,492 |
0.175% |
August
31, 2022 |
$712,372 |
0.175%(1) |
August
31, 2021 |
$628,469 |
0.202% |
(1)Effective
January 22, 2021, the Sub-Advisory fee paid by the Adviser was reduced from
0.25% to 0.175%.
Control
Persons of the Sub-Advisers
Neuberger
Berman Investment Advisers LLC is
an indirect subsidiary of Neuberger Berman Group LLC (“NBG”). The directors,
officers and/or employees of NBIA who are deemed “control persons” of NBIA are:
Joseph Amato and Brad Tank. NBG’s voting equity is owned by NBSH Acquisition,
LLC (“NBSH”). NBSH is owned by portfolio managers, members of the NBG’s
management team, and certain of NBG’s key employees and senior
professionals.
Portfolio
Managers
The
following section provides information regarding each Portfolio Manager’s other
accounts managed, compensation, material conflicts of interests, and any
ownership of securities in the Funds for which they serve. The Portfolio
Managers are shown together in this section only for ease in presenting the
information and should not be viewed for purposes of comparing the Portfolio
Managers or their firms against one another. Each firm is a separate entity that
may employ different compensation structures, and may have different management
requirements, and each Portfolio Manager may be affected by different conflicts
of interest.
Other
Accounts Managed by the Portfolio Managers
The
table below identifies, for each Portfolio Manager of each Fund, the number of
accounts managed (excluding the Funds) and the total assets in such accounts,
within each of the following categories: registered investment companies, other
pooled investment vehicles, and other accounts. To the extent that any of these
accounts are subject to an advisory fee based on account performance, this
information is reflected in a separate table below. Asset amounts have been
rounded and are approximate as of August 31, 2023.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
and
Portfolio
Manager
(Firm) |
Registered
Investment
Companies (excluding
the Funds) |
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) |
|
|
|
|
|
| |
Core
Fixed Income Fund |
|
|
|
| |
Brandon
R. Thomas (Adviser) |
4 |
$387 |
0 |
$0 |
14,616 |
$6,693 |
David
M. Brown (NBIA) |
3 |
$800 |
111 |
$27,996 |
363 |
$34,992 |
Thanos
Bardas (NBIA) |
2 |
$1,171 |
27 |
$4,019 |
77 |
$19,903 |
Nathan
Kush (NBIA) |
2 |
$1,171 |
18 |
$1,165 |
33 |
$6,517 |
Olumide
Owolabi (NBIA) |
1 |
$20 |
5 |
$792 |
53 |
$13,356 |
|
|
|
|
|
| |
Diversified
Equity Fund |
|
|
|
| |
Brandon
R. Thomas (Adviser) |
4 |
$387 |
0 |
$0 |
14,616 |
$6,693 |
Janis
Zvingelis (Adviser) |
4 |
$387 |
0 |
$0 |
14,616 |
$6,693 |
The
following table reflects information regarding accounts for which a Portfolio
Manager has day-to-day management responsibilities and with respect to which the
advisory fee is based on account performance. The Portfolio Managers not listed
below reported that they do not provide day-to-day management of accounts with
performance-based advisory fees. Asset amounts have been rounded and are
approximate as of August 31, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
and
Portfolio
Manager
(Firm) |
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) |
|
|
|
|
|
| |
Core
Fixed Income Fund |
|
|
|
| |
David
M. Brown (NBIA) |
0 |
$0 |
11 |
$2,284 |
4 |
$499 |
Thanos
Bardas (NBIA) |
0 |
$0 |
10 |
$201 |
2 |
$263 |
Olumide
Owolabi (NBIA) |
0 |
$0 |
1 |
$49 |
1 |
$83 |
Material
Conflicts of Interest
Actual
or apparent material conflicts of interest may arise when a Portfolio Manager
has day-to-day management responsibilities with respect to more than one
investment account or in other circumstances. Portfolio Managers who manage
other investment accounts in addition to one or more of the Funds may be
presented with the potential conflicts described below.
Envestnet
Asset Management, Inc.
Although
the Adviser manages other accounts that may have similar investment objectives
or strategies to those of the Funds, the Adviser believes that no material
conflicts currently exist due to the Adviser’s allocation procedures currently
in place. In determining a fair allocation, the Adviser takes into account a
number of factors, including among other things, the Adviser’s fiduciary duty to
each client, any potential conflicts of interest, the size of the transaction,
the relative size of a client’s portfolio, cash available for investment,
suitability, as well as each client’s investment objective.
Neuberger
Berman Investment Advisers LLC
Actual
or apparent conflicts of interest may arise when a Portfolio Manager for
Neuberger Berman Investment Advisers LLC (“NBIA”) has day-to-day management
responsibilities with respect to more than one fund or other account. The
management of multiple funds and accounts (including proprietary accounts) may
give rise to actual or potential conflicts of interest if the funds and accounts
have different or similar objectives, benchmarks, time horizons, and fees, as
the Portfolio Manager must allocate his or her time and investment ideas across
multiple funds and accounts. The Portfolio Manager may execute transactions for
another fund or account that may adversely impact the value of securities or
instruments held by a fund, and which may include transactions that are directly
contrary to the positions taken by a fund. For example, a Portfolio Manager may
engage in short sales of securities or instruments for another account that are
the same type of securities or instruments in which a fund it manages also
invests. In such a case, the Portfolio Manager could be seen as harming the
performance of the fund for the benefit of the account engaging in short sales
if the short sales cause the market value of the securities or instruments to
fall.
Additionally,
if a Portfolio Manager identifies a limited investment opportunity that may be
suitable for more than one fund or other account, a fund may not be able to take
full advantage of that opportunity. There may also be regulatory limitations
that prevent a fund from participating in a transaction that another account or
fund managed by the same Portfolio Manager will invest. For example, the
Investment Company Act of 1940, as amended, prohibits the mutual funds from
participating in certain transactions with certain of its affiliates and from
participating in “joint” transactions alongside certain of its affiliates. The
prohibition on “joint” transactions may limit the ability of the funds to
participate alongside its affiliates in privately negotiated transactions unless
the transaction is otherwise permitted under existing regulatory guidance and
may
reduce the amount of privately negotiated transactions that the funds may
participate in. Further, NBIA may take an investment position or action for a
fund or account that may be different from, inconsistent with, or have different
rights than (e.g., voting rights, dividend or repayment priorities or other
features that may conflict with one another), an action or position taken for
one or more other funds or accounts, including a fund, having similar or
different objectives.
A
conflict may also be created by investing in different parts of an issuer’s
capital structure (e.g., equity or debt, or different positions in the debt
structure). Those positions and actions may adversely impact, or in some
instances benefit, one or more affected accounts, including the funds. Potential
conflicts may also arise because portfolio decisions and related actions
regarding a position held for a fund or another account may not be in the best
interests of a position held by another fund or account having similar or
different objectives. If one account were to buy or sell portfolio securities or
instruments shortly before another account bought or sold the same securities or
instruments, it could affect the price paid or received by the second account.
Securities selected for funds or accounts other than a fund may outperform the
securities selected for the fund.
Finally,
a conflict of interest may arise if NBIA and a Portfolio Manager have a
financial incentive to favor one account over another, such as a
performance-based management fee that applies to one account but not all funds
or accounts for which the Portfolio Manager is responsible. In the ordinary
course of operations, certain businesses within the Neuberger Berman
Organization (“NB”) will seek access to material non-public information. For
instance, NBIA portfolio managers may obtain and utilize material non-public
information in purchasing loans and other debt instruments and certain privately
placed or restricted equity instruments. From time to time, NBIA portfolio
managers will be offered the opportunity on behalf of applicable clients to
participate on a creditors or other similar committee in connection with
restructuring or other “work-out” activity, which participation could provide
access to material non-public information.
NB
maintains procedures that address the process by which material non-public
information may be acquired intentionally by NB. When considering whether to
acquire material non-public information, NB will attempt to balance the
interests of all clients, taking into consideration relevant factors, including
the extent of the prohibition on trading that would occur, the size of NB’s
existing position in the issuer, if any, and the value of the information as it
relates to the investment decision-making process. The acquisition of material
non-public information would likely give rise to a conflict of interest since NB
may be prohibited from rendering investment advice to clients regarding the
securities or instruments of such issuer and thereby potentially limiting the
universe of securities or instruments that NB, including a fund, may purchase or
potentially limiting the ability of NB, including a fund, to sell such
securities or instruments. Similarly, where NB declines access to (or otherwise
does not receive or share within NB) material non-public information regarding
an issuer, the portfolio managers could potentially base investment decisions
with respect to assets of such issuer solely on public information, thereby
limiting the amount of information available to the portfolio managers in
connection with such investment decisions. In determining whether or not to
elect to receive material non-public information, NB will endeavor to act fairly
to its clients as a whole. NB reserves the right to decline access to material
non-public information, including declining to join a creditors or similar
committee.
NBIA
has adopted certain compliance procedures which are designed to address these
types of conflicts. However, there is no guarantee that such procedures will
detect each and every situation in which a conflict arises.
Portfolio
Managers’ Compensation
This
following section describes the structure of, and the methods used to determine
the different types of compensation (e.g.,
salary, bonus, deferred compensation, retirement plans and arrangements) for
each of the Portfolio Managers as of August 31, 2023.
Envestnet
Asset Management, Inc.
The
Portfolio Managers each receive a competitive fixed base salary that is set by
reference to industry standards. The Portfolio managers are also eligible for an
annual bonus that is based on the achievement of corporate and individual
goals.
Neuberger
Berman Investment Advisers LLC
NBIA’s
compensation philosophy is one that focuses on rewarding performance and
incentivizing our employees. NBIA is also focused on creating a compensation
process that it believes is fair, transparent, and competitive with the market.
Compensation
for Portfolio Managers consists of fixed (salary) and variable (bonus)
compensation but is more heavily weighted on the variable portion of total
compensation and is paid from a team compensation pool made available to the
portfolio management team with which the Portfolio Manager is associated. The
size of the team compensation pool is determined based on a formula that takes
into consideration a number of factors including the pre-tax revenue that is
generated by that particular portfolio management team, less certain
adjustments. The bonus portion of the compensation is discretionary and is
determined on the basis of a variety of criteria, including investment
performance (including the aggregate multi-year track record), utilization of
central resources (including research, sales and operations/support), business
building to further the longer term sustainable success of the investment team,
effective team/people management, and overall contribution to the success of NB.
Certain Portfolio Managers may manage products other than mutual funds, such as
high net worth separate accounts. For the management of these accounts, a
Portfolio Manager may generally receive a percentage of pre-tax revenue
determined on a monthly basis less certain deductions. The percentage of revenue
a Portfolio Manager receives pursuant to this arrangement will vary based on
certain revenue thresholds.
The
terms of NBIA’s long-term retention incentives are as follows:
Employee-Owned
Equity.
Certain employees (primarily senior leadership and investment professionals)
participate in NB’s equity ownership structure, which was designed to
incentivize and retain key personnel. In addition, in prior years certain
employees may have elected to have a portion of their compensation delivered in
the form of equity. NBIA also offers an equity acquisition program which allows
employees a more direct opportunity to invest in NB. For confidentiality and
privacy reasons, NBIA cannot disclose individual equity holdings or program
participation.
Contingent
Compensation. Certain
employees may participate in the Neuberger Berman Group Contingent Compensation
Plan (the “CCP”) to serve as a means to further align the interests of our
employees with the success of the firm and the interests of our clients, and to
reward continued employment. Under the CCP, up to 20% of a participant’s annual
total compensation in excess of $500,000 is contingent and subject to vesting.
The contingent amounts are maintained in a notional account that is tied to the
performance of a portfolio of NB investment strategies as specified by the firm
on an employee-by-employee basis. By having a participant’s contingent
compensation tied to NB investment strategies, each employee is given further
incentive to operate as a prudent risk manager and to collaborate with
colleagues to maximize performance across all business areas. In the case of
members of investment teams, including Portfolio Managers, the CCP is currently
structured so that such employees have exposure to the investment strategies of
their respective teams as well as the broader NB portfolio.
Restrictive
Covenants.
Most investment professionals, including Portfolio Managers, are subject to
notice periods and restrictive covenants which include employee and client
non-solicit restrictions as well as restrictions on the use of confidential
information. In addition, depending on participation levels, certain senior
professionals who have received equity grants have also agreed to additional
notice and transition periods and, in some
cases,
non-compete restrictions. For confidentiality and privacy reasons, NBIA cannot
disclose individual restrictive covenant arrangements.
Portfolio
Managers’ Ownership of the Funds
As
of August 31, 2023, the following Portfolio Managers beneficially owned
securities in the Funds as shown below:
|
|
|
|
|
|
|
| |
| Dollar
Range of Equity Securities in the Funds |
Name
of Portfolio Manager |
Core
Fixed Income Fund |
Diversified
Equity Fund |
Brandon
R. Thomas (Adviser) |
$1
- $10,000 |
$1
- $10,000 |
Janis
Zvingelis (Adviser) |
None |
None |
David
M. Brown (NBIA) |
None |
None |
Thanos
Bardas (NBIA) |
None |
None |
Nathan
Kush (NBIA) |
None |
None |
Olumide
Owolabi (NBIA) |
None |
None |
Service
Providers
Fund
Administrator, Transfer Agent and Fund Accountant
Pursuant
to a fund administration and servicing 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, Fund Services acts as the Funds’
administrator. 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; preparing for signature by an officer
of the Trust all of the documents required to be filed for compliance by the
Trust and the Funds with applicable laws and regulations excluding those of the
securities laws of various states; arranging for the computation of performance
data, including net asset value (“NAV”) 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, as compensation for its services, Fund Services
receives from the Funds a combined fee for fund administration and fund
accounting services based on the Funds’ current average daily net assets. Fund
Services is also entitled to be reimbursed for certain out-of-pocket expenses.
In addition to its role as Administrator, Fund Services also acts as fund
accountant, transfer agent (the “Transfer Agent”) and dividend disbursing agent
under separate agreements with the Trust.
For
the fiscal years indicated below, the Funds paid the following fees to Fund
Services for fund administration services:
|
|
|
|
|
|
|
|
|
|
| |
Administration
Fees Paid During Fiscal Years Ended August 31, |
| 2023 |
2022 |
2021 |
Core
Fixed Income Fund |
$220,371 |
$217,643 |
$204,061 |
Diversified
Equity Fund |
$422,270 |
$457,461 |
$451,739 |
Custodian
U.S.
Bank National Association, an affiliate of Fund Services, serves as the
custodian of the assets of the Funds pursuant to a custody agreement between the
Custodian and the Trust, on behalf of the Funds, whereby the Custodian charges
fees on a transactional basis plus out-of-pocket expenses. The Custodian has
custody of all assets and securities of the Funds, delivers and receives
payments for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as directed by
the officers of the Trust. The Custodian’s address is 1555 North River Center
Drive, Suite 302, Milwaukee, Wisconsin 53212. The Custodian does not participate
in decisions relating to the purchase and sale of securities by the Funds. The
Custodian and its affiliates may participate in revenue sharing arrangements
with service providers of funds in which the Funds may invest.
Legal
Counsel
Godfrey
& Kahn, S.C., 833 East Michigan Street, Suite 1800, Milwaukee, Wisconsin
53202 serves as legal counsel to the Funds and the Independent
Trustees.
Independent
Registered Public Accounting Firm
Cohen
& Company, Ltd. (“Cohen”), 342 North Water Street, Suite 830, Milwaukee,
Wisconsin 53202, serves as the independent registered public accounting firm for
the Funds. Cohen audits and reports on the Funds’ annual financial statements,
reviews certain regulatory reports and the Funds’ federal income tax returns,
and performs other auditing and tax services for the Funds when engaged to do
so.
The
Distributor
Foreside
Fund Services, LLC, an affiliate of Foreside Financial Group, LLC d/b/a ACA
Group (the “Distributor”), (also known as the principal underwriter) of the
shares of the Funds and is located at Three Canal Plaza, Suite 100, Portland,
Maine 04101. The Distributor is a registered broker-dealer and is a member of
FINRA. The Distributor is not affiliated with the Funds, the Adviser, or any
other service provider to the Funds.
Under
a Distribution Agreement with the Funds, the Distributor acts as the agent of
the Trust in connection with the continuous offering of shares of the Funds. The
Distributor continually distributes shares of the Funds on a best efforts basis.
The Distributor has no obligation to sell any specific quantity of Fund shares.
The Distributor and its officers have no role in determining the investment
policies or which securities are to be purchased or sold by the
Trust.
The
Distributor may enter into agreements with selected broker-dealers, banks or
other financial intermediaries for distribution of shares of the Funds. With
respect to certain financial intermediaries and related fund “supermarket”
platform arrangements, the Funds and/or the Adviser, rather than the
Distributor, typically enter into such agreements. These financial
intermediaries may charge a fee for their services and may receive shareholder
service or other fees from parties other than the Distributor. These financial
intermediaries may otherwise act as processing agents and are responsible for
promptly transmitting purchase, redemption and other requests to the
Fund.
Investors
who purchase shares through financial intermediaries will be subject to the
procedures of those intermediaries through which they purchase shares, which may
include charges, investment minimums, cutoff times and other restrictions in
addition to, or different from, those listed herein. Information concerning any
charges or services will be provided to customers by the financial intermediary
through which they purchase shares. Investors purchasing shares of the Funds
through financial intermediaries should acquaint themselves with their financial
intermediary’s procedures and should read the Prospectus in conjunction with any
materials and information provided by their financial intermediary. The
financial intermediary, and not its customers, will be the shareholder of
record, although customers may have the right to vote shares depending upon
their arrangement with the financial intermediary. The Distributor does not
receive compensation from the Fund for its distribution services except the
distribution/service fees with respect to the shares of those
classes
for which a Rule 12b-1 distribution plan is effective. The Adviser pays the
Distributor a fee for certain distribution-related services.
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 in accordance with the 1940 Act. The
Distribution Agreement is terminable without penalty by the Trust on behalf of a
Fund on no less than 60 days’ written notice when authorized either by a
vote of a majority of the outstanding voting securities of the Fund or by vote
of a majority of the members of the Board who are not “interested persons” (as
defined in the 1940 Act) of the Trust and have no direct or indirect
financial interest in the operation of the Distribution Agreement, or by the
Distributor, and will automatically terminate in the event of its “assignment”
(as defined in the 1940 Act). The Distribution Agreement provides that the
Distributor shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with the performance of the
Distributor’s obligations and duties under the Distribution Agreement, except a
loss resulting from the Distributor’s willful misfeasance, bad faith or gross
negligence in the performance of such duties and obligations, or by reason of
its reckless disregard thereof.
During
the last three fiscal years, the Distributor did not receive any net
underwriting commissions on the sale of the Funds’ shares.
Distribution
(Rule 12b-1) Plan
The
Trust has adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act,
as amended (the “Distribution Plan”), on behalf of the Funds. Under the
Distribution Plan, the Trust, on behalf of the Funds, pays a Rule 12b-1 fee (the
“Distribution Fee”) to the Distributor for distribution services and the
provision of personal services to shareholders at an annual rate of 0.25% of
each Fund’s average daily NAV attributable to Advisor Class shares of that Fund.
The Distribution Plan provides that the Distributor may use all or any portion
of such Distribution Fee to finance any activity that is principally intended to
result in the sale of shares of the Funds, subject to the terms of the
Distribution Plan, or to provide certain shareholder services.
Pursuant
to an agreement between the Distributor and the Adviser, amounts retained by the
Distributor are not held for profit at the Distributor, but instead are used to
reimburse the Adviser for sales and marketing expenses incurred directly by the
Adviser.
The
Distribution Fee is payable to the Distributor regardless of the
distribution-related expenses actually incurred. Because the Distribution Fee is
not directly tied to expenses, the amount of distribution fees paid by the Funds
during any year may be more or less than actual expenses incurred pursuant to
the Distribution Plan. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as a “compensation”
plan.
The
Distributor may use the Distribution Fee to pay for services covered by the
Distribution Plan including, but not limited to, the provision of personal
services to shareholders, advertising, compensating broker-dealers and selling
personnel engaged in the distribution of Fund shares, the printing and mailing
of prospectuses, statements of additional information and reports to other than
current Fund shareholders, 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
Distribution Plan provides that it will continue from year-to-year upon approval
by the majority vote of the Board of Trustees, including a majority of the
trustees who are not “interested persons” of the Funds, as defined in the 1940
Act, and who have no direct or indirect financial interest in the operations of
the Distribution Plan or in any agreement related to such plan (the “Independent
Trustees”), as required by the 1940 Act, currently cast in person at a meeting
called for that purpose. It is also required that the trustees who are not
“interested persons” of the Funds, select and nominate all other trustees who
are not “interested persons” of the Funds. The Distribution 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 the Fund shares outstanding. All material amendments to the Distribution Plan
or any related agreements must be approved by a vote of a majority of the Board
of Trustees and the Independent Trustees, cast in person at a meeting called for
the purpose of voting on any such amendment.
The
Distribution Plan requires that the Distributor provide to the Board of
Trustees, at least quarterly, a written report on the amounts and purpose of any
payment made under the Distribution Plan. The Distributor is also required to
furnish the Board of Trustees with such other information as may reasonably be
requested in order to enable the Board of Trustees to make an informed
determination of whether the Distribution Plan should be continued. The Board of
Trustees, including a majority of the Independent Trustees, has determined that
there is a reasonable likelihood that the Distribution Plan will benefit the
Funds. In particular, the Board of Trustees has determined that it believes that
the Distribution Plan is reasonably likely to provide an incentive for brokers,
dealers and other financial intermediaries to engage in sales and marketing
efforts on behalf of the Funds and to provide enhanced services to shareholders
of the Funds. With the exception of the Adviser, no “interested person” of the
Funds, as defined in the 1940 Act, and no Independent Trustee of the Funds has
or had a direct or indirect financial interest in the Distribution Plan or any
related agreement.
As
noted above, the Distribution Plan provides for the ability to use Fund assets
to pay financial intermediaries (including those that sponsor mutual fund
supermarkets), plan administrators and other service providers to finance any
activity that is principally intended to result in the sale of Fund shares or
for the provision of services to shareholders. The payments made by the Funds to
these financial intermediaries are based primarily on the dollar amount of
assets invested in the Funds through the financial intermediaries. These
financial intermediaries may pay a portion of the payments that they receive
from the Funds to their investment professionals.
To
the extent these asset-based fees and other payments made under the Distribution
Plan to these financial intermediaries for the distribution services they
provide to the Funds’ shareholders exceed the Distribution Fees available, these
payments are made by the Adviser from its own resources, which may include its
profits from the advisory fee it receives from the Funds. In addition, the Funds
may participate in various “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 Funds may use all or a portion of
the Distribution Fee to pay one or more supermarket sponsors a negotiated fee
for distributing a Fund’s shares or for the provision of services to
shareholders. In addition, in its discretion, the Adviser may pay additional
fees to such intermediaries from its own assets.
To
the extent payments made under the Distribution Plan to the Distributor for the
distribution services it provides to the Funds exceed the Distribution Fees
available, the payment for the Distributor’s services are made by the Adviser
from its own resources.
The
Funds do not participate in any joint distribution activities with other
investment companies.
The
tables below show the amount of Distribution Fees incurred and the allocation of
such fees by the Advisor Class shares of the Funds for the fiscal year ended
August 31, 2023.
Core
Fixed Income Fund
|
|
|
|
| |
Actual
Rule 12b-1 Expenditures Incurred by the Advisor Class Shares of the Fund
During the Fiscal Year Ended August 31, 2023 |
| Total
Dollars Allocated |
Advertising/Marketing |
$0 |
|
Printing/Postage |
$0 |
|
Payment
to Underwriter |
$1,872 |
|
Payment
to Broker/Dealer |
$99,609 |
|
Compensation
to sales personnel |
$0 |
|
Interest,
carrying or other financing charges |
$0 |
|
Other |
$0 |
|
Total |
$101,481 |
|
Diversified
Equity Fund
|
|
|
|
| |
Actual
Rule 12b-1 Expenditures Incurred by the Advisor Class Shares of the Fund
During the Fiscal Year Ended August 31, 2023 |
| Total
Dollars Allocated |
Advertising/Marketing |
$0 |
|
Printing/Postage |
$0 |
|
Payment
to Underwriter |
$0 |
|
Payment
to Broker/Dealer |
$246,836 |
|
Compensation
to sales personnel |
$0 |
|
Interest,
carrying or other financing charges |
$0 |
|
Other |
$0 |
|
Total |
$246,836 |
|
Securities
Lending Activity
The
Trust, on behalf of the Funds, has entered into a securities lending agreement
with U.S. Bank (the “Securities Lending Agent”) to provide certain services
related to the Funds’ securities lending program. Pursuant to the securities
lending agreement, the Securities Lending Agent, on behalf of the Funds, is
authorized to enter into securities loan agreements, negotiate loan fees and
rebate payments, collect loan fees, deliver securities, manage and hold
collateral, invest cash collateral, receive substitute payments, make interest
and dividend payments (in cases where a borrower has provided non-cash
collateral), and upon termination of a loan, liquidate collateral investments
and return collateral to the borrower.
For
the most recent fiscal year ended August 31, 2023, the Funds’ securities lending
activities resulted in the following:
|
|
|
|
|
|
|
| |
| Core
Fixed Income Fund |
Diversified
Equity Fund |
Gross
income from securities lending activities: |
$1,158,278 |
| $9,984,628 |
|
Fees
and/or compensation for securities lending activities and related
services: |
| |
Fees
paid to Securities Lending Agent from a revenue split |
($16,087) |
| ($492,740) |
|
Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
($7,433) |
| ($58,957) |
|
Administrative
fees not included in revenue split |
$0 |
| $0 |
|
Indemnification
fee not included in revenue split |
$0 |
| $0 |
|
Rebates
(paid to borrower) |
($1,086,500) |
| ($7,928,580) |
|
Other
fees not included in revenue split (specify) |
$0 |
| $0 |
|
Aggregate
fees/compensation for securities lending activities: |
($1,110,020) |
| ($8,480,278) |
|
Net
income from securities lending activities: |
$48,258 |
| $1,504,350 |
|
U.S.
Bank oversees the securities lending process, which includes the screening,
selecting and ongoing review of borrowers, monitoring the availability of
securities, negotiating rebates, daily marking to market of loans, monitoring
and maintaining cash collateral levels, processing securities movements and
reinvesting cash collateral as directed by the Advisor. U.S. Bank National
Association, as Securities Lending Agent, received fees from the Funds as set
forth in the table above.
Portfolio
Transactions and Brokerage
Pursuant
to the Advisory Agreement, the Adviser, together with the sub-advisers,
determines which securities are to be purchased and sold by the Funds and which
broker-dealers are eligible to execute the Funds’ portfolio transactions.
Purchases and sales of securities in the OTC market will generally be executed
directly with a “market-maker” unless, in the opinion of the Adviser and the
sub-advisers, a better price or execution can otherwise be obtained by using a
broker for the transaction.
Purchases
of portfolio securities for the Funds will be effected through broker-dealers
(including banks) that specialize in the types of securities that the Funds will
be holding, unless the Adviser believes that 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 and Sub-Adviser, as applicable, 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 available, 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 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 and Sub-Adviser, as applicable, that they
may lawfully and appropriately use in its investment advisory capacities, as
well as provide other brokerage services in addition to execution services. The
Adviser and Sub-Adviser consider such information, which is in addition to and
not in lieu of the services required to be performed under the Advisory
Agreement or Sub-Advisory agreement, to be useful in varying degrees, but of
indeterminable value. 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 or Sub-Adviser has
invested on behalf of the Funds and/or client accounts.
While
it is the Funds’ general policy to first seek to obtain the most favorable price
and execution available in selecting a broker-dealer to execute portfolio
transactions for the Funds, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Funds or to the
Adviser and sub-advisers, even if the specific services are not directly useful
to the Funds and may be useful to the Adviser and sub-advisers in advising other
clients. In negotiating commissions with a broker or evaluating the spread to be
paid to a dealer, the Funds may 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 or Sub-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 or Sub-Adviser’s overall responsibilities to the Funds.
Investment
decisions for the Funds are made independently from those of other client
accounts of the Adviser and sub-advisers. Nevertheless, it is possible that at
times identical securities will be acceptable for both a Fund and one or more of
such client accounts. In such event, the position of the applicable 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 the Funds at the same time, the Funds may not be able to acquire as
large a portion of such security as they desire, or they may have to pay a
higher price or obtain a lower yield for such security. Similarly, the Funds 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 the Fund and all such client accounts in a manner deemed
equitable by the Adviser or Sub-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 the Funds are concerned. In other cases,
however, it is believed that the ability of the Funds to participate in volume
transactions may produce better executions for the Funds. Notwithstanding the
above, the Adviser and sub-advisers may execute buy and sell orders for accounts
and take action in performance of their duties with respect to any of their
accounts that may differ from actions taken with respect to another account, so
long as the Adviser and sub-advisers shall, to the extent practicable, 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.
When
buying or selling securities, the Adviser or Sub-Adviser, as applicable, may,
although does not currently, execute trades for the Funds with broker-dealers
that are affiliated with the Trust, the Adviser, the Sub-Adviser, or their
affiliates, and the Funds may pay commissions to such broker-dealers in
accordance with procedures adopted by the Board. The Trust has adopted
procedures to monitor and control such affiliated brokerage transactions, which
are reported to and reviewed by the Board at least quarterly.
The
Funds are required to identify any securities of their “regular brokers or
dealers” that the Funds have acquired during their most recent fiscal year. The
following tables list such securities which have been acquired by the Core Fixed
Income Fund as of August 31, 2023:
Core
Fixed Income Fund
|
|
|
|
| |
Securities |
Value
of Holding |
Bank
of America Corp. |
$4,536,274 |
|
Citigroup,
Inc. |
$2,260,919 |
|
Goldman
Sachs & Co. |
$1,327,965 |
|
JP
Morgan Chase & Co. |
$1,558,141 |
|
Morgan
Stanley & Co., Inc. |
$6,355,861 |
|
Wells
Fargo & Co. |
$3,593,580 |
|
As
of August 31, 2023, the Diversified Equity Fund did not acquire any securities
of its “regular brokers or dealers”.
The
Funds are also required to identify any brokerage transactions during their most
recent fiscal year that were directed to a broker because of research services
provided, along with the amount of any such transactions and any related
commissions paid by the Funds. During the last fiscal year, the Funds had no
such transactions.
The
following table shows the amounts paid by each Fund in brokerage commissions for
the fiscal years ended August 31, 2023, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
| |
Brokerage
Commissions During Fiscal Years Ended August 31, |
| 2023 |
2022 |
2021 |
Core
Fixed Income Fund |
$404 |
$33 |
$3,195 |
Diversified
Equity Fund |
$581,291 |
$407,676 |
$445,176 |
Portfolio
Turnover
Although
the Funds generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser and Sub-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 and brokerage commission costs and
may generate capital gains, including short-term capital gains taxable to
shareholders at ordinary income rates. To the extent that a Fund experiences an
increase in brokerage commissions due to a higher portfolio turnover rate, the
performance of the Fund could be negatively impacted by the increased expenses
incurred by the Fund. Furthermore, a high portfolio turnover rate may result in
a greater number of taxable transactions.
For
the fiscal years indicated below, the portfolio turnover rates for the Funds
were as follows:
|
|
|
|
|
|
|
| |
Portfolio
Turnover During Fiscal Years Ended August 31, |
| 2023 |
2022 |
Core
Fixed Income Fund |
195.1% |
201.7% |
Diversified
Equity Fund |
100.6% |
59.6% |
Code
of Ethics
The
Trust, the Adviser and the Sub-Adviser have each adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act. These Codes of Ethics permit, subject to certain
conditions, personnel of the Adviser to invest in securities that may be
purchased or held by the Funds. The Distributor relies on the principal
underwriter’s exception under Rule 17j-1(c)(3) of the 1940 Act from the
requirements to adopt a code of ethics pursuant to Rule 17j-1 because the
Distributor is not affiliated with the Trust or the Adviser, and no officer,
director, or general partner of the Distributor serves as an officer, director
or general partner of the Trust or the Adviser.
Proxy
Voting Procedures
The
Board of Trustees has adopted proxy voting policies and procedures (“Proxy
Policies”) on behalf of the Trust which delegate to the Adviser the
responsibility for voting proxies relating to portfolio securities held by the
Funds as part of its investment advisory services, subject to the supervision
and oversight of the Board of Trustees. The Proxy Policies of the Adviser are
attached as Appendix A. Notwithstanding this delegation of responsibilities,
however, the Funds retain the right to vote proxies relating to their 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 the Funds and their
shareholders, taking into account the value of each Fund’s
investments.
The
actual voting records relating to portfolio securities during the 12-month
period ended June 30th
is available without charge, upon request, by calling toll-free, (866) PMC‑7338
or by accessing the SEC’s website at www.sec.gov.
Anti-Money
Laundering Compliance Program
The
Trust has established an Anti-Money Laundering Compliance Program (the
“Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
“USA PATRIOT Act”) and related anti-money laundering laws and regulations. To
ensure compliance with these laws, 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.
Deanna B. Marotz 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.
Portfolio
Holdings Information
The
Trust, on behalf of the Funds, has adopted portfolio holdings disclosure
policies (the “Disclosure Policies”) that govern the timing and circumstances of
disclosure of portfolio holdings of the Funds. Information about the Funds’
portfolio holdings will not be distributed to any third party except in
accordance with these Disclosure Policies. The Board of Trustees considered the
circumstances under which the Funds’ portfolio holdings may be disclosed under
the Disclosure Policies, considering actual and potential material conflicts
that could arise in such circumstances between the interests of the Funds’
shareholders and the interests of the Adviser, Distributor or any other
affiliated person of the Funds. After due consideration, the Board determined
that the Funds have a legitimate business purpose for disclosing portfolio
holdings to persons described in these Disclosure Policies.
Information
about the Funds’ portfolio holdings will not be distributed to any third party
except as described below:
•the
disclosure is required to respond to a regulatory request, court order or other
legal proceeding;
•the
disclosure is to a mutual fund rating or evaluation services organization (such
as Factset, Morningstar and Lipper), or statistical agency or person performing
similar functions, or due
diligence
department of a broker-dealer or wirehouse, who has, if necessary, signed a
confidentiality agreement, or is bound by applicable duties of confidentiality
imposed by law, with the Funds;
•the
disclosure is made to the Funds’ service providers who generally need access to
such information in the performance of their contractual duties and
responsibilities, and who are subject to duties of confidentiality imposed by
law and/or contract, such as the Adviser, the Board of Trustees, the Funds’
independent registered public accountants, regulatory authorities, counsel to
the Funds or the Board of Trustees, proxy voting service providers, financial
printers involved in the reporting process, the fund administrator, fund
accountant, transfer agent, or custodian of the Funds;
•the
disclosure is made by the Adviser’s trading desk to broker-dealers in connection
with the purchase or sale of securities or requests for price quotations or bids
on one or more securities; in addition, the Adviser’s trading desk may
periodically distribute a holdings list (consisting of names only) to
broker-dealers so that such brokers can provide the Adviser with order flow
information;
•the
disclosure is made to institutional consultants evaluating the Funds on behalf
of potential investors;
•the
disclosure is (a) in connection with a quarterly, semi-annual or annual report
that is available to the public or (b) relates to information that is otherwise
available to the public; or
•the
disclosure is made pursuant to prior written approval of the Trust’s CCO, or
other person so authorized, is for a legitimate business purpose and is in the
best interests of the Funds’ shareholders.
For
purposes of the Disclosure Policies, portfolio holdings information does not
include descriptive information if that information does not present material
risks of dilution, arbitrage, market timing, insider trading or other
inappropriate trading for the Funds. Information excluded from the definition of
portfolio holdings information generally includes, without limitation: (i)
descriptions of allocations among asset classes, regions, countries or
industries/sectors; (ii) aggregated data such as average or median ratios, or
market capitalization, performance attributions by industry, sector or country;
or (iii) aggregated risk statistics. It is the policy of the Trust to prohibit
any person or entity from receiving any direct or indirect compensation or
consideration of any kind in connection with the disclosure of information about
the Funds’ portfolio holdings.
The
Trust’s CCO must document any decisions regarding non-public disclosure of
portfolio holdings and the rationale therefor. In connection with the oversight
responsibilities by the Board of Trustees, any documentation regarding decisions
involving the non-public disclosure of portfolio holdings of the Funds to third
parties must be provided to the full Board of Trustees or its authorized
committee. In addition, on a quarterly basis, the Board will review any
disclosures of portfolio holdings outside of the permitted disclosures described
above to address any conflicts between the interests of Fund shareholders and
those of the Adviser or any other Fund affiliate.
Currently,
on or about the 15th calendar day of the month following a calendar quarter, the
Funds provide their quarterly portfolio holdings to rating and ranking
organizations, including Lipper, a Thomson Reuters Company, Morningstar, Inc.,
Standard & Poor’s Financial Services, LLC, Bloomberg L.P., Thomson Reuters
Corporation, Vickers Stock Research Corporation, Intercontinental Exchange, Inc.
and Capital-Bridge, Inc. Portfolio holdings information may be separately
provided to any person at the same time that it is filed with the SEC or one day
after it is published on the Funds’ website. Portfolio holdings disclosure may
be approved under the Disclosure Policies by the Trust’s CCO. Disclosure of the
Funds’ 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 Part F of 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.
Any
suspected breach of this policy must be reported immediately to the Trust’s CCO,
or to the chief compliance officer of the Adviser who is to report it to the
Trust’s CCO. The Board of Trustees reserves the right to amend the Disclosure
Policies at any time without prior notice in its sole discretion.
Determination
of Net Asset Value
The
NAV of a Fund’s shares will fluctuate and is determined 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 the
NYSE 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. If
the NYSE closes early, the Fund will calculate the NAV as of the close of
trading on the NYSE on that day. If an emergency exists as permitted by the SEC,
the NAV may be calculated at a different time.
The
NAV per share is computed by dividing the value of the securities held by a Fund
plus any cash or other assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued expenses) by the total
number of shares in the applicable Fund outstanding at such time.
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Net
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Net
Asset Value Per Share |
Shares
Outstanding |
Generally,
the Funds’ investments are valued at market value or, in the absence of a market
value, at fair value as determined in good faith by the Adviser pursuant to the
Adviser’s procedures subject to oversight by the Board of Trustees.
Each
equity security owned by a Fund, including depositary receipts, that is traded
on a national securities exchange, except for securities listed on the NASDAQ
Stock Market LLC (“NASDAQ”), is valued at its last sale price on the exchange on
which such security is traded, as of the close of business on the day the
security is being valued. All equity securities that are not traded on a listed
exchange are valued at the last sales price at the close of the OTC market. If a
non-exchange listed security does not trade on a particular day, then the mean
between the last quoted bid and asked price will be used as long as it continues
to reflect the value of the security.
Securities
that are traded on more than one exchange are valued using the price of the
exchange that the Fund generally considers to be the principal exchange on which
the security is traded. Fund securities listed on NASDAQ shall be valued using
the NASDAQ Official Closing Price, which may not necessarily represent the last
sales price. If there has been no sale on such exchange or on NASDAQ on such
day, the security will be valued at the mean between the most recent bid and the
asked prices on such day, or the security shall be valued at the latest sales
price on the “composite market” for the day such security is being valued. The
composite market is defined as a consolidation of the trade information provided
by a national securities and foreign exchange and OTC markets as published by an
approved independent pricing service (“Pricing Service”).
Debt
securities, including short-term debt instruments having a maturity of 60 days
or less, are valued at the mean in accordance with prices provided by a Pricing
Service. Pricing Services may use various valuation methodologies such as the
mean between the bid and the asked prices, matrix pricing or other analytical
pricing models as well as market transactions and dealer quotations. If a price
is not available from a Pricing Service, the most recent quotation obtained from
one or more broker-dealers known to follow the issue will be obtained. Pricing
service quotations will be valued at the mean between the bid and the offer.
Fixed income securities purchased on a delayed-delivery basis are typically
marked to market daily until settlement at the forward settlement date. Any
discount or premium is accrued or amortized using the constant yield method
until maturity. In the absence of available quotations, the securities will be
priced at fair value.
Foreign
securities will be priced in their local currencies as of the close of their
primary exchange or market or as of the time a Fund calculates its NAV,
whichever is earlier. Foreign securities, currencies and other assets
denominated
in foreign currencies are then translated into U.S. dollars at the exchange rate
of such currencies against the U.S. dollar, as provided by an approved pricing
service or reporting agency. All assets denominated in foreign currencies will
be converted into U.S. dollars using the applicable currency exchange rates as
of the close of the NYSE, generally 4:00 p.m. Eastern Time.
Money
market funds, demand notes and repurchase agreements are valued at cost. If cost
does not represent current market value the securities will be priced at fair
value.
Redeemable
securities issued by open-end, registered investment companies are valued at the
NAVs of such companies for purchase and/or redemption orders placed on that day.
All exchange-traded funds are valued at the last reported sale price on the
exchange on which the security is principally traded.
Futures
contracts are valued at the last settlement price at the close of trading on the
relevant exchange or board of trade. Futures contracts for which reliable market
quotations are not readily available shall each be valued at a price, supplied
by a Pricing Service approved by the Board which is in the opinion of such
Pricing Service representative of the market value of such positions at the time
of determination of the NAV, it being the opinion of the Board that the
valuations supplied by such Pricing Service accurately reflect the fair value of
such position.
Forward
foreign currency contracts are valued at the mean between the bid and asked
prices.
Exchange
traded options are valued at the composite price, using the National Best Bid
and Offer quotes (“NBBO”). NBBO consists of the highest bid price and lowest ask
price across any of the exchanges on which an option is quoted, thus providing a
view across the entire U.S. options marketplace. Specifically, composite pricing
looks at the last trades on the exchanges where the options are traded. If there
are no trades for the option on a given business day composite option pricing
calculates the mean of the highest bid price and lowest ask price across the
exchanges where the option is traded.
Pursuant
to Rule 2a-5 of the 1940 Act, other assets of the Funds are valued in such
manner as the Adviser in good faith deems appropriate to reflect their fair
value.
Additional
Purchase and Redemption Information
The
information provided below supplements the information contained in the
Prospectus regarding the purchase and redemption of Fund shares.
How
to Purchase Shares
You
may purchase shares of the Funds directly from the Funds, or from securities
brokers, dealers or other financial intermediaries (collectively, “Financial
Intermediaries”). Investors should contact their Financial Intermediary directly
for appropriate instructions, as well as information pertaining to accounts and
any service or transaction fees that may be charged. The Funds may enter into
arrangements with certain Financial Intermediaries whereby such Financial
Intermediaries (and other authorized intermediaries) are authorized to accept
your order on behalf of the Funds (each an “Authorized Intermediary”). If you
transmit your purchase request to an Authorized Intermediary before the close of
regular trading (generally 4:00 p.m., Eastern time) on a day that the NYSE is
open for business, shares will be purchased at the next calculated NAV, after
the Financial Intermediary receives the request. Investors should check with
their Financial Intermediary to determine if it is an Authorized
Intermediary.
Shares
are purchased at the next calculated NAV, after the Transfer Agent or Authorized
Intermediary receives your purchase request in good order. In most cases, in
order to receive that day’s NAV, the Transfer Agent must receive your order in
good order before the close of regular trading on the NYSE (generally
4:00 p.m., Eastern time).
The
Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Funds’ shares; (ii) to reject purchase orders in
whole or in part when in the judgment of the Adviser or the Distributor such
rejection
is in the best interest of the Funds, and (iii) to reduce or waive the
minimum for initial and subsequent investments for certain fiduciary accounts or
under circumstances where certain economies can be achieved in sales of the
Funds’ shares. The Adviser reserves the right to reject any initial or
additional investments.
How
to Redeem Shares and Delivery of Redemption Proceeds
You
may redeem your Fund shares any day the NYSE is open for regular trading, either
directly with the Funds or through your Financial Intermediary.
Payments
to shareholders for shares of the Funds redeemed directly from the Funds will be
made as promptly as possible, but no later than seven days after receipt by the
Transfer Agent of the written request in proper form, with the appropriate
documentation as stated in the Prospectus, except that the Funds may suspend the
right of redemption or postpone the date of payment upon redemption for more
than seven calendar days as determined by the SEC during any period when
(a) trading on the NYSE is restricted as determined by the SEC or the NYSE
is closed other than on weekends and holidays; (b) an emergency exists as
determined by the SEC making disposal of portfolio securities or valuation of
net assets of the Funds not reasonably practicable; or (c) for such other
period as the SEC may permit for the protection of the Funds’ shareholders.
The
value of shares on redemption or repurchase may be more or less than the
investor’s cost, depending upon the market value of the Funds’ portfolio
securities at the time of redemption or repurchase.
Telephone
Redemptions
Shareholders
with telephone transaction privileges established on their account may redeem
Fund shares by telephone. Upon receipt of any instructions or inquiries by
telephone from the shareholder, the Funds or its authorized agents may carry out
the instructions and/or respond to the inquiry consistent with the shareholder’s
previously established account service options. For joint accounts, instructions
or inquiries from either party will be carried out without prior notice to the
other account owners. In acting upon telephone instructions, the Funds and their
agents use procedures that are reasonably designed to ensure that such
instructions are genuine. These include recording all telephone calls, requiring
pertinent information about the account and sending written confirmation of each
transaction to the registered owner.
The
Transfer Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Transfer Agent fails to employ
reasonable procedures, the Funds and the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent instructions. If these procedures are
followed, however, to the extent permitted by applicable law, neither the Funds
nor their agents will be liable for any loss, liability, cost or expense arising
out of any redemption request, including any fraudulent or unauthorized request.
For additional information, contact the Transfer Agent.
Redemption
in-Kind
The
Funds do not intend to redeem shares in any form except cash. The Trust, on
behalf of the Funds, however, has filed a notice of election under Rule 18f-1 of
the 1940 Act that allows the Funds to redeem in-kind redemption requests of a
certain amount. Specifically, if the amount you are redeeming during any 90-day
period is in excess of the lesser of $250,000 or 1% of the net assets of a Fund,
valued at the beginning of such period, the Fund has the right to redeem your
shares by giving you the amount that exceeds $250,000 or 1% of the net assets of
the Funds in securities instead of cash. 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. For federal income tax
purposes, redemptions made in kind are taxed in the same manner to a redeeming
shareholder as redemptions made in cash. In addition, sales of in-kind
securities may generate taxable gains.
Federal
Income Tax Matters
This
section is not intended to be a full discussion of federal income tax laws and
the effect of such laws on you.
This
section is based on the Code, Treasury Regulations, judicial decisions, and
Internal Revenue Service (the “IRS”) guidance as of the date hereof, all of
which are subject to change, and possibly with retroactive effect. These changes
could impact a Fund’s investments or the tax consequences to you of investing in
a Fund. Some of the changes could affect the timing, amount and tax treatment of
Fund distributions made to shareholders. There may be other federal, state,
foreign or local tax considerations to a particular shareholder. No assurance
can be given that legislative, judicial, or administrative changes will not be
forthcoming which could affect the accuracy of any statements made in this
section. Please consult your tax adviser before investing.
Each
series of the Trust is treated as a separate entity for federal income tax
purposes. Each Fund, as a series of the Trust, intends to qualify and elect to
be treated as a regulated investment company (“RIC”) under Section 851(a) of the
Code, provided it complies with all applicable requirements regarding the source
of its income, diversification of its assets and timing and amount of its
distributions. Each Fund’s policy is to distribute to its shareholders all of
its investment company taxable income and any net capital gain for each fiscal
year in a manner that complies with the distribution requirements of the Code,
so that the Fund will not be subject to any federal income or excise taxes on
amounts distributed. However, the Funds can give no assurances that their
anticipated distributions will be sufficient to eliminate all Fund level taxes.
If a Fund does not qualify as a RIC, and is unable to obtain relief from such
failure, it would generally be taxed as a regular corporation and, in such case,
it would be more beneficial for a shareholder to directly own the Fund’s
underlying investments rather than indirectly owning them through the
Fund.
To
qualify as a RIC, each Fund must derive at least 90% of its gross income from
“good income,” which includes: (1) dividends, interest, certain payments with
respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies; (2) other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to the Fund’s business of investing in such stock, securities or foreign
currencies and (3) net income derived from interests in a qualified publicly
traded partnership. Some Fund investments may produce income that will not
qualify as good income for the purposes of this annual gross income requirement.
Although Code Section 851(b) authorizes the U.S. Treasury Department to issue
Treasury Regulations excluding “foreign currency gains” that are not directly
related to a RIC’s principal business of investing in stock or securities from
qualifying income, Treasury Regulations currently provide that gains from the
sale or other disposition of foreign currencies is qualifying income.
Nevertheless, there can be no absolute assurances that future Treasury
Regulations will not come to a different conclusion or that a Fund will satisfy
all requirements to be taxed as a RIC.
Furthermore,
to qualify as a RIC, each Fund must diversify its holdings such that at the end
of each fiscal quarter, (i) at least 50% of the value of the Fund’s assets
consists of cash, cash equivalents, U.S. government securities, securities of
other RICs, and other acceptable securities with such other securities limited,
in respect to any one issuer, to an amount not greater in value than 5% of the
value of the Fund’s total assets and to not more than 10% of the outstanding
voting securities of such issuer; and (ii) no more than 25% of the value of the
Fund’s assets may be invested in the securities of any one issuer (other than
U.S. government securities or securities of other RICs), or of any two or more
issuers that are controlled, as determined under applicable Code rules, by the
Fund and that are engaged in the same, similar or related trades or businesses,
or of certain qualified publicly traded partnerships.
Each
Fund will be subject to a 4% federal excise tax if it 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 its capital gain net income for the 12‑month period ending on
October 31 during such year (reduced by any net ordinary losses, but not
below the Fund’s net capital gain for that period) and (iii) any amounts
from the prior calendar year that were not distributed and on which the Fund
paid no federal income tax.
If
the Funds retains some or all of its income or gains, it will be subject to
federal income tax at regular corporate rates to the extent such income or gains
are not distributed. The Funds may elect to designate certain amounts retained
as undistributed net gain as deemed distributions in a notice to its
shareholders, who (i) will be required to include for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of the
undistributed amount so designated, (ii) will be entitled to credit their
proportionate shares of the income tax paid by the Funds on that undistributed
amount against their federal income tax liabilities and to claim refunds to the
extent such credits exceed their tax liabilities, and (iii) will be entitled to
increase their tax basis, for federal income tax purposes, in their Shares by an
amount equal to the excess of the amount undistributed net capital gain included
in their respective income over their respective tax credit.
Investment
company taxable income generally consists of interest, dividends, net short-term
capital gain and net gain from foreign currency transactions, less expenses. Net
capital gain is the excess of the net long-term gain from a Fund’s sales or
exchanges of capital assets over the net short-term loss from such sales or
exchanges, taking into account any capital loss carryforward of such Fund. The
Funds may elect to defer certain losses for tax purposes. Any future net capital
losses realized by a Fund in any taxable year may be carried forward
indefinitely, and such carryforwards will generally retain their character as
long-term or short-term capital losses.
At
August 31, 2023, the Funds had capital loss carryovers as follows:
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Long-Term |
Core
Fixed Income Fund |
$(20,029,413) |
$(23,728,675) |
Diversified
Equity Fund |
— |
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Capital
loss carryovers are carried forward indefinitely to offset future realized
capital gains. To the extent the Funds realize future net capital gains, taxable
distributions to shareholders will be offset by any unused capital loss
carryovers from the year ended August 31, 2023.
Distributions
of investment company taxable income are generally taxable to shareholders as
ordinary income. For a non-corporate shareholder, a portion of a Fund’s
distributions of investment company taxable income may consist of “qualified
dividend income” eligible for taxation at the reduced federal income tax rates
applicable to long-term capital gains to the extent that the amount distributed
is attributable to and reported as “qualified dividend income” and the
shareholder meets certain holding period requirements with respect to its Fund
shares. For a corporate shareholder, a portion of a Fund’s distributions of
investment company taxable income may qualify for the intercorporate
dividends‑received deduction to the extent such Fund receives dividends directly
or indirectly from a U.S. corporation, reports the amount distributed as
eligible for deduction and the shareholder meets certain holding period
requirements with respect to its shares. The aggregate amount so reported to
either non-corporate or corporate shareholders, as applicable, cannot, however,
exceed the aggregate amount of such dividends received by a Fund for its taxable
year.
Distributions
of net capital gain are taxable to shareholders as long-term capital gain
regardless of the length of time that a shareholder has owned Fund shares.
Distributions of net capital gain are not eligible for “qualified dividend
income” treatment or the dividends-received deduction referred to
above.
Distributions
of any investment company taxable income and net capital gain will be taxable as
described above whether received in additional Fund 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 and paid the following January
are taxable as if received on December 31. Distributions are generally
includable in alternative minimum taxable income in computing a non-corporate
shareholder’s liability for the alternative minimum tax.
Certain
individuals, trusts and estates may be subject to a net investment income
(“NII”) tax of 3.8% (in addition to the regular income tax). The NII tax is
imposed on the lesser of: (i) a taxpayer’s investment income, net of deductions
properly allocable to such income; or (ii) the amount by which such taxpayer’s
modified adjusted gross income exceeds certain thresholds ($250,000 for married
individuals filing jointly, $200,000 for unmarried individuals and $125,000 for
married individuals filing separately). The Funds’ distributions are includable
in a shareholder’s investment income for purposes of this NII tax. In addition,
any capital gain realized by a shareholder upon the sale, exchange or redemption
of Fund shares is includable in such shareholder’s investment income for
purposes of this NII tax.
A
sale, redemption or exchange of Fund shares, whether for cash or in-kind
proceeds, may result in recognition of a taxable capital gain or loss. Gain or
loss realized upon a sale, redemption or exchange of Fund shares will generally
be treated as a long-term capital gain or loss if the shares have been held for
more than one year, and, if held for one year or less, as a short-term capital
gain or loss. However, any loss realized upon a sale, redemption or exchange of
shares held for six months or less will be treated as a long‑term capital loss
to the extent of any distributions of net capital gain received or deemed to be
received with respect to such shares. In determining the holding period of such
shares for this purpose, any period during which the shareholder’s risk of loss
is offset by means of options, short sales, or similar transactions is not
counted. Any loss realized upon a sale, redemption or exchange of Fund shares
may be disallowed under certain wash sale rules to the extent shares of the same
Fund are purchased (through reinvestment of distributions or otherwise) within
30 days before or after the sale, redemption or exchange. If a
shareholder’s loss is disallowed under the wash sale rules, the basis of the new
shares will be increased to preserve the loss until a future sale, redemption or
exchange of the shares.
Under
the Foreign Account Tax Compliance Act (“FATCA”), a Fund may be required to
withhold a generally nonrefundable 30% tax on (i) distributions of investment
company taxable income, and (ii) distributions of net capital gain and the gross
proceeds of a sale, exchange, or redemption of Fund shares paid to: (A) certain
“foreign financial institutions” unless such foreign financial institution
agrees to verify, monitor, and report to the IRS the identity of certain of its
accountholders, among other items, (unless such entity is otherwise deemed
compliant under the terms of an intergovernmental agreement with the United
States and the entity’s country of residence), and (B) certain “non-financial
foreign entities” unless such entity certifies to the Funds that it does not
have any substantial U.S. owners or provides the name, address, and taxpayer
identification number of each substantial U.S. owner, among other items. In
December 2018, the IRS and Treasury Department released proposed Treasury
Regulations that would eliminate FATCA withholding on Fund distributions of net
capital gain and the gross proceeds from a sale, exchange or redemption of Fund
shares. Although taxpayers are entitled to rely on these proposed Treasury
Regulations until final Treasury Regulations are issued, these proposed Treasury
Regulations have not been finalized, may not be finalized in their proposed
form, and are potentially subject to change. This FATCA withholding tax could
also affect a Fund’s return on its investments in foreign securities or affect a
shareholder’s return if the shareholder holds its Fund shares through a foreign
intermediary. You are urged to consult your tax adviser
regarding
the application of this FATCA withholding tax to your investment in the Funds
and the potential certification, compliance, due diligence, reporting, and
withholding obligations to which you may become subject in order to avoid this
withholding tax.
Except
in the case of certain shareholders, if a shareholder does not furnish the Funds
with its correct Social Security Number or other applicable taxpayer
identification number and certain certifications or the Funds receive
notification from the IRS requiring backup withholding, the Funds are required
by federal law to withhold federal income tax from the shareholder’s
distributions and redemption proceeds at a rate set under Section 3406 of the
Code for U.S. residents.
Foreign
taxpayers (including nonresident aliens) are generally subject a tax withholding
at a flat rate of 30% on U.S.-source income that is not effectively connected
with the conduct of a trade or business in the U.S. This withholding rate may be
lower under the terms of a tax treaty or convention.
Distributions
Each
Fund will receive income primarily in the form of dividends and interest earned
on the Fund’s investments in securities. This income, less the expenses incurred
in their operations, is a Fund’s net investment income, substantially all of
which will be distributed to the Fund’s shareholders.
The
amount of a Fund’s distributions is dependent upon the amount of net investment
income received by the Fund from its portfolio holdings, is not guaranteed and
is subject to the discretion of the Board of Trustees. The Funds do not pay
“interest” or guarantee any fixed rate of return on an investment in their
shares.
Each
Fund may also realize capital gains or losses in connection with sales or other
dispositions of its portfolio securities. Any net gain that 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 (taking into account any capital loss carryforwards)
will comprise part of net investment 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, the Fund will generally 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 loss carryforward) will be
distributed and treated as long-term capital gains in the hands of the
shareholders regardless of the length of time that the shares may have been held
by the shareholders. Net capital losses of the Funds may be carried forward
indefinitely and will generally retain their character as short-term or
long-term capital losses. For more information concerning applicable capital
gains tax rates, please consult your tax adviser.
Any
distribution paid by a Fund reduces that 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. Shareholders have the right to change their elections
with respect to the reinvestment of distributions by notifying the Transfer
Agent in writing or calling; 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.
Cost
Basis Reporting
The
Funds are required to report to certain shareholders and the IRS the cost basis
of Fund shares acquired on or after January 1, 2012 (“covered shares”) when the
shareholder sells, redeems or exchanges such shares.
These
requirements do not apply to shares held through a tax-deferred arrangement,
such as a 401(k) plan or an IRA, or to shares held by tax-exempt organizations,
financial institutions, banks, corporations (other than S corporations), credit
unions and certain other entities and governmental bodies. Shares acquired
before January 1, 2012 (“non-covered shares”) are treated as if held in a
separate account from covered shares. The Funds are not required to determine or
report a shareholder’s cost basis in non-covered shares and are not responsible
for the accuracy or reliability of any information provided for non-covered
shares.
The
cost basis of a share is generally its purchase price adjusted for
distributions, returns of capital, and other corporate actions. Cost basis is
used to determine whether the sale, redemption or exchange of a share results in
a capital gain or loss. If you sell, redeem or exchange covered shares during
any year, then the Funds will report the gain or loss, cost basis, and holding
period of such covered shares to the IRS and you on Form 1099.
A
cost basis method is the method by which a Fund determines which specific
covered shares are deemed to be sold, exchanged, or redeemed when a shareholder
sells, redeems or exchanges less than its entire holding of Fund shares and has
made multiple purchases of Fund shares on different dates at differing net asset
values. If a shareholder does not affirmatively elect a cost basis method, the
Funds will use the average cost method, which averages the basis of all covered
shares in an account regardless of holding period, and covered shares sold,
redeemed or exchanged are deemed to be those with the longest holding period
first. Each shareholder may elect in writing (and not over the telephone) any
alternate IRS-approved cost basis method to calculate the cost basis in its
covered shares. The default cost basis method applied by the Funds or the
alternate method elected by a shareholder may not be changed after the
settlement date of a sale, redemption or exchange of Fund shares.
If
you hold Fund shares through a broker (or another nominee), please contact that
broker or nominee with respect to the reporting of cost basis and available
elections for your account.
You
are encouraged to consult your tax adviser regarding the application of these
cost basis reporting rules and, in particular, which cost basis calculation
method you should elect.
Financial
Statements
The
audited financial statements, accompanying notes and report of the independent
registered public accounting firm appearing in the Funds’ 2023 Annual
Report to Shareholders,
are incorporated by reference into this SAI.
APPENDIX
A -- PROXY VOTING POLICIES
Envestnet
Asset Management, Inc.
Client
Proxy Voting Policies and Procedures
Envestnet
Asset Management, Inc. (“Envestnet”) generally delegates proxy voting to the
asset managers to whom it allocates client assets. Envestnet shall maintain
copies of the asset managers’ proxy voting procedures on file for so long as
Envestnet has clients whose assets are being managed by such asset managers. In
the unlikely event that Envestnet becomes responsible for voting proxies
relating to securities held by its clients, Envestnet has developed the
following principles, policies and procedures to ensure that such proxies are
voted in the best interest of Envestnet’s clients. These principles, policies
and procedures are relatively general in nature to allow Envestnet the
flexibility and discretion to use its business judgment in making appropriate
decisions with respect to client proxies.
Summary
Envestnet
acknowledges and agrees that it has a fiduciary obligation to its clients to
ensure that any proxies for which it has voting authority are voted solely in
the best interests and for the exclusive benefit of its clients. The policies
detailed below are intended to guide Envestnet and its personnel in ensuring
that proxies are voted in such manner without limiting the Envestnet or its
personnel in specific situations to vote in a pre-determined manner. These
policies are designed to assist Envestnet in identifying and resolving any
conflicts of interest it may have in voting client proxies.
Voting
Principles, Policies and Procedures
Envestnet
will abide by the following principles, policies and procedures in voting client
proxies:
1.Envestnet
will at all times ensure that client proxies are voted with attention to the
best interests and for the sole benefit of its clients.
2.Envestnet
will use its reasonable efforts to ensure that each decision regarding how to
vote a client proxy is based on reasonably complete information with respect to
the issue to which the proxy relates such that Envestnet can make an informed
decision.
3.Envestnet
will determine a client’s best interest based on the maximization of investor
value which is defined as an increase in long-term value through capital
appreciation and dividends. Envestnet expects that it will, in most instances,
vote in accordance with management’s recommendations with respect to specific
proxy issues; however, Envestnet will not vote in accordance with management’s
recommendations in instances where Envestnet believes in good faith that
management’s interests do not coincide with investors’ best interests.
4.Envestnet
will ensure that each and every proxy is voted unless the responsible Envestnet
personnel affirmatively determine to abstain from voting such proxy because such
abstention is in the best interest of the client.
5.All
proxy voting will be executed by Envestnet’s chief executive based on a
recommendation from the responsible portfolio manager for the securities to
which the proxy relates. If the portfolio manager determines that there is an
actual conflict of interest between the client and Envestnet with respect to a
specific proxy issue, Envestnet’s chief executive will, along with Envestnet’s
other executive officers, determine whether Envestnet may vote the proxy itself
or will contact the relevant client to allow the client to make the final
decision with respect to the proxy issue in question.
6.Envestnet
will maintain a client proxy file to retain records relating to the proxies
voted by Envestnet on behalf of its clients. This file will contain, at a
minimum, the proxy materials distributed by the issuer of the security to which
the proxy relates and a record of how Envestnet voted that proxy. If Envestnet
conducts additional research into the proxy issue, it will maintain copies of
such research in the file as well.
How
to Obtain Information on Your Proxy
If
you would like information on how Envestnet has actually voted any proxies with
respect to securities held in your portfolio for which it exercised voting
authority, please contact the following individual at Envestnet:
Debra
DeVoe
Chief
Compliance Officer
One
North Wacker Drive, Suite 1925
Chicago,
Illinois 60606
(312)
827-7950