ck0000811030-20231231
STATEMENT
OF ADDITIONAL INFORMATION
MUZINICH
FUNDS
April
30, 2024
Investment Advisor:
Account
Information and Shareholder Services:
Muzinich
Funds
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
WI 53201-0701
1-855-MUZINICH
or 1-855-689-4642
MUZINICH
CREDIT OPPORTUNITIES FUND
Institutional
Shares (Ticker: MZCIX)
Supra
Institutional Shares (Ticker: MZCSX)
MUZINICH
FLEXIBLE U.S. HIGH YIELD INCOME FUND
(formerly
Muzinich U.S. High Yield Credit Fund)
Institutional
Shares (Ticker: MZHIX)
Supra
Institutional Shares (Ticker: MZHSX)
MUZINICH
LOW DURATION FUND
Supra
Institutional Shares (Ticker: MZLSX)
This
Statement of Additional Information (the “SAI”) provides additional information
to the Prospectus dated April 30, 2024, as may be amended from time to
time, of the Muzinich Credit Opportunities Fund, Muzinich Flexible U.S. High
Yield Income Fund (formerly Muzinich U.S. High Yield Credit Fund), and Muzinich
Low Duration Fund (each, a “Fund,” and collectively, the “Funds”), each a series
of Professionally Managed Portfolios, a registered, open-end management
investment company (the “Trust”). This SAI is not a prospectus and should only
be read in conjunction with the Prospectus. You may obtain the Prospectus
without charge by contacting U.S. Bank Global Fund Services at the address or
telephone number listed above or by visiting the Funds’ website at
www.MuzinichUSFunds.com.
The
Funds’ most recent Annual Report to shareholders is available, without charge,
upon request by calling the number listed above. The financial statements,
accompanying notes and report of independent registered public accounting firm
appearing in the Annual Report are incorporated into this SAI by reference to
the Funds’ Annual
Report
dated December 31, 2023,
as filed with the U.S. Securities and Exchange Commission (“SEC”). The Muzinich
Credit Opportunities Fund commenced operations on January 3, 2013. The Muzinich
Flexible U.S. High Yield Income Fund commenced operations on March 31, 2016. The
Muzinich Low Duration Fund commenced operations on June 30, 2016.
TABLE
OF CONTENTS
GLOSSARY
As
used in this SAI, the following terms have the meanings listed:
“Accountant”
means U.S. Bank Global Fund Services.
“Administrator”
means U.S. Bank Global Fund Services.
“Advisor”
or “Muzinich” means Muzinich & Co., Inc., the Funds’ investment advisor.
“Board”
means the Board of Trustees of the Trust.
“CFTC”
means Commodities Future Trading Commission.
“Code”
means the Internal Revenue Code of 1986, as amended the rules thereunder, IRS
interpretations and any private letter rulings or similar authority upon which
the Funds may rely.
“Custodian”
means U.S. Bank National Association.
“Distributor”
means Quasar Distributors, LLC.
“Fund”
means each of the: Muzinich Flexible U.S. High Yield Income Fund, Muzinich Low
Duration Fund, and Muzinich Credit Opportunities Fund (together, the
“Funds”).
“Fund
Services” means U.S. Bank Global Fund Services.
“Independent
Trustee” means a Trustee that is not an interested person of the Trust as that
term is defined in Section 2(a)(19) of the 1940 Act.
“IRS”
means U.S. Internal Revenue Service.
“Moody’s”
means Moody’s Investors Service.
“NAV”
means net asset value per share.
“NRSRO”
means a nationally recognized statistical rating organization.
“SAI”
means Statement of Additional Information.
“SEC”
means the U.S. Securities and Exchange Commission.
“S&P”
means S&P Global Ratings, a division of the McGraw Hill Companies.
“Transfer
Agent” means U.S. Bancorp Fund Services, LLC doing business as U.S. Bank Global
Fund Services.
“Trust”
means Professionally Managed Portfolios.
“U.S.”
means United States.
“U.S.
Government Securities” means obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
“1933
Act” means the Securities Act of 1933, as amended, and including rules and
regulations as promulgated thereunder.
“1934
Act” means the Securities Exchange Act of 1934, as amended, and including rules
and resolutions as promulgated thereunder.
“1940
Act” means the Investment Company Act of 1940, as amended, and including rules
and regulations SEC interpretations and any exemptive order applicable to the
Funds or interpretive relief promulgated thereunder.
THE
TRUST
The
Trust is a Massachusetts business trust organized on
February 24, 1987, and is registered with the SEC as an open-end
management investment company. Prior to May 1991, the Trust was known as
the Avondale Investment Trust. The Trust’s Agreement and Declaration of Trust
(the “Declaration of Trust”) permits the Trust’s Board of Trustees (the “Board”)
to issue an unlimited number of full and fractional shares of beneficial
interest, without par value, which may be issued in any number of series. The
Trust consists of various series that represent separate investment portfolios.
The Board may from time to time issue other series, the assets and liabilities
of which will be separate and distinct from any other series. This SAI relates
only to the Funds.
The
shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust.
The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Funds’ assets for any shareholder held personally liable for
obligations of the Funds or the Trust. The Declaration of Trust provides that
the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Funds or the Trust and satisfy any
judgment thereon. All such rights are limited to the assets of the Funds. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. However, the activities of
the Trust as an investment company would not likely give rise to liabilities in
excess of the Trust’s total assets. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance exists and a Fund itself is unable to meet
its obligations.
Fund
History
Each
Fund is a diversified series of the Trust. This means that for 75% of its total
assets, each Fund may not invest more than 5% of its total assets in securities
of a single issuer or hold more than 10% of the outstanding voting shares of a
single issuer. Under applicable federal securities laws, the diversification of
a mutual fund’s holdings is measured at the time a 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. Accordingly, a fund would be subject to the risk
that its performance may be hurt disproportionately by the poor performance of
relatively few securities despite the fund qualifying as a diversified fund
under applicable federal securities laws.
The
Funds do not hold themselves out as related to any other series within the Trust
for purposes of investment and investor services, nor do they share the same
investment advisor with any other series of the Trust. The Funds’ Prospectus and
this SAI are a part of the Trust’s Registration Statement filed with the SEC.
Copies of the Trust’s complete Registration Statement may be obtained from the
SEC upon payment of the prescribed fee or may be accessed free of charge at the
SEC’s website at www.sec.gov.
The
Muzinich Credit Opportunities Fund (the “Credit Opportunities Fund”) commenced
operations on January 3, 2013. The Muzinich Flexible U.S. High Yield Income
Fund (formerly Muzinich U.S. High Yield Credit Fund) (the “U.S. High Yield
Fund”) commenced operations on March 31, 2016. The Muzinich Low Duration
Fund (the “Low Duration Fund”) commenced operations on June 30, 2016.
INVESTMENT
POLICIES AND RISKS
The
following information supplements the discussion of each Fund’s investment
objective and policies as set forth in the Prospectuses. The Funds may invest in
the following types of investments, which are subject to certain risks, as
discussed below.
Fixed
Income Securities
High
Yield and Other Securities
Each
Fund will invest in debt securities, including bonds and debentures (which are
long-term) and notes (which may be short- or long-term). Each Fund will invest
in securities that are rated below investment grade or non-rated. Investments in
high yield securities (i.e., less than investment grade), while providing
greater income and opportunity for gain than investments in higher-rated
securities, entail relatively greater risk of loss of income or principal.
Lower-grade obligations are commonly referred to as “junk bonds.” Market prices
of high-yield, lower-grade obligations may fluctuate more than market prices of
higher-rated securities. Lower grade, fixed income securities tend to reflect
short-term corporate and market developments to a greater extent than
higher-rated obligations which, assuming no change in their fundamental quality,
react primarily to fluctuations in the general level of interest
rates.
Each
Fund may purchase unrated securities. Unrated securities may be less liquid than
comparable rated securities and involve the risk that the portfolio manager may
not accurately evaluate the securities comparative credit rating.
The
high yield market at times is subject to substantial volatility. An economic
downturn or increase in interest rates may have a more significant effect on
high yield securities and their markets, as well as on the ability of
securities’ issuers to repay principal and interest. Issuers of high yield
securities may be of low creditworthiness and the high yield securities may be
subordinated to the claims of senior lenders. During periods of economic
downturn or rising interest rates the issuers of high yield securities may have
greater potential for insolvency and a higher incidence of high yield bond
defaults may be experienced.
The
prices of high yield securities have been found to be less sensitive to interest
rate changes than higher-rated investments but are more sensitive to adverse
economic changes or individual corporate developments. During an economic
downturn or substantial period of rising interest rates, highly leveraged
issuers may experience financial stress which would adversely affect their
ability to service their principal and interest payment obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
high yield security owned by a Fund defaults, the Fund may incur additional
expenses in seeking recovery. Periods of economic uncertainty and changes can be
expected to result in increased volatility of the market prices of high yield
securities and a Fund’s NAV per share. Yields on high yield securities will
fluctuate over time. Furthermore, in the case of high yield securities
structured as zero coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes and therefore tend to be
more volatile than the market prices of securities which pay interest
periodically and in cash.
Certain
securities held by each Fund including high yield securities, may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, a Fund would have to replace the security with a
lower yielding security, resulting in a decreased return for the investor.
Conversely,
a high yield security’s value will decrease in a rising interest rate market, as
will a Fund’s net assets.
The
secondary market for high yield securities may at times become less liquid or
respond to adverse publicity or investor perceptions making it more difficult
for each Fund to accurately value high yield securities or dispose of them. To
the extent a Fund owns or may acquire illiquid or restricted high yield
securities, these securities may involve special registration responsibilities,
liabilities and costs, liquidity difficulties, and judgment will play a greater
role in valuation because there is less reliable and objective data
available.
Special
tax considerations are associated with investing in high yield bonds structured
as zero coupon or pay-in-kind securities. A Fund will report the interest on
these securities as income even though it receives no cash interest until the
security’s maturity or payment date. Further, each Fund must distribute
substantially all of its income to its shareholders to qualify for pass-through
treatment under the tax law. Accordingly, a Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash or may
have to borrow to satisfy distribution requirements.
Credit
ratings evaluate the safety of principal and interest payments, not the market
value risk of high yield securities. Since credit rating agencies may fail to
timely change the credit ratings to reflect subsequent events, the Advisor
monitors the issuers of high yield securities in the portfolio to determine if
the issuers will have sufficient cash flow and profits to meet required
principal and interest payments, and to attempt to assure the securities’
liquidity so the Fund can meet redemption requests. To the extent that a Fund
invests in high yield securities, the achievement of its investment objective
may be more dependent on the Advisor’s credit analysis than would be the case
for higher quality bonds. The Funds may retain a portfolio security whose rating
has been changed.
Syndicated
Loans and Assignments
Each
Fund may purchase participations in commercial loans. Such indebtedness may be
secured or unsecured. Syndicated loans typically represent direct participation
in a loan to a corporate borrower, and generally are offered by banks or other
financial institutions or lending syndicates. A Fund may participate in such
syndications, or can buy part of a loan, becoming a part lender. When purchasing
syndicated loans, a Fund assumes the credit risk associated with the corporate
borrower and may assume the credit risk associated with an interposed bank or
other financial intermediary. The participation interests in which each Fund
intends to invest may not be rated by any nationally recognized rating service.
Each Fund may invest in debtor-in-possession financings (commonly known as “DIP
financings”). DIP financings are arranged when an entity seeks the protections
of the bankruptcy court under Chapter 11 of the U.S. Bankruptcy Code. These
financings allow the entity to continue its business operations while
reorganizing under Chapter 11. Such financings constitute senior liens on
unencumbered security (i.e., security not subject to other creditors’ claims).
There is a risk that the entity will not emerge from Chapter 11 and be
forced to liquidate its assets under Chapter 7 of the U.S. Bankruptcy Code.
In the event of liquidation, a Fund’s only recourse will be against the property
securing the DIP financing. A loan is often administered by an agent bank acting
as agent for all holders. The agent bank administers the terms of the loan, as
specified in the loan agreement. In addition, the agent bank is normally
responsible for the collection of principal and interest payments from the
corporate borrower and the apportionment of these payments to the credit of all
institutions which are parties to the loan agreement. Unless, under the terms of
the loan or other indebtedness, a Fund has direct recourse against the corporate
borrower, the Fund may have to rely on the agent bank or other financial
intermediary to apply appropriate credit remedies against a corporate borrower.
A financial institution’s employment as agent bank might be terminated in the
event that it fails to observe a requisite standard of care or becomes
insolvent. A
successor
agent bank would generally be appointed to replace the terminated agent bank,
and assets held by the agent bank under the loan agreement should remain
available to holders of such indebtedness. However, if assets held by the agent
bank for the benefit of a Fund were determined to be subject to the claims of
the agent bank’s general creditors, a Fund might incur certain costs and delays
in realizing payment on a syndicated loan and could suffer a loss of principal
and/or interest. In situations involving other interposed financial institutions
(e.g., an insurance company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the corporate borrower for payment of principal and
interest. If a Fund does not receive scheduled interest or principal payments on
such indebtedness, the Fund’s share price and yield could be adversely affected.
Loans that are fully secured offer the Funds more protection than an unsecured
loan in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidation of collateral from a secured loan
would satisfy the corporate borrower’s obligation, or that the collateral can be
liquidated. A Fund may invest in syndicated loans with credit quality comparable
to that of issuers of its securities investments. Indebtedness of companies
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Some companies may never pay off their indebtedness, or may
pay only a small fraction of the amount owed. Consequently, when investing in
indebtedness of companies with poor credit, the Funds bear a substantial risk of
losing the entire amount invested.
Each
Fund is diversified and limits the amount of its total assets that it will
invest in any one issuer and each Fund limits the amount of its total assets
that it will invest in issuers within the same industry (see “Investment
Restrictions”). For purposes of these limits, a Fund generally will treat the
corporate borrower as the “issuer” of indebtedness held by the Fund. In the case
of syndicated loans where a bank or other lending institution serves as a
financial intermediary between a Fund and the corporate borrower, if the
participation does not shift to the Fund the direct debtor-creditor relationship
with the corporate borrower, SEC interpretations require a Fund to treat both
the lending bank or other lending institution and the corporate borrower as
“issuers.” Treating a financial intermediary as an issuer of indebtedness may
restrict the Funds’ ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries. Loans and other types of direct indebtedness may not be readily
marketable and may be subject to restrictions on resale. In some cases,
negotiations involved in disposing of indebtedness may require weeks to
complete. Consequently, some indebtedness may be difficult or impossible to
dispose of readily at what the Advisor believes to be a fair price.
Additionally, even where there is a market for certain loans the settlement
period may be extended, up to several weeks or longer. That means a Fund may
have a limited ability to receive payment promptly on the sale of some of the
loans in its portfolio. In addition, valuation of illiquid indebtedness involves
a greater degree of judgment in determining a Fund’s net asset value than if
that value were based on available market quotations, and could result in
significant variations in the Fund’s daily share price. At the same time, some
loan interests are traded among certain financial institutions and accordingly
may be deemed liquid. As the market for different types of indebtedness
develops, the liquidity of these instruments is expected to improve. In
addition, each Fund currently intends to treat indebtedness for which there is
no readily available market as illiquid for purposes of a Fund’s limitation on
illiquid investments. Investments in syndicated loans are considered to be debt
obligations for purposes of the Trust’s investment restriction relating to the
lending of funds or assets by a Fund.
Investments
in loans through a direct assignment of the financial institution’s interests
with respect to the loan may involve additional risks to the Funds. For example,
if a loan is foreclosed, a Fund could become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, a Fund could be held liable as co-lender. It is unclear
whether loans and other forms of direct indebtedness offer
securities
law protections against fraud and misrepresentation. In the absence of
definitive regulatory guidance, each Fund relies upon the Advisor’s research in
an attempt to avoid situations where fraud or misrepresentation could adversely
affect the Fund.
U.S.
Government Securities and Mortgage-Backed Securities
The
Funds may invest in U.S. Government Securities. U.S. Government Securities
include securities issued by the U.S. Treasury and by U.S. Government agencies
and instrumentalities. U.S. Government Securities may be supported by the
full faith and credit of the United States; by the right of the issuer to borrow
from the U.S. Treasury; by the discretionary authority of the U.S. Treasury
to lend to the issuer; or solely by the creditworthiness of the issuer. Holders
of U.S. Government Securities not backed by the full faith and credit of the
United States must look principally to the agency or instrumentality issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. No assurance can be given that the U.S. Government would provide
support if it were not obligated to do so by law. Neither the U.S. Government
nor any of its agencies or instrumentalities guarantees the market value of the
securities they issue.
Among
the U.S. Government securities that a Fund may purchase are “mortgage-backed
securities” or “MBS” of the Government National Mortgage Association (“Ginnie
Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the
Federal National Mortgage Association (“Fannie Mae”). These MBS include
“pass-through” securities and “participation certificates;” both are similar,
representing pools of mortgages that are assembled, with interests sold in the
pool; the assembly is made by an “issuer” which assembles the mortgages in the
pool and passes through payments of principal and interest for a fee payable to
it. Payments of principal and interest by individual mortgagors are “passed
through” to the holders of the interest in the pool. Thus, the monthly or other
regular payments on pass-through securities and participation certificates
include payments of principal (including prepayments on mortgages in the pool)
rather than only interest payments. Timely payment of principal and interest on
Ginnie Mae pass-throughs is guaranteed by the full faith and credit of the
United States, but their yield is not guaranteed. Freddie Mac and Fannie Mae are
both instrumentalities of the U.S. Government, but their obligations are not
backed by the full faith and credit of the United States. It is possible that
the availability and the marketability (i.e., liquidity) of these securities
discussed in this paragraph could be adversely affected by actions of the U.S.
Government to tighten the availability of its credit or to affect adversely the
tax effects of owning them.
Events
Regarding Fannie Mae and Freddie Mac Securities. On September 6, 2008, the
Federal Housing Finance Agency (“FHFA”) placed Fannie Mae and Freddie Mac into
conservatorship. As the conservator, FHFA succeeded to all rights, titles,
powers and privileges of Fannie Mae and Freddie Mac and of any stockholder,
officer or director of Fannie Mae and Freddie Mac with respect to Fannie Mae and
Freddie Mac and the assets of Fannie Mae and Freddie Mac.
Fannie
Mae and Freddie Mac are continuing to operate as going concerns while in
conservatorship and each remains liable for all of its obligations, including
its guaranty obligations, associated with its mortgage-backed securities. The
FHFA has indicated that the conservatorship of each enterprise will end when the
director of FHFA determines that FHFA’s plan to restore the enterprise to a safe
and solvent condition has been completed.
Under
the Federal Housing Finance Regulatory Reform Act of 2008 (the “Reform
Act”), which was included as part of the Housing and Economic Recovery Act of
2008, FHFA, as conservator or receiver, has the power to repudiate any contract
entered into by Fannie Mae or Freddie Mac prior to FHFA’s appointment as
conservator or receiver, as applicable, if FHFA determines, in its sole
discretion, that
performance
of the contract is burdensome and that repudiation of the contract promotes the
orderly administration of Fannie Mae’s or Freddie Mac’s affairs.
The
Reform Act requires FHFA to exercise its right to repudiate any contract within
a reasonable period of time after its appointment as conservator or receiver.
FHFA, in its capacity as conservator, has indicated that it has no intention to
repudiate the guaranty obligations of Fannie Mae or Freddie Mac because FHFA
views repudiation as incompatible with the goals of the conservatorship.
However, in the event that FHFA, as conservator or if it is later appointed as
receiver for Fannie Mae or Freddie Mac, were to repudiate any such guaranty
obligation, the conservatorship or receivership estate, as applicable, would be
liable for actual direct compensatory damages in accordance with the provisions
of the Reform Act. Any such liability could be satisfied only to the extent of
Fannie Mae’s or Freddie Mac’s assets available therefor. In the event of
repudiation, the payments of interest to holders of Fannie Mae or Freddie Mac
mortgage-backed securities would be reduced if payments on the mortgage loans
represented in the mortgage loan groups related to such mortgage-backed
securities are not made by the borrowers or advanced by the servicer. Any actual
direct compensatory damages for repudiating these guaranty obligations may not
be sufficient to offset any shortfalls experienced by such mortgage-backed
security holders. Further, in its capacity as conservator or receiver, FHFA has
the right to transfer or sell any asset or liability of Fannie Mae or Freddie
Mac without any approval, assignment or consent. If FHFA, as conservator or
receiver, were to transfer any such guaranty obligation to another party,
holders of Fannie Mae or Freddie Mac mortgage-backed securities would have to
rely on that party for satisfaction of the guaranty obligation and would be
exposed to the credit risk of that party.
In
addition, certain rights provided to holders of mortgage-backed securities
issued by Fannie Mae and Freddie Mac under the operative documents related to
such securities may not be enforced against FHFA, or enforcement of such rights
may be delayed, during the conservatorship or any future receivership. The
operative documents for Fannie Mae and Freddie Mac mortgage-backed securities
may provide (or with respect to securities issued prior to the date of the
appointment of the conservator may have provided) that upon the occurrence of an
event of default on the part of Fannie Mae or Freddie Mac, in its capacity as
guarantor, which includes the appointment of a conservator or receiver, holders
of such mortgage-backed securities have the right to replace Fannie Mae or
Freddie Mac as trustee if the requisite percentage of mortgage-backed securities
holders consent. The Reform Act prevents mortgage-backed security holders from
enforcing such rights if the event of default arises solely because a
conservator or receiver has been appointed. The Reform Act also provides that no
person may exercise any right or power to terminate, accelerate or declare an
event of default under certain contracts to which Fannie Mae or Freddie Mac is a
party, or obtain possession of or exercise control over any property of Fannie
Mae or Freddie Mac, or affect any contractual rights of Fannie Mae or Freddie
Mac, without the approval of FHFA, as conservator or receiver, for a period of
45 or 90 days following the appointment of FHFA as conservator or receiver,
respectively.
In
October 2012, FHFA released a white paper, Building a New Infrastructure for the
Secondary Mortgage Market, proposing a framework for a common securitization
platform and an improved contractual and disclosure framework and requested
public input. The white paper sought to identify the core components of mortgage
securitization that will be needed in the housing finance system in the future.
Along with the white paper, FHFA joined Fannie Mae and Freddie Mac in outreach
to a full range of stakeholders, including a variety of industry participants -
small and large companies, trade groups, advocacy organizations, vendors,
originators, servicers, investors, and mortgage issuers, among others. FHFA has
worked with Fannie Mae and Freddie Mac to use the feedback gathered on the
securitization platform prototype, to align key contractual features and
practices, and address additional protections investors require.
FHFA
has stated that long-term, continued operation in a government-run
conservatorship is not sustainable for Fannie Mae and Freddie Mac because each
company lacks capital, cannot rebuild its capital base, and is operating on a
remaining, finite line of capital from taxpayers. However, FHFA has stated that
it will continue to carry out its responsibilities as conservator until Congress
determines the future of Fannie Mae and Freddie Mac.
Investment
Characteristics of MBS
The
investment characteristics of adjustable and fixed rate MBS differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule, and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, if a
Fund purchases MBS at a premium, a faster than expected prepayment rate will
reduce both the market value and the yield to maturity from those which were
anticipated. A prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and market value. Conversely, if
a Fund purchases mortgage-backed securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity and market value.
Prepayments
Prepayments
on a pool of mortgage loans are influenced by a variety of factors, including
economic conditions, changes in mortgagors’ housing needs, job transfer,
unemployment, mortgagors’ net equity in the mortgage properties and servicing
decisions. The timing and level of prepayments cannot be predicted. Generally,
however, prepayments on adjustable rate mortgage loans and fixed rate mortgage
loans will increase during a period of falling mortgage interest rates and
decrease during a period of rising mortgage interest rates. Accordingly, the
amounts of prepayments available for reinvestment by a Fund are likely to be
greater during a period of declining mortgage interest rates. If general
interest rates also decline, such prepayments are likely to be reinvested at
lower interest rates than a Fund was earning on the mortgage-backed securities
that were prepaid.
Adjustable
Rate Mortgage Loans (“ARMs”)
Certain
mortgage loans underlying the MBS in which a Fund may invest will be ARMs. ARMs
eligible for inclusion in a mortgage pool will generally provide for a fixed
initial mortgage interest rate for a specified period of time. Thereafter, the
interest rates (the “Mortgage Interest Rates”) may be subject to periodic
adjustment based on changes in the applicable index rate (the “Index Rate”). The
adjusted rate would be equal to the Index Rate plus a gross margin, which is a
fixed percentage spread over the Index Rate established for each ARM at the time
of its origination.
There
are two main categories of indexes which provide the basis for rate adjustments
on ARMs: those based on U.S. Treasury securities and those derived from a
calculated measure such as a cost of funds index or a moving average of mortgage
rates. Commonly utilized indexes include the one-year, three-year and five-year
constant maturity Treasury rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one year London Interbank
Offered Rate, the prime rate of a specific bank, or commercial paper rates. Some
indexes, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District
Federal Home Loan Bank Cost of Funds index, tend to lag behind changes in market
rate levels and tend to be somewhat less volatile. The degree of volatility in
the market value of a Fund’s portfolio and therefore in the NAV per share of a
Fund will be a function of the length of the interest rate reset periods and the
degree of volatility in the applicable indexes.
Adjustable
interest rates can cause payment increases that some mortgagors may find
difficult to make. However, certain ARMs may provide that the Mortgage Interest
Rate may not be adjusted to a rate above an applicable lifetime maximum rate or
below an applicable lifetime minimum rate for such ARMs. Certain ARMs may also
be subject to limitations on the maximum amount by which the Mortgage Interest
Rate may adjust for any single adjustment period. Other ARMs (“Negatively
Amortizing ARMs”) may provide instead or as well for limitations on changes in
the monthly payment on such ARMs. Limitations on monthly payments can result in
monthly payments which are greater or less than the amount necessary to amortize
a Negatively Amortizing ARM by its maturity at the Mortgage Interest Rate in
effect in any particular month. In the event that a monthly payment is not
sufficient to pay the interest accruing on a Negatively Amortizing ARM, any such
excess interest is added to the principal balance of the loan, causing negative
amortization, and is repaid through future monthly payments. It may take
borrowers under Negatively Amortizing ARMs longer periods of time to achieve
equity and may increase the likelihood of default by such borrowers. In the
event that a monthly payment exceeds the sum of the interest accrued at the
applicable Mortgage Interest Rate and the principal payment which would have
been necessary to amortize the outstanding principal balance over the remaining
term of the loan, the excess (or “accelerated amortization”) further reduces the
principal balance of the ARM. Negatively Amortizing ARMs do not provide for the
extension of their original maturity to accommodate changes in their Mortgage
Interest Rate. As a result, unless there is a periodic recalculation of the
payment amount (which there generally is), the final payment may be
substantially larger than the other payments. These limitations on periodic
increases in interest rates and on changes in monthly payments protect borrowers
from unlimited interest rate and payment increases.
The
mortgage loans underlying other MBS in which a Fund may invest will be fixed
rate mortgage loans. Generally, fixed rate mortgage loans eligible for inclusion
in a mortgage pool will bear simple interest at fixed annual rates and have
original terms to maturity ranging from five to 40 years. Fixed rate mortgage
loans generally provide for monthly payments of principal and interest in
substantially equal installments for the contractual term of the mortgage note
in sufficient amounts to fully amortize principal by maturity although certain
fixed rate mortgage loans provide for a large final “balloon” payment upon
maturity.
Collateralized
Mortgage Obligations
The
Funds may invest in collateralized mortgage obligations (“CMOs”) that are
collateralized by mortgage-backed securities issued by GNMA, FHLMC or FNMA
(“Mortgage Assets”). CMOs are multiple-class debt obligations. Payments of
principal and interest on the Mortgage Assets are passed through to the holders
of the CMOs as they are received, although certain classes (often referred to as
“tranches”) of CMOs have priority over other classes with respect to the receipt
of mortgage prepayments. Each tranche is issued at a specific or floating coupon
rate and has a stated maturity or final distribution date. Interest is paid or
accrues in all tranches on a monthly, quarterly or semi-annual basis. Payments
of principal and interest on Mortgage Assets are commonly applied to the
tranches in the order of their respective maturities or final distribution
dates, so that generally, no payment of principal will be made on any tranche
until all other tranches with earlier stated maturity or distribution dates have
been paid in full.
CMOs
are issued in multiple classes. Each class of CMOs is issued at a specific
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Principal prepayments on the Mortgage Assets underlying
the CMOs may cause some or all of the class of CMOs to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrued on all classes of CMOs on a monthly basis.
The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of CMOs in various ways. In certain structures (known as
“sequential pay” CMOs), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs
in the order of their respective final distribution dates. Thus, no payment of
principal will be made on any class of sequential pay CMOs until all other
classes having an earlier final distribution date have been paid in
full.
Additional
structures of CMOs include, among others, “parallel pay” CMOs. Parallel pay CMOs
are those which are structured to apply principal payments and prepayments of
the Mortgage Assets to two or more classes concurrently on a proportionate or
disproportionate basis. These simultaneous payments are taken into account in
calculating the final distribution date of each class.
Collateralized
Debt Obligations
The
Funds also may invest in collateralized debt obligations (“CDOs”), which include
collateralized bond obligations (“CBOs”), collateralized loan obligations
(“CLOs”) and other similarly structured securities. A CBO is a trust which is
backed by a diversified pool of high risk, below investment grade fixed-income
securities. A CLO is a trust typically collateralized by a pool of loans, which
may include, among others, domestic and foreign senior secured loans, senior
unsecured loans, and subordinate corporate loans, including loans that may be
rated below investment grade or equivalent unrated loans.
For
both CBOs and CLOs, the cash flows from the trust are split into two or more
portions, called tranches, varying in risk and yield. The riskiest portion is
the “equity” tranche which bears the bulk of defaults from the bonds or loans in
the trust and serves to protect the other, more senior tranches from default in
all but the most severe circumstances. Since it is partially protected from
defaults, a senior tranche from a CBO trust or CLO trust typically has higher
ratings and lower yields than its underlying securities, and can be rated
investment grade. Despite the protection from the equity tranche, CBO or CLO
tranches can experience substantial losses due to actual defaults, increased
sensitivity to defaults due to collateral default and disappearance of
protecting tranches, market anticipation of defaults, and aversion to CBO or CLO
securities as a class.
The
risks of an investment in a CDO depends largely on the type of the underlying
collateral and the class of the CDO in which a Fund invests. Normally, CBOs,
CLOs and other CDOs are privately offered and sold, and thus, are not registered
under the securities laws. As a result, investments in CDOs may be characterized
by a Fund as illiquid securities; however, an active dealer market may exist for
CDOs allowing a CDO to qualify as a Rule 144A security. In addition to the
normal risks associated with fixed-income securities discussed elsewhere in the
SAI and the Prospectus (e.g., interest rate risk and default risk), CDOs carry
additional risks including, but not limited to: (1) the possibility that
distributions from collateral securities will not be adequate to make interest
or other payments; (2) the quality of the collateral may decline in value or
default; (3) the Funds may invest in CDOs that are subordinate to other classes;
and (4) the complex structure of the security may not be fully understood at the
time of investment and may produce disputes with the issuer or unexpected
investment results.
Asset-Backed
Securities
The
Funds may invest in asset-backed securities, including asset-backed commercial
paper. Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that are not mortgage
loans or interests in mortgage loans. Asset-backed securities represent
fractional interests in, or are secured by and payable from, pools of assets
such as motor vehicle installment sales contracts, installment loan contracts,
leases of various types of real and personal property and receivables from
revolving credit (for example, credit card) agreements. Assets are securitized
through the use of trusts and special purpose corporations that issue securities
that are often backed by a pool of assets representing the obligations of a
number of different parties. Repayments relating to the assets underlying the
asset-backed securities depend largely on the cash flows generated by such
assets. The credit quality of most asset-backed securities depends primarily on
the credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or any
other affiliated entities, and the amount and quality of any credit enhancements
associated with the securities. Payments or distributions of principal and
interest on asset-backed securities may be supported by credit enhancements
including letters of credit, an insurance guarantee, reserve funds, and over
collateralization. Asset-backed securities have structures and characteristics
similar to those of mortgage-backed securities; accordingly, they are subject to
many of the same risks, though often, to a greater extent.
Corporate
Debt Obligations
General.
The Funds may invest in corporate debt obligations. Corporate debt obligations
include corporate bonds, debentures, notes, commercial paper and other similar
corporate debt instruments. These instruments are used by companies to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest and must repay the amount borrowed at maturity. Commercial paper
(short-term unsecured promissory notes) is issued by companies to finance their
current obligations and normally has a maturity of less than nine months. The
Funds may also invest in corporate fixed income securities registered and sold
in the U.S. by foreign issuers (Yankee bonds) and those sold outside the U.S. by
foreign or U.S. issuers (eurobonds).
Variable
and Floating Rate Securities
The
Funds may invest in variable and floating rate securities. Fixed income
securities that have variable or floating rates of interest may, under certain
limited circumstances, have varying principal amounts. These securities pay
interest at rates that are adjusted periodically according to a specified
formula, usually with reference to one or more interest rate indices or market
interest rates (the “underlying index”). The interest paid on these securities
is a function primarily of the underlying index upon which the interest rate
adjustments are based. These adjustments minimize changes in the market value of
the obligation. Similar to fixed rate debt instruments, variable and floating
rate instruments are subject to changes in value based on changes in market
interest rates or changes in the issuer’s creditworthiness. The rate of interest
on securities may be tied to U.S. Government Securities or indices on those
securities as well as any other rate of interest or index.
Variable
and floating rate demand notes of corporations are redeemable upon a specified
period of notice. These obligations include master demand notes that permit
investment of fluctuating amounts at varying interest rates under direct
arrangements with the issuer of the instrument. The issuer of these obligations
often has the right, after a given period, to prepay the outstanding principal
amount of the obligations upon a specified number of days’ notice.
Certain
securities may have an initial principal amount that varies over time based on
an interest rate index, and, accordingly, a Fund might be entitled to less than
the initial principal amount of the security upon the security’s maturity. A
Fund intends to purchase these securities only when the Advisor believes the
interest income from the instrument justifies any principal risks associated
with the instrument. The Advisor may attempt to limit any potential loss of
principal by purchasing similar instruments that are intended to provide an
offsetting increase in principal. There can be no assurance that the Advisor
will be able to limit the effects of principal fluctuations and, accordingly, a
Fund may incur losses on those securities even if held to maturity without
issuer default.
There
may not be an active secondary market for any particular floating or variable
rate instruments, which could make it difficult for a Fund to dispose of the
instrument during periods that the Fund is not entitled to exercise any demand
rights it may have. A Fund could, for this or other reasons, suffer a loss with
respect to those instruments. The Advisor monitors the liquidity of each Fund’s
investment in variable and floating rate instruments, but there can be no
guarantee that an active secondary market will exist.
Non-U.S. Dollar
Denominated Securities and Other Fixed Income Securities
Each
Fund may invest in short-term money market instruments issued in the U.S. or
abroad, denominated in U.S. dollars or any foreign currency. Short-term money
market instruments include repurchase agreements, short-term fixed or variable
rate certificates of deposit, time deposits with a maturity no greater than
180 days, bankers’ acceptances, commercial paper rated A-1 by S&P or
Prime-1 by Moody’s or in similar other money market securities. Certificates of
deposit represent an institution’s obligation to repay funds deposited with it
that earn a specified interest rate over a given period. Bankers’ acceptances
are negotiable obligations of a bank to pay a draft, which has been drawn by a
customer, and are usually backed by goods in international trade. Time deposits
are non-negotiable deposits with a banking institution that earn a specified
interest rate over a given period. Certificates of deposit and time deposits
generally may be withdrawn on demand by the Fund but may be subject to early
withdrawal penalties that could reduce the Fund’s performance.
Each
Fund may also invest in other high yield fixed income securities denominated in
U.S. dollars, any foreign currency or in a multi-national currency unit (e.g.,
the European Currency Unit).
The
Funds may invest in non-U.S. dollar denominated securities including debt
obligations denominated in foreign or composite currencies (such as the European
Currency Unit) issued by (1) foreign national, provincial, state or
municipal governments or their political subdivisions; (2) international
organizations designated or supported by governmental entities (e.g., the World
Bank and the European Community); (3) non-dollar securities issued by the
U.S. Government; and (4) foreign corporations.
Risks
of Debt Securities
General.
Yields on debt securities, including municipal securities, are dependent on a
variety of factors, including the general conditions of the debt securities
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. Debt securities with longer maturities tend to produce
higher yields and are generally subject to greater price movements than
obligations with shorter maturities.
Certain
debt securities may be subject to extension risk, which refers to the change in
total return on a security resulting from an extension or abbreviation of the
security’s maturity. Issuers may prepay fixed rate debt securities when interest
rates fall, forcing the Fund to invest in securities with lower interest
rates.
Issuers of debt securities are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors that
may restrict the ability of the issuer to pay, when due, the principal of and
interest on its debt securities. The possibility exists therefore, that, as a
result of bankruptcy, litigation or other conditions, the ability of an issuer
to pay, when due, the principal of and interest on its debt securities may
become impaired.
Interest
Rate Risk.
The market value of the interest-bearing debt securities held by a Fund will be
affected by changes in interest rates. There is normally an inverse relationship
between the market value of securities sensitive to prevailing interest rates
and actual changes in interest rates. The longer the remaining maturity (and
duration) of a security, the more sensitive the security is to changes in
interest rates. All debt securities, including U.S. Government Securities, can
change in value when there is a change in interest rates. As a result, an
investment in a Fund is subject to risk even if all debt securities in the
Fund’s investment portfolio are paid in full at maturity.
Credit
Risk.
Changes in the ability of an issuer to make payments of interest and principal
and in the markets’ perception of an issuer’s creditworthiness will also affect
the market value of that issuer’s debt securities. The financial condition of an
issuer of a debt security held by the Fund may cause it to default on interest
or principal payments due on a security. This risk generally increases as
security credit ratings fall.
The
Funds may also invest in investment grade and non-investment grade debt
securities, including (i) “distressed securities” rated at the time of
purchase D by S&P or C by Moody’s or (ii) unrated investment grade and
non-investment grade, but determined to be of comparable quality by the
Advisor.
Each
of the Funds may retain securities whose rating has been lowered below the
lowest permissible rating category if the Advisor determines that retaining such
security is in the best interests of the Fund.
Moody’s,
S&P and other NRSROs are private services that provide ratings of the credit
quality of debt obligations, including convertible securities. A description of
the range of ratings assigned to various types of bonds and other securities by
several NRSROs is included in Appendix
A
to this SAI. The Advisor may use these ratings to determine whether to purchase,
sell or hold a security. Ratings are general and are not absolute standards of
quality. Securities with the same maturity, interest rate and rating may have
different market prices. If an issue of securities ceases to be rated or if its
rating is reduced after it is purchased by a Fund, the Advisor will determine
whether the Fund should continue to hold the obligation. Credit ratings attempt
to evaluate the safety of principal and interest payments and do not evaluate
the risks of fluctuations in market value. The rating of an issuer is a rating
agency’s view of potential developments related to the issuer and may not
necessarily reflect actual outcomes. Also, rating agencies may fail to make
timely changes in credit ratings. An issuer’s current financial condition may be
better or worse than a rating indicates. Unrated securities may not be as
actively traded as rated securities. Because a downgrade often results in a
reduction in the market price of the security, the sale of a downgraded security
may result in a loss.
Credit
ratings for debt securities provided by rating agencies evaluate the safety of
principal and interest payments, not market value risk. The rating of an issuer
is a rating agency’s view of past and future potential developments related to
the issuer and may not necessarily reflect actual outcomes. There can be a lag
between the time of developments relating to a issuer and the time a rating is
assigned and updated.
Stressed,
Distressed or Defaulted Borrowers Risk.
The Funds can invest in debt instruments of borrowers that are experiencing, or
are likely to experience, financial difficulty. These debt instruments are
subject to greater credit and liquidity risks than other debt instruments. In
addition, the Funds can
invest
in debt instruments of borrowers that have filed for bankruptcy protection or
that have had involuntary bankruptcy petitions filed against them by creditors.
Various laws enacted for the protection of debtors may apply to such debt
instruments. A bankruptcy proceeding or other court proceeding could delay or
limit the ability of a Fund to collect the principal and interest payments on
that borrower’s indebtedness or adversely affect the Fund’s rights in collateral
relating to such indebtedness. If a lawsuit is brought by creditors of a
borrower under a debt instrument, a court or a trustee in bankruptcy could take
certain actions that would be adverse to a Fund. For example:
• Other
creditors might convince the court to set aside a loan or the collateralization
of the loan as a “fraudulent conveyance” or “preferential transfer.” In that
event, the court could recover from the Fund the interest and principal payments
that the borrower made before becoming insolvent. There can be no assurance that
the Fund would be able to prevent that recapture.
• A
bankruptcy court may restructure the payment obligations under the debt
instrument so as to reduce the amount to which the Fund would be
entitled.
• The
court might discharge the amount of the indebtedness that exceeds the value of
the collateral.
• The
court could subordinate the Fund’s rights to the rights of other creditors of
the borrower under applicable law, decreasing, potentially significantly, the
likelihood of any recovery on the Fund’s investment.
Leverage
Transactions
General
Each
Fund may use leverage to increase potential returns, although use of leverage is
not a principal investment strategy for any Fund. Leverage involves special
risks and may involve speculative investment techniques. Leverage exists when
cash made available to a Fund through an investment technique is used to make
additional Fund investments. Leverage transactions include borrowing for other
than temporary or emergency purposes, lending portfolio securities, entering
into reverse repurchase agreements, and purchasing securities on a when-issued,
delayed delivery or forward commitment basis. A Fund uses these investment
techniques only when the Advisor believes that the leveraging and the returns
available to a Fund from investing the cash will provide investors with a
potentially higher return. (See “Risks” below.) Each Fund will reduce its
borrowing amount within three days, if that Fund’s asset coverage falls below
the amount required by the 1940 Act.
Borrowing.
Currently, the 1940 Act permits a Fund to borrow money from banks in amounts of
up to one-third of the Fund’s total assets (including the amount borrowed). To
the extent permitted by the 1940 Act, or the rules and regulations thereunder, a
Fund may also borrow an additional 5% of its total assets without regard to the
foregoing limitation for temporary purposes, such as the clearance of portfolio
transactions. To limit the risks attendant to borrowing, the 1940 Act requires a
Fund to maintain at all times an “asset coverage” of at least 300% of the amount
of its borrowings. Asset coverage means the ratio that the value of a Fund’s
total assets, minus liabilities other than borrowings, bears to the aggregate
amount of all borrowings. Borrowing money to increase a Fund’s investment
portfolio is known as “leveraging.” Borrowing, especially when used for
leverage, may cause the value of a Fund’s shares to be more volatile than if the
Fund did not borrow. This is because borrowing tends to magnify the effect of
any increase or decrease in the value of a Fund’s portfolio holdings. Borrowed
money thus creates an opportunity for greater gains, but also greater losses. To
repay borrowings, a Fund may have to sell securities at a time and at a price
that is unfavorable to the Fund. There also are costs associated with borrowing
money, and these costs would offset and could eliminate a Fund’s net investment
income in any given period.
The
use of borrowing by a Fund involves special risk considerations that may not be
associated with other funds having similar objectives and policies. Since
substantially all of a Fund’s assets fluctuate in value, while the interest
obligation resulting from a borrowing will be fixed by the terms of the Fund’s
agreement with its lender, the net asset value per share of the Fund will tend
to increase more when its portfolio securities increase in value and to decrease
more when its portfolio assets decrease in value than would otherwise be the
case if the Fund did not borrow funds. In addition, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions, a
Fund might have to sell portfolio securities to meet interest or principal
payments at a time when fundamental investment considerations would not favor
such sales. Each Fund will reduce its borrowing amount within three days, if
that Fund’s asset coverage falls below the amount required by the 1940 Act.
Senior
Securities.
Pursuant to Section 18(f)(1) of the 1940 Act, a Fund may not issue any
class of senior security or sell any senior security of which it is the issuer,
except that the Fund shall be permitted to borrow from any bank so long as
immediately after such borrowings, there is an asset coverage of at least 300%
and that in the event such asset coverage falls below this percentage, the Fund
shall reduce the amount of its borrowings, within 3 days, to an extent that the
asset coverage shall be at least 300%.
Reverse
Repurchase Agreements.
Each Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with its investment restrictions. Pursuant
to such agreements, a Fund would sell portfolio securities to financial
institutions such as banks and broker-dealers and agree to repurchase the
securities at the mutually agreed-upon date and price. A Fund may enter into
reverse repurchase agreements to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. A Fund may also seek to enter
reverse repurchase agreements when the Advisor believes the interest income to
be earned from the investment of the proceeds of the transaction is greater than
the interest expense of the transaction.
Rule
18f-4 under the 1940 Act permits the Funds to enter into reverse repurchase
agreements, provided that a Fund treats the reverse repurchase agreements as
either (1) borrowings subject to the asset coverage requirements under the 1940
Act (see “Borrowing” above) or (2) derivatives transactions under Rule 18f-4
(see “Regulation of Derivatives and Certain Other Transactions”
below).
The
use of reverse repurchase agreements by a Fund creates leverage which increases
its investment risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the cost of the agreements, a
Fund’s earnings or NAV will increase faster than otherwise would be the case.
Conversely, if the income and gains fail to exceed the costs, earnings or NAV
would decline faster than otherwise would be the case. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the price at which the Fund is obligated to repurchase
the securities.
When-Issued
Securities and Forward Commitments.
The Funds may purchase securities offered on a “when-issued” and “forward
commitment” basis (including a delayed delivery basis). Securities purchased on
a “when-issued” or “forward commitment basis” are securities not available for
immediate delivery despite the fact that a market exists for those securities. A
purchase is made on a “delayed delivery” basis when the transaction is
structured to occur sometime in the future.
When
these transactions are negotiated, the price, which is generally expressed in
yield terms, is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within two months after the transaction, but delayed settlements
beyond two months may be negotiated. During the period between a commitment and
settlement, no
payment
is made for the securities purchased by the purchaser and, thus, no interest
accrues to the purchaser from the transaction. At the time a Fund makes the
commitment to purchase securities on a when-issued basis or forward commitment,
the Fund will record the transaction as a purchase and thereafter reflect the
value each day of such securities in determining its NAV. No when-issued or
forward commitments will be made by a Fund if, as a result, more than 5% of the
Fund’s total assets would be committed to such transactions.
Rule
18f-4 under the 1940 Act permits the Funds to invest in securities on a
when-issued or forward-settling basis, or with a non-standard settlement cycle,
notwithstanding the limitation on the issuance of senior securities in Section
18 of the 1940 Act, provided that a Fund intends to physically settle the
transaction and the transaction will settle within 35 days of its trade date
(the “Delayed-Settlement Securities Provision”). A when-issued,
forward-settling, or non-standard settlement cycle security that does not
satisfy the Delayed-Settlement Securities Provision is treated as a derivatives
transaction under Rule 18f-4. See “Regulation of Derivatives and Certain Other
Transactions” below.
Risks
Leverage
creates the risk of magnified capital losses. Leverage may involve the creation
of a liability that requires the Fund to pay interest (for instance, reverse
repurchase agreements) or the creation of a liability that does not entail any
interest costs (for instance, forward commitment costs).
The
risks of leverage include a higher volatility of the NAV of a Fund’s securities
which may be magnified by favorable or adverse market movements or changes in
the cost of cash obtained by leveraging and the yield from invested cash. So
long as a Fund is able to realize a net return on its investment portfolio that
is higher than interest expense incurred, if any, leverage will result in higher
current net investment income for the Fund than if the Fund were not leveraged.
Changes in interest rates and related economic factors could cause the
relationship between the cost of leveraging and the yield to change so that
rates involved in the leveraging arrangement may substantially increase relative
to the yield on the obligations in which the proceeds of the leveraging have
been invested. To the extent that the interest expense involved in leveraging
approaches the net return on a Fund’s investment portfolio, the benefit of
leveraging will be reduced, and, if the interest expense incurred as a result of
leveraging on borrowings were to exceed the net return to investors, the Fund’s
use of leverage would result in a lower rate of return than if the Fund were not
leveraged. In an extreme case, if a Fund’s current investment income were not
sufficient to meet the interest expense of leveraging, it could be necessary for
the Fund to liquidate certain of its investments at an inappropriate
time.
Convertible
Securities
General.
Each Fund may invest in convertible securities. Each Fund may also invest in
U.S. or foreign securities convertible into foreign common stock. Convertible
securities include debt securities, preferred stock or other securities that may
be converted into or exchanged for a given amount of common stock of the same or
a different issuer during a specified period and at a specified price in the
future. A convertible security entitles the holder to receive interest on debt
or the dividend on preferred stock until the convertible security matures or is
redeemed, converted or exchanged.
Convertible
securities rank senior to common stock in a company’s capital structure but are
usually subordinated to comparable nonconvertible securities. Convertible
securities have unique investment characteristics in that they generally:
(1) have higher yields than common stocks, but lower yields than comparable
non-convertible securities; (2) are less subject to fluctuation in value
than the underlying
stocks
since they have fixed income characteristics; and (3) provide the potential
for capital appreciation if the market price of the underlying common stock
increases.
A
convertible security may be subject to redemption at the option of the issuer at
a price established in the convertible security’s governing instrument. If a
convertible security is called for redemption, a Fund will be required to permit
the issuer to redeem the security, convert it into the underlying common stock
or sell it to a third party.
Risks.
Investment in convertible securities generally entails less risk than an
investment in the issuer’s common stock. Convertible securities are typically
issued by smaller capitalization companies whose stock price may be volatile.
Therefore, the price of a convertible security may reflect variations in the
price of the underlying common stock in a way that nonconvertible debt does not.
The extent to which such risk is reduced, however, depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
Security
Ratings Information.
Each Fund’s investments in convertible securities are subject to the credit risk
relating to the financial condition of the issuers of the securities that each
Fund holds. Each Fund may purchase unrated convertible securities and preferred
stock if, at the time of purchase, the Advisor believes that they are of
comparable quality to rated securities that the Fund may purchase.
Unrated
securities may not be as actively traded as rated securities. A Fund may retain
securities whose ratings have been lowered below the lowest permissible rating
category (or that are unrated and determined by the Advisor to be of comparable
quality to securities whose rating has been lowered below the lowest permissible
rating category) if the Advisor determines that retaining such security is in
the best interests of the Fund. Because a downgrade often results in a reduction
in the market price of the security, the sale of a downgraded security may
result in a loss.
Moody’s,
S&P and other NRSROs are private services that provide ratings of the credit
quality of debt obligations, including convertible securities. A description of
the range of ratings assigned to various types of bonds and other securities by
several NRSROs is included in Appendix
A
to this SAI. Each Fund may use these ratings to determine whether to purchase,
sell or hold a security. Ratings are general and are not absolute standards of
quality. Securities with the same maturity, interest rate and rating may have
different market prices. To the extent that the ratings given by an NRSRO may
change as a result of changes in such organizations or their rating systems, the
Advisor will attempt to substitute comparable ratings. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings. An issuer’s current financial condition may be
better or worse than a rating indicates.
Credit
ratings for debt securities provided by rating agencies evaluate the safety of
principal and interest payments, not market value risk. The rating of an issuer
is a rating agency’s view of past and future potential developments related to
the issuer and may not necessarily reflect actual outcomes. There can be a lag
between the time of developments relating to an issuer and the time a rating is
assigned and updated. See Appendix
A
for additional information on credit ratings.
Warrants
General.
Each of the Funds may hold warrants resulting from reorganizations. Warrants are
securities, typically issued with preferred stock or bonds that give the holder
the right to purchase a given number of shares of common stock at a specified
price and time. The price of the warrant usually represents a premium over the
applicable market value of the common stock at the time of the warrant’s
issuance.
Warrants
have no voting rights with respect to the common stock, receive no dividends and
have no rights with respect to the assets of the issuer.
Risks.
Investments in warrants involve certain risks, including the possible lack of a
liquid market for the resale of the warrants, potential price fluctuations due
to adverse market conditions or other factors and failure of the price of the
common stock to rise. If the warrant is not exercised within the specified time
period, it becomes worthless.
Regulation
of Derivatives and Certain Other Transactions
Each
Fund may, but is not required to, use derivatives for risk management purposes
or as part of its investment strategies. Derivatives are financial contracts
whose values depend on, or are derived from, the value of an underlying asset,
reference rate or index. A Fund may use derivatives to earn income and enhance
returns, to hedge or adjust the risk profile of its portfolio, to replace more
traditional direct investments and to obtain exposure to otherwise inaccessible
markets.
There
are three types of derivatives in which a Fund may invest: futures, options and
swaps. Derivatives may be (1) standardized, exchange-traded contracts or
(2) customized, privately negotiated contracts. Exchange-traded derivatives
tend to be more liquid and subject to less credit risk than those that are
privately negotiated.
The
Fund’s use of derivatives may involve risks that are different from, or possibly
greater than, the risks associated with investing directly in securities or
other more traditional instruments. These risks include the risk that the value
of a derivative instrument may not correlate perfectly, or at all, with the
value of the assets, reference rates, or indexes that they are designed to
track. Other risks include: an illiquid secondary market for a particular
instrument and possible exchange-imposed price fluctuation limits, either of
which may make it difficult or impossible to close out a position when desired;
the risk that adverse price movements in an instrument can result in a loss
substantially greater than the Fund’s initial investment in that instrument (in
some cases, the potential loss is unlimited); and the risk that a counterparty
will not perform its obligations.
Rule
18f-4 under the 1940 Act (“Rule 18f-4” or the “Derivatives Rule”), regulates the
ability of a Fund to enter into derivative transactions and other leveraged
transactions. The Derivatives Rule defines the term “derivatives” to include
short sales and forward contracts, such as To Be Announced or “TBA”
transactions, in addition to instruments traditionally classified as
derivatives, such as swaps, futures, and options. Rule 18f-4 also regulates
other types of leveraged transactions, such as reverse repurchase transactions
and transactions deemed to be “similar to” reverse repurchase transactions, such
as certain securities lending transactions in connection with which a Fund
obtains leverage. The Derivatives Rule requires the Funds to trade derivatives
and other transactions that create future payment or delivery obligations
(except reverse repurchase agreements and similar financing transactions)
subject to a value-at-risk (“VaR”) leverage limit and certain derivatives risk
management program and reporting requirements. Generally, these requirements
apply unless a Fund qualifies as a “limited derivatives user,” as defined in the
Derivatives Rule.
Under
Rule 18f-4, when a fund trades reverse repurchase agreements or similar
financing transactions, including certain tender option bonds, it needs to
aggregate the amount of indebtedness associated with the reverse repurchase
agreements or similar financing transactions with the aggregate amount of any
other senior securities representing indebtedness when calculating the fund’s
asset coverage ratio or it can decide to treat all such transactions as
derivatives transactions.
Among
other things, under Rule 18f-4, the Funds are prohibited from entering into
these derivatives transactions except in reliance on the provisions of the
Derivatives Rule. A Fund will generally satisfy the limits under the Derivatives
Rule if the VaR of its portfolio (inclusive of derivatives transactions) does
not exceed 200% of the VaR of its “designated reference portfolio.” The
“designated reference portfolio” is a representative unleveraged index or a
fund’s own portfolio absent derivatives holdings, as determined by such fund’s
derivatives risk manager. This limits test is referred to as the “Relative VaR
Test.” In addition, among other requirements, Rule 18f-4 requires a fund to
establish a derivatives risk management program, appoint a derivatives risk
manager, and carry out enhanced reporting to the Board, the SEC and the public
regarding a fund’s derivatives activities.
These
requirements may limit the ability of a Fund to use derivatives as part of its
investment strategies. These requirements may increase the cost of a Fund’s
investments and cost of doing business, which could adversely affect
investors.
Each
Fund may use the following types of derivatives.
Futures
Contracts and Options on Futures Contracts
A
futures contract is an agreement that obligates the buyer to buy and the seller
to sell a specified quantity of an underlying asset (or settle for cash the
value of a contract based on an underlying asset, rate or index) at a specific
price on the contract maturity date. Options on futures contracts are options
that call for the delivery of futures contracts upon exercise. A Fund may
purchase or sell futures contracts and options thereon to hedge against changes
in interest rates, securities (through index futures or options) or currencies.
Options
An
option is an agreement that, for a premium payment or fee, gives the option
holder (the buyer) the right but not the obligation to buy (a “call option”) or
sell (a “put option”) the underlying asset (or settle for cash an amount based
on an underlying asset, rate or index) at a specified price (the exercise price)
during a period of time or on a specified date. Investments in options are
considered speculative. A Fund may lose the premium paid for them if the price
of the underlying security or other asset decreased or remained the same (in the
case of a call option) or increased or remained the same (in the case of a put
option). If a put or call option purchased by a Fund were permitted to expire
without being sold or exercised, its premium would represent a loss to the Fund.
The Funds’ investments in options include the following:
◦Options
on Foreign Currencies.
The Fund may purchase or sell call or put options on foreign currencies that are
privately negotiated or traded on U.S. or foreign exchanges for hedging purposes
to protect against declines in the U.S. Dollar value of foreign currency
denominated securities held by the Fund and against increases in the U.S. Dollar
cost of securities to be acquired. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although if rates move adversely, the Fund may forfeit the entire amount
of the premium plus related transaction costs. The Fund may also purchase or
sell options on foreign currencies for non-hedging purposes as a means of making
direct investments in foreign currencies.
◦Options
on Securities.
The Fund may purchase or sell call or put options on securities. The Fund will
only exercise an option it purchased if the price of the security was less (in
the case of a put option) or more (in the case of a call option) than the
exercise price. If the Fund does not exercise an option, the premium it paid for
the option will be lost. Normally, the Fund will sell only
“covered”
options, which means writing an option for securities the Fund owns, but may
write an uncovered call option for cross-hedging purposes.
◦Options
on Securities Indices.
An option on a securities index is similar to an option on a security except
that, rather than taking or making delivery of a security at a specified price,
an option on a securities index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the chosen
index is greater than (in the case of a call) or less than (in the case of a
put) the exercise price of the option.
Swaps
A
swap, which may be a customized and privately negotiated agreement or a
standardized and exchange-traded contract, obligates two parties to exchange a
series of cash flows at specified intervals (payment dates) based upon, or
calculated by, reference to changes in specified prices or rates for a specified
amount of an underlying asset (the “notional” principal amount). Swaps are
entered into on a net basis (i.e., the two payment streams are netted out, with
a fund receiving or paying, as the case may be, only the net amount of the two
payments). Examples of such swaps may include, but are not limited to, currency
swaps, interest rate swaps, total return swaps, and credit default swaps. If a
Fund writes swaps, it will segregate the full notional amount to cover the
obligation. Payments received by the Fund from swap agreements will result in
taxable income, either as ordinary income or capital gains. Except for currency
swaps, the notional principal amount is used solely to calculate the payment
streams but is not exchanged. With respect to currency swaps, actual principal
amounts of currencies may be exchanged by the counterparties at the initiation,
and again upon the termination, of the transaction. The swap market has grown
substantially in recent years, with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become well established and
relatively liquid.
Exclusion
from Definition of Commodity Pool Operator.
Pursuant to amendments by the Commodity Futures Trading Commission to
Rule 4.5 under the Commodity Exchange Act (“CEA”), the Advisor has filed a
notice of exemption from registration as a “commodity pool operator” with
respect to the Funds. The Funds and the Advisor are therefore not subject to
registration or regulation as a pool operator under the CEA. In order to claim
the Rule 4.5 exemption, the Funds are significantly limited in their
ability to invest in commodity futures, options and swaps (including securities
futures, broad-based stock index futures and financial futures contracts). As a
result, these limitations may have a negative impact on the ability of the
Advisor to manage the Funds, and on the Funds’ performance.
Foreign
Securities Exposure
The
Funds may invest in securities issued by foreign companies or governmental
authorities either directly or through depository receipts or exchange traded
funds (“ETFs”) (generally “foreign securities”). Investing in foreign securities
involves more risk than investing in U.S. securities. Changes in the value of
foreign currencies can significantly affect the value of a foreign security held
by a Fund, irrespective of developments relating to the issuer. In addition, the
values of foreign securities may be affected by changes in exchange control
regulations and fluctuations in the relative rates of exchange between the
currencies of different nations, as well as by economic and political
developments. Other risks involved in investing in foreign securities include
the following: there may be less publicly available information about foreign
companies comparable to the reports and ratings that are published about
companies in the United States; foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies; some foreign stock markets
have substantially less volume than U.S. markets, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies;
there may be less government supervision and regulation of foreign stock
exchanges, brokers and listed companies than exist in the United States; and
there may be the possibility of expropriation or confiscatory taxation,
political or social instability or diplomatic developments which could affect
assets of a Fund held in foreign countries. Investments in foreign government
debt obligations also involve special risks. The issuer of the debt may be
unable or unwilling to pay interest or repay principal when due in accordance
with the terms of such debt, and a Fund may have limited legal resources in the
event of default. Political conditions, especially a sovereign entity’s
willingness to meet the terms of its debt obligations, are of considerable
significance.
Foreign
Securities Traded in the United States.
The Funds may invest directly in foreign equity or debt securities that are
traded in the United States. Such securities are generally denominated in United
States dollars. They also may be issued originally in the United States. For
example, some foreign companies raise capital by selling dollar-denominated
bonds to institutional investors in the United States (“Yankee Bonds”). Such
bonds have all of the risks associated with foreign securities traded in foreign
markets, except for the risks of foreign securities markets. There may be a thin
trading market for foreign securities that are traded in the United States, and
in some cases such securities may be illiquid, since such securities may be
restricted and traded principally among institutional investors. See “Restricted
and Illiquid Securities” for the risks of illiquid securities. To the extent
that dollar-denominated foreign stocks and bonds are traded in the United States
securities markets, the Funds do not consider them to be foreign securities for
purposes of investment policies restricting investments on such
securities.
Foreign
Securities Traded in Foreign Markets.
The Funds may invest in foreign securities that are traded in foreign securities
markets. In addition to the general risks of foreign investments discussed
above, securities that are traded in foreign markets present special risks,
including higher brokerage costs, potentially thinner trading markets, extended
settlement periods and the risks of holding securities with foreign
sub-custodians and securities depositories. When the Funds are investing in
securities that are denominated in foreign currencies, they may also sell
securities denominated in foreign currencies and retain the proceeds in those
foreign currencies to use at a future date (to purchase other securities
denominated in those currencies) or buy foreign currencies outright to purchase
securities denominated in those foreign currencies at a future date. The Funds
may also engage in foreign currency futures contracts, foreign currency forward
contracts, foreign currency exchange contracts and options thereon. See “Foreign
Currency” below for a description of such investments. The Funds may also invest
some or all of their excess cash in deposit accounts with foreign
banks.
Foreign
Securities Traded in Emerging Markets.
The Funds may invest in the securities of issuers in less developed foreign
countries including countries whose economies or securities markets are not yet
highly developed (“emerging markets”). Emerging markets are nations with below
investment grade credit ratings and social or business activity in the process
of rapid growth and industrialization. There are special risks associated with
investing in emerging markets in addition to those described above in “Foreign
Securities Traded in Foreign Markets.” These special risks include, among
others, greater political uncertainties, an economy’s dependence on revenues
from particular commodities or on international aid or development assistance,
currency transfer restrictions, a limited number of potential buyers for such
securities and delays and disruptions in securities settlement
procedures.
Foreign
Currency.
A Fund also may invest in foreign currency, foreign currency futures, and
foreign currency options. Unlike forward foreign currency exchange contracts,
foreign currency futures contracts and options on such contracts are
standardized as to amount and delivery period and are traded on boards of trade
and commodities exchanges. It is anticipated that such contracts may provide
greater liquidity and lower costs than forward currency exchange
contracts.
The
Funds may temporarily hold funds in bank deposits in foreign currencies during
the completion of investment programs and may conduct foreign currency exchange
transactions either on a cash basis or at the rate prevailing in the foreign
exchange market.
A
forward currency contract (“forward contract”) involves an obligation to
purchase or sell a specific amount of a specific currency at a future date,
which may be any fixed number of days (usually less than one year) from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. At or before settlement of a forward currency contract, a Fund may
either deliver the currency or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract. If a Fund makes delivery of
the foreign currency at or before the settlement of a forward contract, it may
be required to obtain the currency through the conversion of assets of the Fund
into the currency. Each Fund may close out a forward contract obligating it to
purchase currency by selling an offsetting contract, in which case, it will
realize a gain or a loss.
Forward
contracts are considered “derivatives,” financial instruments whose performance
is derived, at least in part, from the performance of another asset (such as a
security, currency or an index of securities). A Fund enters into forward
contracts in order to “lock in” the exchange rate between the currency it will
deliver and the currency it will receive for the duration of the contract. In
addition, each Fund may enter into forward contracts to hedge against risks
arising from securities the Fund owns or anticipates purchasing, or the U.S.
dollar value of interest and dividends paid on those securities. The Fund does
not intend to enter into forward contracts on a regular or continuing basis and
the Fund will not enter these contracts for speculative purposes.
Each
Fund will not have more than 20% (based on the mark-to-market value of its
currency hedges) of its total assets committed to forward contracts, or maintain
a net exposure to forward contracts that would obligate the Fund to deliver an
amount of foreign currency in excess of 105% the value of the Fund’s investment
securities or other assets denominated in that currency.
Foreign
currency transactions involve certain costs and risks. A Fund incurs foreign
exchange expenses in converting assets from one currency to another. Forward
contracts involve a risk of loss if the Advisor is inaccurate in its prediction
of currency movements. The projection of short-term currency market movements is
extremely difficult and the successful execution of a short-term hedging
strategy is highly uncertain. The precise matching of forward contract amounts
and the value of the securities involved is generally not possible. Accordingly,
it may be necessary for a Fund to purchase additional foreign currency if the
market value of the security is less than the amount of the foreign currency the
Fund is obligated to deliver under the forward contract and the decision is made
to sell the security and make delivery of the foreign currency. The use of
forward contracts as a hedging technique does not eliminate fluctuations in the
prices of the underlying securities the Fund owns or intends to acquire, but it
does fix a rate of exchange in advance. Although forward contracts can reduce
the risk of loss due to a decline in the value of the hedged currencies, they
also limit any potential gain that might result from an increase in the value of
the currencies. There is also the risk that the other party to the transaction
may fail to deliver currency when due which may result in a loss to a
Fund.
Participatory
Notes.
The Funds may invest in securities that are traded in foreign markets through
participatory notes. Participatory notes (commonly known as P-notes) are
derivative instruments used by foreign funds or investors that would like to
invest in securities of a foreign issuer traded in its local market. Foreign
funds or investors buy P-notes from brokers who are registered in a foreign
issuer’s local market. Such brokers buy shares of an issuer on the local market
and create the P-notes to represent interests in the shares. Thus, investments
in P-notes present similar risks to investing directly in an
issuer’s
shares. Normally, P-notes can only be sold back to the broker that issued them.
As a result, P-notes also expose investors to counterparty risk, which is the
risk that the entity issuing the note may not be able to honor its financial
commitment to the purchaser.
Illiquid
Investments and Restricted Securities
Pursuant
to Rule 22e-4 under the 1940 Act, a Fund may not acquire any “illiquid
investment” if, immediately after the acquisition, the Fund would have invested
more than 15% of its net assets in illiquid investments that are assets. An
“illiquid investment” is any investment that a Fund reasonably expects cannot be
sold or disposed of in current market conditions in seven calendar days or less
without the sale or disposition significantly changing the market value of the
investment. Each Fund has implemented a liquidity risk management program and
related procedures to identify illiquid investments pursuant to Rule 22e-4. The
15% limits are applied as of the date a Fund purchases an illiquid investment.
It is possible that a Fund’s holding of illiquid investments could exceed the
15% limit, for example as a result of market developments or
redemptions.
Each
Fund may purchase certain restricted securities that can be resold to
institutional investors and which may be determined to not be illiquid
investments pursuant to the Fund’s liquidity risk management program. In many
cases, those securities are traded in the institutional market under Rule 144A
under the 1933 Act and are called Rule 144A securities.
Investments
in illiquid investments involve more risks than investments in similar
securities that are readily marketable. Illiquid investments may trade at a
discount from otherwise comparable, more liquid investments. Investment of a
Fund’s assets in illiquid investments may restrict the ability of the Fund to
dispose of its investments in a timely fashion and for a fair price as well as
its ability to take advantage of market opportunities. The risks associated with
illiquidity will be particularly acute where a Fund’s operations require cash,
such as when the Fund has net redemptions, and could result in the Fund
borrowing to meet short-term cash requirements or incurring losses on the sale
of illiquid investments.
Illiquid
investments are often restricted securities sold in private placement
transactions between issuers and their purchasers and may be neither listed on
an exchange nor traded in other established markets. In many cases, the
privately placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. To the
extent privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales could be less than those
originally paid by a Fund or less than the fair value of the securities. In
addition, issuers whose securities are not publicly traded may not be subject to
the disclosure and other investor protection requirements that may be applicable
if their securities were publicly traded. If any privately placed securities
held by a Fund are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Private placement investments may involve investments
in smaller, less seasoned issuers, which may involve greater risks than
investments in more established companies. These issuers may have limited
product lines, markets or financial resources, or they may be dependent on a
limited management group. In making investments in private placement securities,
a Fund may obtain access to material non-public information, which may restrict
the Fund’s ability to conduct transactions in those securities.
Investment
Company Securities
Open-End
and Closed-End Investment Companies
The
Funds may invest in the securities of other registered investment companies
(affiliated and unaffiliated), including money market mutual funds, subject to
the limitations set forth in the 1940 Act.
Investments
in the securities of other investment companies will likely result in the
duplication of advisory fees and certain other expenses. By investing in another
investment company, a Fund becomes a shareholder of that investment company. As
a result, Fund shareholders indirectly will bear the Fund’s proportionate share
of the fees and expenses paid by shareholders of the other investment company,
in addition to the fees and expenses Fund shareholders directly bear in
connection with the Fund’s own operations.
Each
Fund currently intends to limit its investments in securities issued by other
investment companies so that not more than 3% of the outstanding voting stock of
any one investment company (other than money market funds) will be owned by the
Fund, or its affiliated persons, as a whole. In addition to the advisory and
operational fees a Fund bears directly in connection with its own operation, the
Fund would also bear its pro rata portions of each other investment company’s
advisory and operational expenses.
Section 12(d)(1)(A)
of the 1940 Act generally prohibits a fund from purchasing (1) more
than 3% of the total outstanding voting stock of another fund;
(2) securities of another fund having an aggregate value in excess of 5% of
the value of the acquiring fund; and (3) securities of the other fund and
all other funds having an aggregate value in excess of 10% of the value of the
total assets of the acquiring fund. There are some exceptions, however, to these
limitations pursuant to various rules promulgated by the SEC.
Section 12(d)(1)
of the 1940 Act restricts investments by registered investment companies in
securities of other registered investment companies. The acquisition of shares
by a Fund in other registered investment companies is therefore subject to the
restrictions of Section 12(d)(1) of the 1940 Act, except as may be
permitted by Rule and/or an exemptive order obtained by the other registered
investment companies that permits the Fund to invest in the other registered
investment companies beyond the limits of Section 12(d)(1), subject to
certain terms and conditions, including that the Fund enter into an agreement
with the other registered investment companies regarding the terms of the
investment.
In
accordance with Section 12(d)(1)(F) and Rule 12d1-3 of the
1940 Act, the provisions of Section 12(d)(1) shall not apply to
securities purchased or otherwise acquired by the Fund if (i) immediately
after such purchase or acquisition not more than 3% of the total outstanding
stock of such registered investment company is owned by the Fund and all
affiliated persons of the Fund; and (ii) the Fund is not proposing to offer
or sell any security issued by it through a principal underwriter or otherwise
at a public or offering price including a sales load or service fee that exceeds
the limits set forth in Rule 2341 of the Conduct Rules of the Financial
Industry Regulatory Authority (“FINRA”) applicable to a fund of funds
(e.g.,
8.5%).
Rule
12d1-4 permits funds to invest in other investment companies without an
exemptive order, subject to certain conditions, including limits on control and
voting of acquired funds’ shares, evaluations, and findings by investment
advisers, fund investment agreements, and limits on most three-tier fund
structures.
Exchange-Traded
Funds
The
Funds may also invest in shares of exchange-traded funds (“ETFs”). ETFs are
investment companies which seek to replicate the performance, before fees and
expenses, of an underlying index of securities. An ETF is similar to a
traditional mutual fund but trades at different prices during the day on a
securities exchange like a stock. Similar to investments in other investment
companies discussed above, a Fund’s investments in ETFs will involve duplication
of advisory fees and other expenses since the Fund will be investing in another
investment company. In addition, the Fund’s investment in ETFs is also subject
to its limitations on investments in investment companies discussed above. To
the extent the Fund invests in
ETFs
which focus on a particular market segment or industry, the Fund will also be
subject to the risks associated with investing in those sectors or industries.
The shares of the ETFs in which the Fund will invest will be listed on a
national securities exchange and the Fund will purchase and sell these shares on
the secondary market at their current market price, which may be more or less
than their net asset value. Investors in the Fund should be aware that
index-based ETFs are subject to “tracking risk,” which is the risk that an ETF
will not be able to replicate exactly the performance of the index it
tracks.
As
a purchaser of ETF shares on the secondary market, a Fund will be subject to the
market risk associated with owning any security whose value is based on market
price. ETF shares historically have tended to trade at or near their net asset
value, but there is no guarantee that they will continue to do so. Unlike
traditional mutual funds, shares of an ETF may be purchased and redeemed
directly from the ETF only in large blocks (typically 50,000 shares or more) and
only through participating organizations that have entered into contractual
agreements with the ETF. The Funds do not expect to enter into such agreements
and therefore will not be able to purchase and redeem their ETF shares directly
from the ETF, but will instead purchase and sell shares on the secondary
market.
Other
Pooled Investment Vehicles
The
Funds may invest in pooled investment vehicles, including limited partnerships.
Examples of such vehicles include private funds and private funds of funds. A
private fund generally invests in non-public companies that the fund’s manager
believes will experience significant growth over a certain time period. A
private fund of funds invests in other private funds of the type described.
Investments in private funds, once made, typically may not be redeemed for
several years, though they may be sold to other investors under certain
circumstances.
To
the extent that the Funds invest in pooled investment vehicles, such investments
may be deemed illiquid. (See “Illiquid and Restricted Securities” for the risks
of investing in illiquid securities above). In addition, a Fund will bear its
ratable share of such vehicles’ expenses, including its management expenses and
performance fees. Performance fees are fees paid to the vehicle’s manager based
on the vehicle’s investment performance (or returns) as compared to some
benchmark. The fees a Fund pays to invest in a Pooled Investment Vehicle may be
higher than the fees it would pay if the manager of the Pooled Investment
Vehicle managed the Fund’s assets directly. Further, the performance fees
payable to the manager of a Pooled Investment Vehicle may create an incentive
for the manager to make investments that are riskier or more speculative than
those it might make in the absence of an incentive fee.
Market
and Regulatory Risk
Events
in the financial markets and economy may cause volatility and uncertainty and
affect performance. Such adverse effects on performance could include a decline
in the value and liquidity of securities held by a Fund, unusually high and
unanticipated levels of redemptions, an increase in portfolio turnover, a
decrease in NAV, and an increase in Fund expenses. It may also be unusually
difficult to identify both investment risks and opportunities, in which case
investment objectives may not be met. Market events may affect a single issuer,
industry, sector, or the market as a whole. Traditionally liquid investments may
experience periods of diminished liquidity. During a general downturn in the
financial markets, multiple asset classes may decline in value, and a Fund may
lose value, regardless of the individual results of the securities and other
instruments in which the Fund invests. It is impossible to predict whether or
for how long such market events will continue, particularly if they are
unprecedented, unforeseen or widespread events or conditions. Therefore, it is
important to understand that the value of your investment may fall, sometimes
sharply and for extended periods, and you could lose money.
Governmental
and regulatory actions, including tax law changes, may also impair portfolio
management and have unexpected or adverse consequences on particular markets,
strategies, or investments. Policy and legislative changes in the United States
and in other countries are affecting many aspects of financial regulation, and
may in some instances contribute to decreased liquidity and increased volatility
in the financial markets. The impact of these changes on the markets, and the
practical implications for market participants, may not be fully known for some
time. In addition, economies and financial markets throughout the world are
becoming increasingly interconnected. As a result, whether or not a Fund invests
in securities of issuers located in or with significant exposure to countries
experiencing economic and financial difficulties, pandemics, epidemics and other
similar circumstances in one or more countries or regions, the value and
liquidity of the Fund’s investments may be negatively affected.
Securities
Lending
Upon
approval from the Board, the Fund may lend the securities in its portfolio to
brokers, dealers and financial institutions (but not individuals) in order to
increase the return on its portfolio. The SEC currently requires that the
following conditions must be met whenever the Fund’s portfolio securities are
loaned: (1) the Fund must receive at least 100% cash collateral from the
borrower; (2) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral;
(3) the Fund must be able to terminate the loan at any time; (4) the
Fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any increase in
market value; (5) the Fund may pay only reasonable custodian fees approved
by the Board in connection with the loan; (6) while voting rights on the
loaned securities may pass to the borrower, the Board must terminate the loan
and regain the right to vote the securities if a material event adversely
affecting the investment occurs, and (7) the Fund may not loan its
portfolio securities so that the value of the loaned securities is more than
one-third of its total asset value, including collateral received from such
loans. These conditions may be subject to future modification. Such loans will
be terminable at any time upon specified notice. The Fund might experience the
risk of loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund. In addition, the Fund 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, the Fund could
experience delays in recovering securities or collateral or could lose all or
part of the value of the loaned securities. As part of participating in a
lending program, the Fund may be required to invest in collateralized debt or
other securities that bear the risk of loss of principal. In addition, all
investments made with the collateral received are subject to the risks
associated with such investments. If such investments lose value, the Fund will
have to cover the loss when repaying the collateral.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that the 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 Fund any accrued income on those securities, 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.
Special
Risks Related to Cyber Security
A
Fund and its service providers are susceptible to cyber security risks that
include, among other things, theft, unauthorized monitoring, release, misuse,
loss, destruction or corruption of confidential and highly restricted data;
denial of service attacks; unauthorized access to relevant systems, compromises
to
networks
or devices that a Fund and its service providers use to service a Fund’s
operations; or operational disruption or failures in the physical infrastructure
or operating systems that support the Fund and its service providers. Cyber
attacks against or security breakdowns of a Fund or its service providers may
adversely impact a Fund and its shareholders, potentially resulting in, among
other things, financial losses; the inability of Fund shareholders to transact
business and a Fund to process transactions; inability to calculate a Fund’s
NAV; violations of applicable privacy and other laws; regulatory fines,
penalties, reputational damage, reimbursement or other compensation costs;
and/or additional compliance costs. A Fund may incur additional costs for cyber
security risk management and remediation purposes. In addition, cyber security
risks may also impact issuers of securities in which a Fund invests, which may
cause a Fund’s investment in such issuers to lose value. There can be no
assurance that a Fund or its service providers will not suffer losses relating
to cyber attacks or other information security breaches in the
future.
Temporary
Defensive Position
Each
Fund may invest in prime money market instruments or exchange-traded funds,
pending investment of cash balances. Each Fund may also assume a temporary
defensive position and may invest without limit in prime quality money market
instruments. Prime quality instruments are those instruments that are rated in
one of the two highest short-term rating categories by an NRSRO or, if not
rated, determined by the Advisor to be of comparable quality.
Money
market instruments usually have maturities of one year or less and fixed rates
of return. The money market instruments in which a Fund may invest include
short-term U.S. Government Securities, commercial paper, bankers’ acceptances,
time deposits, interest-bearing savings deposits of commercial banks, repurchase
agreements concerning securities in which the Fund may invest, exchange traded
funds and money market mutual funds.
Equity
Securities
Common
and Preferred Stock
General.
Each Fund may hold common stock received as part of reorganizations. Common
stock represents an equity (ownership) interest in a company, and usually
possesses voting rights and earns dividends. Dividends on common stock are not
fixed but are declared at the discretion of the issuer. Common stock generally
represents the riskiest investment in a company. In addition, common stock
generally has the greatest appreciation and depreciation potential because
increases and decreases in earnings are usually reflected in a company’s stock
price.
Each
Fund may hold preferred stock received as a result of a reorganization.
Preferred stock is a class of stock having a preference over common stock as to
the payment of dividends and the recovery of investment should a company be
liquidated, although preferred stock is usually junior to the debt securities of
the issuer. Preferred stock typically does not possess voting rights and its
market value may change based on changes in interest rates.
Risks.
The
fundamental risk of investing in common and preferred stock is the risk that the
value of the stock might decrease. Stock values fluctuate in response to the
activities of an individual company or in response to general market and/or
economic conditions. Historically, common stocks have provided greater long-term
returns and have entailed greater short-term risks than preferred stocks,
fixed-income and money market investments. The market value of all securities,
including common and preferred stocks, is based upon the market’s perception of
value and not necessarily the book value of an issuer or other objective
measures of a company’s worth. If you invest in a Fund, you should be willing to
accept the risks of the stock market and should consider an investment in the
Fund only as a part of your overall investment portfolio.
INVESTMENT
LIMITATIONS
For
purposes of all investment policies of each Fund: (1) the term
“1940 Act” includes the rules thereunder, SEC interpretations and any
exemptive order upon which a Fund may rely; and (2) the term “Code”
includes the rules thereunder, IRS interpretations and any private letter ruling
or similar authority upon which a Fund may rely.
The
Funds have adopted the following policies and investment restrictions as
fundamental policies (unless otherwise noted), which may not be changed without
the affirmative vote of the holders of a “majority” of the outstanding voting
securities of the 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 the Fund represented at a meeting at
which the holders of more than 50% of the Fund’s outstanding shares are
represented or (ii) more than 50% of the outstanding shares of a
Fund.
Fundamental
Limitations
As
a matter of fundamental policy, each Fund may not:
1.Borrow
money or issue senior securities, except through reverse repurchase agreements
or otherwise as permitted under the 1940 Act, as interpreted, modified or
otherwise permitted by regulatory authority. Generally, issuing senior
securities is prohibited under the 1940 Act; however, certain exceptions
apply such as in the case of reverse repurchase agreements, borrowing, and
certain other leveraging transactions.
2.Act
as underwriter (except to the extent the Fund may be deemed to be an underwriter
in connection with the sale of securities in its investment
portfolio).
3.Invest
25% or more of its net assets, calculated at the time of purchase and taken at
market value, in securities of issuers in any one industry or groups of
industries (other than U.S. government securities).
4.Purchase
or sell real estate, unless acquired as a result of ownership of securities
(although the Fund may purchase and sell securities that are secured by real
estate and securities of companies that invest or deal in real
estate).
5.Purchase
or sell physical commodities, unless acquired as a result of ownership of
securities or other instruments. This limitation shall not prevent the Fund from
purchasing, selling, or entering into futures contracts, or acquiring securities
or other instruments and options thereon backed by, or related to, physical
commodities.
6.Make
loans (except purchases of debt securities and syndicated loans consistent with
the investment policies of the Fund). For purposes of this limitation, entering
into repurchase agreements, lending securities and acquiring any debt security
are not deemed to be the making of loans.
7.With
respect to 75% of its total assets, invest more than 5% of its total assets in
securities of a single issuer or hold more than 10% of the voting securities of
such issuer. (Does not apply to investment in the securities of the U.S.
government, its agencies or instrumentalities or securities of other investment
companies.)
With
respect to Fundamental Investment Restriction No. 1, under SEC staff
interpretations, reverse repurchase agreements, firm commitment agreements and
standby commitment agreements will not constitute impermissible borrowings under
the 1940 Act if the Fund segregates assets or otherwise covers its obligations
to limit a Fund’s risk of loss.
MANAGEMENT
Trustees
and Executive Officers
The
Board is responsible for the overall management of the Trust, including general
supervision and review of the investment activities of the Funds. The Board, in
turn, elects the officers of the Trust, who are responsible for administering
the day-to-day operations of the Trust and its separate series. The current
trustees and officers of the Trust, their year of birth, positions with the
Trust, terms of office with the Trust and length of time served, their principal
occupations for the past five years and other directorships are set forth in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Year of Birth and Address
|
Position
with
the
Trust(1) |
Term
of Office(2)
and Length of Time Served |
Principal
Occupation During Past Five Years |
Number
of Portfolios
in
Fund Complex(3)
Overseen
by Trustees |
Other
Directorships Held During the Past 5 Years |
| Independent
Trustees of the Trust |
Kathleen
T. Barr
(born 1955)
c/o U.S. Bank Global Fund Services
615 East
Michigan Street
Milwaukee, WI 53202 |
Trustee
Chairperson |
Indefinite
Term;
Since November 2018.
Indefinite
Term; Since February 2023. |
Retired;
Former Chair of the Governing Council, Independent Directors Council
(since 2020); formerly, President, owner of a registered investment
adviser, Productive Capital Management, Inc. (2010 to 2013); formerly,
Chief Administrative Officer, Senior Vice President and Senior Managing
Director of Allegiant Asset Management Company (merged with PNC Capital
Advisors, LLC in 2009); formerly, Chief Administrative Officer, Chief
Compliance Officer and Senior Vice President of PNC Funds and PNC
Advantage Funds (f/k/a Allegiant Funds) (registered investment
companies). |
3 |
Independent
Director, Muzinich Corporate Lending Income Fund, Inc. (2023 to present);
Independent Director, Muzinich BDC, Inc. (2019 to present); Independent
Trustee for the William Blair Funds (2013 to present) (18
series). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Year of Birth and Address
|
Position
with
the
Trust(1) |
Term
of Office(2)
and Length of Time Served |
Principal
Occupation During Past Five Years |
Number
of Portfolios
in
Fund Complex(3)
Overseen
by Trustees |
Other
Directorships Held During the Past 5 Years |
Eric
W. Falkeis
(born 1973)
c/o U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee, WI 53202 |
Trustee
|
Indefinite
Term;
Since September 2011.
|
Chief
Operating Officer, Tidal Financial Group (2024 to present); formerly,
Chief Growth Officer, Tidal Financial Group (2022 to 2023); Chief
Executive Officer, Tidal ETF Services LLC (2018 to present); formerly,
Chief Operating Officer, Direxion Funds (2013 to 2018); formerly, Senior
Vice President and Chief Financial Officer (and other positions), U.S.
Bancorp Fund Services, LLC (1997 to 2013). |
3 |
Independent
Director, Muzinich Corporate Lending Income Fund, Inc. (2023 to present);
Interested Trustee, Tidal Trust II (2022 to present) (41 series);
Independent Director, Muzinich BDC, Inc. (2019 to present); Interested
Trustee, Tidal ETF Trust I (2018 to Present) (40 series); Former
Interested Trustee, Direxion Funds (36 series), Direxion Shares ETF Trust
(112 series) and Direxion Insurance Trust (2013 to 2018). |
Steven
J. Paggioli
(born 1950)
c/o U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee, WI 53202 |
Trustee |
Indefinite
Term;
Since May 1991. |
Consultant;
formerly, Executive Vice President, Investment Company Administration, LLC
(mutual fund administrator). |
3 |
Independent
Director, Muzinich Corporate Lending Income Fund, Inc. (2023 to present);
Independent Director, Muzinich BDC, Inc. (2019 to present); Independent
Trustee, AMG Funds (1993 to present) (42
series). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Year of Birth and Address
|
Position
with
the
Trust(1) |
Term
of Office(2)
and Length of Time Served |
Principal
Occupation During Past Five Years |
Number
of Portfolios
in
Fund Complex(3)
Overseen
by Trustees |
Other
Directorships Held During the Past 5 Years |
Ashi
S. Parikh
(born 1966)
c/o U.S. Bank Global Fund Services
615 East
Michigan Street
Milwaukee, WI 53202 |
Trustee |
Indefinite
Term;
Since June 2020. |
President
and Chief Investment Officer, Venturi Private Wealth (investment
management firm) (2022 to present); formerly, Chief Executive and Chief
Investment Officer and various other positions, RidgeWorth Investments,
LLC (global investment management firm) (2006 to 2017); formerly, Chief
Investment Officer Institutional Growth Equities, Eagle Asset Management
(investment management firm); formerly Sr. Managing Director, Growth
Equities, Banc One Investment Advisors (investment management
firm). |
3 |
Board
of Directors Member, Investment Working Group, The Ohio State University
Endowments and Foundation (2016 to present); Board of Directors, World
Methodist Council, Investment Committee (2018 to present); Independent
Trustee, PNC Funds (2018 to 2019) (32 series); Interested Trustee,
RidgeWorth Funds (2014 to 2017) (35 series). |
Cynthia
M. Fornelli
(born 1960)
c/o U.S. Bank Global Fund Services
615
East Michigan Street Milwaukee, WI 53202
|
Trustee |
Indefinite
Term; Since January 2022. |
Independent
Director of TriplePoint Venture Growth BDC Corp. (2019 to present);
Retired; formerly, Executive Director of the Center for Audit Quality
(2007-2019); formerly, Senior Vice President of Regulatory Conflicts
Management at Bank of America (2005-2007); formerly, Deputy Director,
Division of Investment Management with the U.S. Securities and Exchange
Commission (1998-2005). |
3 |
Independent
Director, TriplePoint Private Venture Credit, Inc. (2020 to
present). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Year of Birth and Address
|
Position
with
the
Trust(1) |
Term
of Office(2)
and Length of Time Served |
Principal
Occupation During Past Five Years |
Number
of Portfolios
in
Fund Complex(3)
Overseen
by Trustees |
Other
Directorships Held During the Past 5 Years |
| Officers
of the Trust |
Jason
F. Hadler
(born 1975)
c/o U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee, WI 53202 |
President
& Principal Executive Officer |
Indefinite
Term; Since September 2021. |
Senior
Vice President and Head of Client Experience, U.S. Bank Global Fund
Services, since March 2022; Senior Vice President and Head of Fund
Services Fund Administration Department, U.S. Bank Global Fund Services
(December 2003-March 2022). |
Not
Applicable. |
Not
Applicable. |
Carl
G. Gee, Esq.
(born 1990)
c/o U.S. Bank Global Fund Services
615
East Michigan Street Milwaukee, WI 53202 |
Secretary
& Vice President |
Indefinite
Term;
Since February 2021. |
Assistant
Secretary of the Trust (2020-2021); Assistant Vice President and Counsel,
U.S. Bank Global Fund Services since August 2016; Summer Associate, Husch
Blackwell LLP (2015); Law Clerk, Brady Corporation (global printing
systems, labels and safety products company) (2014-2015). |
Not
Applicable. |
Not
Applicable. |
Craig
Benton
(born 1985)
c/o U.S. Bank Global Fund Services
615 East
Michigan Street Milwaukee, WI 53202 |
Treasurer
& Vice President |
Indefinite
Term;
Since December 2021. |
Assistant
Treasurer of the Trust (2016-2021); Assistant Vice President, U.S. Bank
Global Fund Services since November 2007. |
Not
Applicable. |
Not
Applicable. |
Kyle
J. Buscemi
(born 1996)
c/o U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee, WI
53202 |
Assistant
Treasurer |
Indefinite
Term;
Since June 2022. |
Mutual
Funds Administrator, U.S. Bank Global Fund Services since June 2018;
Business Administration Student, 2014-2018. |
Not
Applicable. |
Not
Applicable. |
Kathryn
E. LaPlante Johnson
(born 1998)
c/o U.S. Bank Global Fund
Services
615 East Michigan Street
Milwaukee, WI 53202 |
Assistant
Treasurer |
Indefinite
Term; Since November 2023. |
Mutual
Funds Administrator, U.S. Bank Global Fund Services since June 2020;
Business Administration Student, 2017-2021. |
Not
Applicable. |
Not
Applicable. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Year of Birth and Address
|
Position
with
the
Trust(1) |
Term
of Office(2)
and Length of Time Served |
Principal
Occupation During Past Five Years |
Number
of Portfolios
in
Fund Complex(3)
Overseen
by Trustees |
Other
Directorships Held During the Past 5 Years |
Gazala
Khan
(born 1969)
c/o U.S. Bank Global Fund Services
615 East
Michigan Street Milwaukee, WI 53202 |
Chief
Compliance Officer
Anti-Money
Laundering Officer |
Indefinite
Term;
Since November 2022. |
Vice
President and Compliance Officer, U.S. Bank Global Fund Services since
July 2022; Chief Compliance Officer Matthews Asia Fund (May 2019-July 15,
2022); Chief Compliance Officer GS Trust/VIT (June 2009-May 2019); Vice
President GSAM (May 2005-June 2009); Staff Accountant, SEC Office of
Compliance Inspection and Examination (1999-2005). |
Not
Applicable. |
Not
Applicable. |
(1)All
Trustees of the Trust who are not “interested persons” of the Trust as defined
under the 1940 Act (“Independent Trustees”).
(2)Under
the terms of the Board’s retirement policy, a Trustee shall retire at the end of
the calendar year in which he or she reaches the age of 78.
(3)The
Trust is comprised of numerous series managed by unaffiliated investment
advisors. The term “Fund Complex” applies to the Funds. The Funds do not hold
themselves out as related to any other series within the Trust, for purposes of
investment and investor services, nor do they share the same investment advisor
with any other series.
Additional
Information Concerning the Board of Trustees
The
Role of the Board
The
Board oversees the management and operations of the Trust. Like all mutual
funds, the day-to-day management and operation of the Trust is the
responsibility of the various service providers to the Trust, such as the
Adviser, the Distributor, the Administrator, the Custodian, and the Transfer
Agent, each of whom is discussed in greater detail in this Statement of
Additional Information. The Board has appointed various senior employees of the
Administrator as officers of the Trust, with responsibility to monitor and
report to the Board on the Trust’s operations. In conducting this oversight, the
Board receives regular reports from these officers and the service providers.
For example, the Treasurer reports as to financial reporting matters and the
President reports as to matters relating to the Trust’s operations. In addition,
the Adviser provides regular reports on the investment strategy and performance
of the Funds. The Board has appointed a Chief Compliance Officer who administers
the Trust’s compliance program and regularly reports to the Board as to
compliance matters. These reports are provided as part of formal “Board
Meetings” which are typically held quarterly, in person, and involve the Board’s
review of recent operations. In addition, various members of the Board also meet
with management in less formal settings, between formal “Board Meetings,” to
discuss various topics. In all cases, however, the role of the Board and of any
individual Trustee is one of oversight and not of management of the day-to-day
affairs of the Trust and its oversight role does not make the Board a guarantor
of the Trust’s investments, operations or activities.
Board
Structure, Leadership
The
Board has structured itself in a manner that it believes allows it to perform
its oversight function effectively. It has established three standing
committees, a Nominating and Governance Committee, an Audit Committee, and a
Qualified Legal Compliance Committee, which are discussed in greater detail
below under “Trust Committees.” The Board is entirely comprised of Trustees who
are Independent Trustees, which are Trustees that are not affiliated with the
Adviser, the principal underwriter, or their affiliates. The Independent
Trustees have engaged their own independent counsel to advise them on matters
relating to their responsibilities in connection with the Trust. The Nominating
and Governance Committee, Audit Committee and Qualified Legal Compliance
Committee are comprised of all of the Independent Trustees. The Chairperson of
the Board is an Independent Trustee. The Trust has appointed Kathleen Barr, an
Independent Trustee, as Chairperson of the Board, and she acts as a liaison with
the Trust’s service providers, officers, legal counsel, and other Trustees
between meetings, helps to set Board meeting agendas, and serves as Chairperson
during executive sessions of the Independent Trustees. The Board has determined
not to combine the Chairperson position and the principal executive officer
position and has appointed a Vice President of the Administrator as the
President of the Trust, who routinely interacts with the unaffiliated investment
advisers of the Trust and comprehensively manages the operational aspects of the
Funds in the Trust. The Board reviews its structure and the structure of its
committees annually. The Board has determined that the structure of the
Independent Chairperson, the composition of the Board, and the function and
composition of its various committees are appropriate means to address any
potential conflicts of interest that may arise.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and discusses these matters with appropriate management and
other personnel. Because risk management is a broad concept comprised of many
elements (e.g., 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 Audit Committee
meets with the Treasurer and the Trust’s independent registered public
accounting firm to discuss, among other things, the internal control structure
of the Trust’s financial reporting function. The Board meets regularly with the
Chief Compliance Officer to discuss compliance and operational risks and how
they are managed. The Board also receives reports from the Adviser as to
investment risks of the Fund. In addition to these reports, from time to time
the Board receives reports from the Administrator and the Adviser as to
enterprise risk management.
Information
about Each Trustee’s Qualification, Experience, Attributes or Skills
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills (“Trustee Attributes”) appropriate to their continued
service as Trustees of the Trust in light of the Trust’s business and structure.
In addition to a demonstrated record of business and/or professional
accomplishment, each of the Trustees has served on the Board for a number of
years. They have substantial board experience and, in their service to the
Trust, have gained substantial insight as to the operation of the Trust. They
have demonstrated a commitment to discharging their oversight duties as trustees
in the interests of shareholders. The Board annually conducts a
“self-assessment” wherein the effectiveness of the Board and individual Trustees
is reviewed.
In
addition to the information provided in the chart above, below is certain
additional information concerning each particular Trustee and his/her Trustee
Attributes. The information is not all-inclusive. Many Trustee Attributes
involve intangible elements, such as intelligence, integrity, work ethic, the
ability
to work together, the ability to communicate effectively, the ability to
exercise judgment, to ask incisive questions, and commitment to shareholder
interests.
Ms.
Barr’s Trustee Attributes include her substantial mutual fund experience,
including her role as Chair of the Governing Council for the Independent
Directors Council and member of the ICI Board of Governors. She has executive
experience as the former owner of a registered investment adviser (Productive
Capital Management, Inc.), as the Chief Administrative Officer, Senior Vice
President and Senior Managing Director of Allegiant Asset Management Company
(merged with PNC Capital Advisors LLC in 2009), and as the Chief Administrative
Officer, Chief Compliance Officer and Senior Vice President of PNC Funds and PNC
Advantage Funds (f/k/a Allegiant Funds). Ms. Barr also currently serves on the
board of several registered investment companies. Ms. Barr has been determined
to qualify as an Audit Committee financial expert for the Trust. The Board
believes Ms. Barr’s experience, qualifications, attributes or skills on an
individual basis and in combination with those of the other Trustees led to the
conclusion that she possesses the requisite skills and attributes as a Trustee
to carry out oversight responsibilities with respect to the Trust.
Mr.
Falkeis’ Trustee Attributes include his substantial ETF and mutual fund
experience and his experience with financial, accounting, investment and
regulatory matters through his former position as Senior Vice President and
Chief Financial Officer (and other positions) of U.S. Bancorp Fund
Services, LLC, a full-service provider to ETFs, mutual funds and alternative
investment products. Mr. Falkeis currently serves as Chief Operating Officer and
Chief Executive Officer of Tidal ETF Services LLC, (2018 to present), formerly,
Chief Growth Officer of Tidal Financial Group, and he has experience consulting
with investment advisers regarding the legal structure of investment companies,
distribution channel analysis, marketing and actual distribution of those funds.
Mr. Falkeis also has substantial managerial, operational and risk oversight
experience through his former positions as Chief Operating Officer and Trustee
of the Direxion Funds and the Direxion Exchange Traded Funds. Mr. Falkeis has
been determined to qualify as an Audit Committee financial expert for the Trust.
The Board believes Mr. Falkeis’ experience, qualifications, attributes or skills
on an individual basis and in combination with those of the other Trustees led
to the conclusion that he possesses the requisite skills and attributes as a
Trustee to carry out oversight responsibilities with respect to the
Trust.
Mr.
Paggioli’s Trustee Attributes include his substantial mutual fund and investment
advisory experience. Mr. Paggioli is an independent consultant on investment
company and investment advisory matters. He has held a number of senior
positions with mutual fund and investment advisory organizations and related
businesses, including Executive Vice President, Director and Principal of the
Wadsworth Group (fund administration, distribution transfer agency and
accounting services). He serves on the boards of several investment management
companies and advisory firms. He is a member of the Board of Governors of the
Investment Company Institute and of the Governing Council of the Independent
Directors Council. He has served on various industry association and
self-regulatory committees and formerly worked on the staff of the SEC. Mr.
Paggioli has been determined to qualify as an Audit Committee financial expert
for the Trust. The Board believes Mr. Paggioli’s experience,
qualifications, attributes or skills on an individual basis and in combination
with those of the other Trustees led to the conclusion that he possesses the
requisite skills and attributes as a Trustee to carry out oversight
responsibilities with respect to the Trust.
Mr. Parikh’s
Trustee Attributes include his substantial investment and executive experience
in the asset management industry, including his position as Chief Executive
Officer and Chief Investment Officer of RidgeWorth Investments (global
investment management firm with over $41 billion in assets). He has also
served as a Trustee of several investment trusts (including private investment
trusts). Mr. Parikh has ongoing responsibility as a member of the
Investment Working Group as part of the Board of Directors
for
the Ohio State University Endowments & Foundation, as well as an ongoing
position as a member of the Investment Committee for the World Methodist Council
Endowment Fund (a charitable religious foundation). Mr. Parikh has been
determined to qualify as an Audit Committee financial expert for the Trust. The
Board believes Mr. Parikh possesses the requisite skills and attributes as
a Trustee to carry out oversight responsibilities with respect to the
Trust.
Ms.
Fornelli’s Trustee Attributes include her substantial governance, legal,
regulatory and business experience, including her role as an Independent
Director of TriplePoint Venture Growth BDC Corp and TriplePoint Private Venture
Credit, Inc. She has broad leadership experience in strategy formulation,
corporate governance and risk management. She has executive experience as the
Executive Director of Center for Audit Quality (2007-2019), Senior Vice
President of Regulatory and Conflicts Management at Bank of America (2005-2007)
and Deputy Director, Division of Investment Management with the US Securities
and Exchange Commission (1998-2005). Ms. Fornelli has been determined to qualify
as an Audit Committee financial expert for the Trust. The Board believes Ms.
Fornelli’s experience, qualifications, attributes or skills on an individual
basis and in combination with those of the other Trustees led to the conclusion
that she possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
Trust
Committees
The
Trust has three standing committees: the Nominating and Governance Committee,
and the Audit Committee, which also serves as the Qualified Legal Compliance
Committee (“QLCC”).
The
Nominating and Governance Committee, comprised of all of the Independent
Trustees, is responsible for seeking and reviewing candidates for consideration
as nominees for Trustees and meets only as necessary. The Nominating and
Governance Committee is also responsible for, among other things, assisting the
Board in its oversight of the Trust’s compliance program under Rule 38a-1 under
the 1940 Act, reviewing and making recommendations regarding Independent Trustee
compensation and the Trustees’ annual “self-assessment.” The Nominating and
Governance Committee has appointed Independent Trustee Eric Falkeis as the
Chairperson of the Committee. The Nominating and Governance Committee will
consider nominees nominated by shareholders. Recommendations for consideration
by shareholders 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 By-Laws. In general, to comply with
such procedures, such nominations, together with all required biographical
information, must be delivered to and received by the President of the Trust at
the principal executive offices of the Trust not later than 120 days and no more
than 150 days prior to the shareholder meeting at which any such nominee would
be voted on. The Nominating and Governance Committee met once during the Funds’
last fiscal year ended December 31, 2023.
The
Audit Committee is comprised of all of the Independent Trustees. The Audit
Committee has appointed Independent Trustee Cynthia Fornelli as the Chairperson
of the Committee. The Audit Committee generally meets on a quarterly basis with
respect to the various series of the Trust, and may meet more frequently. The
function of the Audit Committee, with respect to each series of the Trust, is to
review the scope and results of the audit of such series’ financial statements
and any matters bearing on the audit or the financial statements, and to ensure
the integrity of the series’ pricing and financial reporting. The Audit
Committee met once with respect to the Funds during their last fiscal year ended
December 31, 2023.
The
function of the QLCC is to receive reports from an attorney retained by the
Trust of evidence of a material violation by the Trust or by any officer,
director, employee or agent of the Trust. The QLCC did not meet with respect to
the Funds during their last fiscal year ended December 31, 2023.
Trustee
Ownership of Fund Shares and Other Interests
The
following table shows the amount of shares in the Funds and the amount of shares
in other portfolios of the Trust owned by the Trustees as of the calendar year
ended December 31, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name |
Dollar
Range of
Credit
Opportunities
Fund Shares |
Dollar
Range of
U.S. High Yield Fund
Shares |
Dollar
Range of
Low Duration
Fund Shares |
Aggregate
Dollar
Range of Fund
Shares in the Trust |
| Kathleen
T. Barr |
None |
None |
None |
$10,001-$50,000 |
| Eric
W. Falkeis |
$50,001-$100,000 |
None |
None |
$10,001-$50,000 |
| Steven
J. Paggioli |
None |
None |
None |
Over
$100,000 |
| Ashi
S. Parikh |
$10,001-$50,000 |
None |
None |
Over
$100,000 |
| Cynthia
Fornelli |
None |
None |
None |
None |
Furthermore,
neither the Independent Trustees nor members of their immediate family, own
securities beneficially or of record in the Advisor, the Funds’ principal
underwriter, or any of their affiliates. Accordingly, during the two most
recently completed calendar years, neither the Independent Trustees nor members
of their immediate family, have had a direct or indirect interest, the value of
which exceeds $120,000, in the Advisor, the Funds’ principal underwriter or any
of its affiliates.
Compensation
Effective
January 1, 2024, the Independent Trustees were due to receive an annual retainer
of $145,000 allocated among each of the various portfolios comprising the Trust,
an additional $8,000 per regularly scheduled Board meeting, and an additional
$3,500 per special meeting, paid by the Trust or applicable advisors/portfolios,
as well as reimbursement for expenses incurred in connection with attendance at
Board meetings. The Chairperson of the Audit Committee receives additional
compensation of $20,000 annually, the Chairperson of the Nominating and
Governance Committee receives additional compensation of $8,000 annually and the
Chairperson of the Board of Trustees receives additional compensation of $30,000
annually, and such compensation is also allocated among each of the various
portfolios comprising the Trust. Independent Trustees receive additional fees
from the applicable portfolios for any special meetings at rates assessed by the
Trustees depending on the length of the meeting and whether in-person attendance
is required. All Trustees will be reimbursed for expenses in connection with
each Board meeting attended, which reimbursement is allocated among applicable
portfolios of the Trust. The Trust has no pension or retirement plan. No other
entity affiliated with the Trust pays any compensation to the Trustees. Set
forth below is the rate of compensation received by the following Independent
Trustees for the fiscal year ended December 31, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
of Person/Position
|
Credit
Opportunities
Fund |
U.S.
High
Yield
Fund |
Low
Duration
Fund |
Pension
or
Retirement
Benefits
Accrued as
Part
of
Fund
Expenses |
Estimated
Annual
Benefits
Upon
Retirement |
Total
Compensation
from
Fund
and
Fund
Complex(1)
Paid
to
Trustees |
| Kathleen
T. Barr, Trustee |
$4,939 |
$3,953 |
$7,687 |
None |
None |
$16,579 |
| Eric
W. Falkeis, Trustee |
$4,933 |
$3,903 |
$7,810 |
None |
None |
$16,646 |
| Steve
J. Paggioli, Trustee |
$4,478 |
$3,506 |
$7,187 |
None |
None |
$15,171 |
|
Ashi
S. Parikh, Trustee |
$4,478 |
$3,506 |
$7,187 |
None |
None |
$15,171 |
| Cynthia
Fornelli, Trustee |
$4,965 |
$3,887 |
$7,988 |
None |
None |
$16,840 |
(1)There
are currently numerous portfolios comprising the Trust. The term “Fund Complex”
applies only to the Funds. For the fiscal year ended December 31, 2023,
cumulative Trustees’ fees and expenses were received in the amount of
$963,000.
Investment
Advisor
Muzinich
& Co., Inc., 450 Park Avenue, New York, New York 10022 serves as investment
advisor to each Fund pursuant to an investment advisory agreement with the Trust
(the “Advisory Agreement”). Under the Advisory Agreement, the Advisor furnishes,
at its own expense, all services, facilities and personnel necessary in
connection with managing each Fund’s investments and effecting portfolio
transactions for each Fund. The Advisor may also pay fees to certain
brokers/dealers to have the Funds available for sale through such institutions
as well for certain shareholder services provided to customers purchasing Fund
shares through such institutions. Muzinich is completely independent and is
controlled by the Muzinich family.
Information
Regarding Portfolio Managers
The
following information regarding each Fund’s portfolio managers has been provided
by the Advisor.
Other
Accounts Under Management. 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 the advisory
fees with respect to any of these accounts are based on account performance,
this information is reflected in separate tables below. Information in the table
is shown as of December 31, 2023. Asset amounts are approximate and have been
rounded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Portfolio
Manager |
Registered
Investment
Companies
(excluding the Funds) |
| Other
Pooled
Investment Vehicles |
| Other
Accounts |
Number
of
Accounts |
| Total
Assets in
the Accounts |
| Number
of
Accounts |
| Total
Assets in
the Accounts |
| Number
of
Accounts |
| Total
Assets in
the Accounts |
| Low
Duration Fund |
| Joseph
Galzerano |
1 |
| $164
million |
| 20 |
| $14,309
million |
| 7 |
| $821
million |
| Tatjana
Greil Castro |
0 |
| $0 |
| 4 |
| $10,998
million |
| 7 |
| $871
million |
| Ian
Horn |
0 |
| $0 |
| 4 |
| $10,998
million |
| 6 |
| $538
million |
| Eric
Schure |
0 |
| $0 |
| 3 |
| $10,829
million |
| 4 |
| $351
million |
| Richard
Smith |
0 |
| $0 |
| 14 |
| $11,647
million |
| 2 |
| $159
million |
| U.S.
High Yield Fund |
| Sam
McGairl |
0 |
| $0 |
| 2 |
| $1,402
million |
| 5 |
| $291
million |
| Bryan
Petermann |
0 |
| $0 |
| 8 |
| $2,448
million |
| 22 |
| $3,016
million |
| Kevin
Ziets |
0 |
| $0 |
| 9 |
| $2,576
million |
| 22 |
| $3,016
million |
| Credit
Opportunities Fund |
| Anthony
DeMeo |
1 |
| $164
million |
| 7 |
| $2,776
million |
| 7 |
| $716
million |
| Stuart
Fuller |
0 |
| $0 |
| 7 |
| $2,994
million |
| 3 |
| $461
million |
| Joseph
Galzerano |
1 |
| $164
million |
| 20 |
| $14,309
million |
| 7 |
| $821
million |
| Warren
Hyland |
1 |
| $164
million |
| 21 |
| $5,677
million |
| 7 |
| $1,820
million |
| Michael
L. McEachern |
1 |
| $164
million |
| 5 |
| $2,574
million |
| 7 |
| $712
million |
| Thomas
Samson |
1 |
| $164
million |
| 12 |
| $4,200
million |
| 15 |
| $3,447
million |
The
following table reflects information regarding accounts for which the portfolio
manager has day-to-day management responsibilities and with respect to which the
advisory fee is based on account performance. Information is shown as of
December 31, 2023. Asset amounts are approximate and have been rounded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Portfolio
Manager |
Registered
Investment Companies (excluding the Funds) |
| Other
Pooled
Investment Vehicles |
| Other
Accounts |
| Number
of Accounts |
| Total
Assets in the Accounts |
| Number
of Accounts |
| Total
Assets in the Accounts |
| Number
of Accounts |
| Total
Assets in the Accounts |
| Low
Duration Fund |
| Joseph
Galzerano |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Tatjana
Greil Castro |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Ian
Horn |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Eric
Schure |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Richard
Smith |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| U.S.
High Yield Fund |
| Sam
McGairl |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Bryan
Petermann |
0 |
| $0 |
| 1 |
| $94
million |
| 1 |
| $377
million |
| Kevin
Ziets |
0 |
| $0 |
| 1 |
| $94
million |
| 1 |
| $377
million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Portfolio
Manager |
Registered
Investment Companies (excluding the Funds) |
| Other
Pooled
Investment Vehicles |
| Other
Accounts |
| Credit
Opportunities Fund |
| Anthony
DeMeo |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Stuart
Fuller |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Joseph
Galzerano |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Warren
Hyland |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Michael
L. McEachern |
0 |
| $0 |
| 0 |
| $0 |
| 0 |
| $0 |
| Thomas
Samson |
0 |
| $0 |
| 1 |
| $361
million |
| 1 |
| $377
million |
Conflicts
of Interest for Portfolio Managers
Muzinich
endeavors to treat all clients fairly and provide high quality investment
services. However, in addition to managing the Funds, each of Muzinich’s
portfolio managers also manages other accounts, which may include mutual funds
other than the Funds as well as other investment funds and institutional
separate accounts. Some of the other accounts may be managed pursuant to similar
investment strategies as the Funds, while other accounts may be managed pursuant
to different investment strategies. Moreover, certain accounts may pay higher
management fees than the Funds and certain accounts may pay performance fees. In
addition, portfolio managers and their family members may own investments or
other proprietary interests in one or more accounts, and also may directly own
investments in securities which Muzinich recommends for purchase and/or sale to
its clients. Accordingly, the side-by-side management of the Funds and the other
accounts presents a variety of actual and/or potential conflicts of interest, as
a portfolio manager may be incentivized to favor other accounts over the Funds.
For instance, in allocating securities for which there may not be sufficient
quantities available for all relevant accounts to purchase, a portfolio manager
may be incentivized to allocate purchases to accounts other than the Funds.
Portfolio managers may similarly be incentivized to allocate sale opportunities
to certain accounts other than the Funds in circumstances where liquidity is
limited. In addition, one or more accounts may hold securities issued by a
company in which one or more of the Funds hold securities with rights which are
senior or subordinated rights relative to such other accounts. As a result of
the foregoing, portfolio managers may have conflicts of interest because the
applicable Funds’ interest in, and rights with respect to, the portfolio company
may differ from the interests of such other accounts, particularly when an
issuer experiences financial distress. In addition, the management of numerous
accounts other than the Funds may result in a portfolio manager devoting less
time and attention to the investments of the Funds. Furthermore, where portfolio
managers and/or other Muzinich personnel have a material interest in or obtain
material non-public information with respect to a company, the Funds may be
prevented from transacting in the securities of such company.
In
addition to the conflicts of interest described above, Muzinich’s portfolio
managers are also subject to many of the same conflicts of interest that
Muzinich itself faces as a global investment management firm that offers a wide
variety of investment strategies and services. Some of these conflicts are
described below.
Various
conflicts of interest arise in connection with Muzinich’s advisory activities on
behalf of numerous clients. Muzinich and its affiliates may effect transactions
for the accounts of one or more clients that differ materially from the advice
given, or the time or nature of action taken, with respect to one or more other
clients. Accordingly, the results of Muzinich’s investment activities for a
client may differ significantly from the results achieved by Muzinich for other
clients. Furthermore, Muzinich may give advice, and take action, with respect to
a client that may compete or conflict with the advice
Muzinich
may give to, or an investment action Muzinich may take on behalf of, other
clients. Accordingly, Muzinich may buy or sell positions for one client while
undertaking for another client the same or a different, including potentially
opposite, strategy or position. For instance, Muzinich may take short positions
in the securities of certain issuers for the account of a client at the same
time that other client accounts hold or acquire the securities and/or syndicated
loans of such issuers. The short position may result in the impairment of the
price of the long position(s) held or may be designed to profit from a decline
in the price of the applicable securities and/or loans. Moreover, a client
account could similarly be adversely impacted if it establishes a short
position, following which one or more other client accounts takes a long
position in the same or similar securities and/or syndicated loans.
Furthermore,
the timing of transactions entered into or recommended by Muzinich, on behalf of
itself or its clients, may negatively impact certain other client accounts or
benefit certain other client accounts. For example, if, Muzinich on behalf of
one or more client accounts, implements an investment decision or strategy ahead
of, or contemporaneously with, or behind similar investment decisions or
strategies made for other client accounts, it could result, due to market impact
or other factors, in liquidity constraints or in certain client accounts
receiving less favorable investment or trading results or incurring increased
costs.
Conflicts
also may arise in cases where different Muzinich clients invest in different
parts of an issuer’s capital structure. For example, Muzinich may invest in
senior debt obligations of an issuer for one client and junior debt obligations
or equity of the same issuer for another client. Accordingly, one client might
recover all or part of its investment while the other client might not.
Moreover, clients will not be required to take any action or refrain from taking
any action to mitigate another client’s losses in such a scenario. In
negotiating the terms and conditions of any such investments, or any subsequent
amendments or waivers, Muzinich may find that its own interests, the interests
of one or more clients and/or the interests of one or more other clients could
conflict. In these situations, decisions over items such as whether to make or
exit such an investment, exercise certain rights, or take or determine not to
take an action, and/or the voting of proxies (including any such matters in
respect of a corporate reorganization or bankruptcy or similar matters
(including, for example, whether to trigger an event of default or the terms of
any workout)) may result in conflicts of interest.
Similarly,
if an issuer in which a client and one or more other clients hold different
classes of securities (or other assets, instruments or obligations issued by
such issuer) encounters financial problems, decisions over the terms of any
workout will raise conflicts of interest (including, for example, conflicts over
proposed waivers and amendments to debt covenants). For example, a debt holder
may be better served by a liquidation of the issuer in which it may be paid in
full, whereas an equity holder might prefer a reorganization that holds the
potential to create or retain value for the equity holders. Furthermore,
Muzinich may choose to participate in certain ad hoc or other committees on
behalf of its clients as part of such restructuring, work out or bankruptcy
processes. In such instances, Muzinich may, by virtue of receipt of material
non-public information with respect to the issuer, become restricted from
transacting on behalf of its clients in the securities or other instruments of
such issuer. Moreover, in situations in which clients hold positions in multiple
parts of the capital structure of an issuer and/or in situations in which
clients’ interests may otherwise diverge, Muzinich may determine not to
participate in such a committee in order to mitigate conflicts; clients may be
disadvantaged by Muzinich’s refraining from serving in such
capacity.
In
some cases Muzinich may refrain from taking certain actions or making certain
investments on behalf of clients in order to avoid or mitigate certain conflicts
of interest or to prevent adverse regulatory or other effects on Muzinich, or
may sell investments for certain clients (in each case potentially
disadvantaging the clients on whose behalf the actions are not taken,
investments not made, or investments sold). For
instance,
in circumstances in which client accounts including one or more registered
investment funds would be positioned to make side-by-side investments or
otherwise take action with respect to an issuer in which such client accounts
hold an investment, Muzinich, acting on behalf of the client accounts, may be
limited in the terms of the transactions that it may negotiate under applicable
law. In some cases, this has the effect of limiting the ability of certain
client accounts from participating in certain transactions or result in terms to
client accounts that are less favorable than would have otherwise been the case.
Forgone investment opportunities or actions may adversely affect the performance
of a client’s account if similarly attractive opportunities are not available or
cannot be identified.
Muzinich
may receive fees from certain clients based on a share of positive returns of
the client’s assets under management. To the extent that Muzinich receives only
investment management fees from certain clients and investment management fees
and performance‐based fees from certain other clients, Muzinich and/or its
portfolio managers will have a conflict of interest in that clients with a
performance‐based fee will offer Muzinich a potential for higher profitability
when compared to a client with only an investment management fee.
Performance‐based fee arrangements will also create an incentive for Muzinich
and its portfolio managers to favor performance-based fee clients over other
clients in the devotion of time, resources and allocation of investment
opportunities. For instance, Muzinich may be incentivized to provide access to
certain research analysts employed by Muzinich and/or to direct additional
investment opportunities to clients from whom Muzinich receives performance fees
which are not available to other clients. This may impact relative performance
of such clients as compared to other clients.
Muzinich,
from time to time, recommends securities in which Muzinich and/or one or more of
its affiliates, directly or indirectly, has an interest. In addition, Muzinich,
its affiliates, its employees, and employees of its affiliates may have invested
and may in the future make further investments, directly or indirectly, of their
own capital in certain investment funds managed by Muzinich. This may represent
a conflict of interest for Muzinich when allocating trades, correcting errors,
engaging in cross transactions or otherwise making investment decisions on
behalf of these investment funds because Muzinich may be incentivized to favor
such investment funds over other clients of Muzinich. With respect to trade
allocation in particular, these potential conflicts may be greater when
purchasing securities that are limited in supply or selling securities that have
limited liquidity. Muzinich seeks to manage these conflicts by allocating
investment opportunities among accounts in a manner that Muzinich determines
fair and equitable under the circumstances and in accordance with its policies
and procedures regarding trade allocations.
Muzinich,
its employees and its affiliates may invest in issuers that they also recommend
to clients. However, Muzinich, its employees and affiliates may not trade for
their personal accounts in securities which are either restricted or in which
their investment may result in a conflict of interest. They also may give advice
and take action with respect to client accounts they manage, or for their own
accounts, that may differ from action taken, or the time or nature of the action
taken, by the firm or its affiliates on behalf of other client accounts.
Muzinich is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that Muzinich or its affiliates or
their respective employees may buy or sell for their own accounts or for the
accounts of any other client.
The
majority of trades Muzinich makes for its clients are executed through the open
market and it is Muzinich’s policy to generally prohibit cross trades. However,
when Muzinich believes, on a limited case-by-case basis, that it is in the best
interest of all clients involved, such as an account liquidation or large
withdrawal of funds, it may engage in “cross trading” – a transaction where one
or more clients purchases securities from one or more other clients. In such
circumstances, and where consistent with Muzinich’s duty to seek best execution,
Muzinich may select an unaffiliated third party broker-dealer to facilitate the
cross trade, the clients will pay a transaction based fee to the third party
broker-dealer, but
Muzinich
will receive no transaction‐based compensation from the transaction. Where a
fund registered under the 1940 Act is involved, including a Fund, the
transaction will be executed in accordance with the provisions of Rule 17a‐7
under the 1940 Act. In other cases, the transaction will be executed in a
manner, and at a price, that Muzinich believes to be fair for all involved
clients. Muzinich has adopted procedures to seek the fair treatment of clients
in cross trades, including procedures that prohibit funds in which Muzinich or
its employees hold more than a 25% interest, from participating in cross trades.
From
time to time, Muzinich or its personnel may obtain material non-public
information about an issuer of securities. Muzinich has implemented policies and
procedures that are reasonably designed to prevent the misuse by the firm and
its personnel of material non-public information about the firm’s securities
recommendations and clients’ securities holdings and transactions. Where
Muzinich is in possession of material non-public information about an issuer, it
may be unable to purchase or sell securities of that issuer, even if it would be
otherwise advisable to do so. This may prevent Muzinich’s clients, including the
Funds, from capitalizing on investment opportunities or mitigating
losses.
To
manage these and other potential conflicts, Muzinich has adopted and implemented
a Compliance Manual including a Code of Ethics, a trade allocation and
aggregation policy and numerous other policies and procedures which are
reasonably designed to ensure that clients are treated fairly and equitably over
time and in a manner consistent with fiduciary duties.
Information
Concerning Compensation of Portfolio Managers
Muzinich
offers a compensation system with incentives designed to stimulate individual
and firm-wide performance. The firm provides salaries that are augmented through
a profit sharing bonus system, the relative weighting of which varies each year
with firm and individual performance. For the portfolio managers, the relative
performance of portfolios managed by them as compared to the market (as
applicable to each account and its benchmarks) is a significant factor in the
determination of their bonus.
Muzinich
typically pays out a substantial percentage of its net profits in employee
compensation. Accordingly, all members of the firm are highly incentivized to
grow the firm’s profits through both portfolio performance and the overall
success of the firm.
For
all employees, including portfolio managers, individual performance is
considered not only within a professional’s immediate responsibilities (e.g., an
analyst’s investment recommendations), but also in relation to an individual’s
positive contribution to the firm as a whole. Understanding that all of the
firm’s portfolios are managed on a team basis, all team members benefit directly
from the success of the investment management effort across all
products.
Employees’
greatest financial reward should always come from the long-term success of firm
clients and the extended profitability of the firm as a whole, rather than from
shorter-term success.
Portfolio
Managers Ownership in the Funds. The
following indicates the beneficial ownership of the Portfolio Managers of each
Fund as of December 31, 2023:
|
|
| |
|
Amount
Invested Key
A.None
B.$1-$10,000
C.$10,001-$50,000
D.$50,001-$100,000
E.$100,001-$500,000
F.$500,001-$1,000,000
G.Over
$1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
| |
Name
of
Portfolio Manager |
Dollar
Range of Equity Securities in each Fund
|
|
| Credit
Opportunities
Fund |
U.S.
High
Yield Fund |
Low
Duration Fund |
| Anthony
DeMeo |
A |
A |
A |
| Stuart
Fuller |
A |
A |
A |
| Joseph
Galzerano |
D |
A |
A |
| Tatjana
Greil Castro |
A |
A |
A |
| Ian
Horn |
A |
A |
A |
| Warren
Hyland |
A |
A |
A |
| Michael
L. McEachern |
F |
A |
A |
| Sam
McGairl |
A |
A |
A |
| Bryan
Petermann |
A |
E |
A |
| Thomas
Samson |
A |
A |
A |
| Eric
Schure |
A |
A |
A |
| Richard
Smith |
A |
A |
A |
| Kevin
Ziets |
A |
F |
A |
Fees
The
Advisor’s fee is calculated as a percentage of each Fund’s average daily net
assets. The fee, if not waived, is accrued daily by each Fund and is assessed to
each Fund based on average net assets for the previous month. The Advisor’s fee
is paid monthly based on average net assets for the prior month.
In
addition to receiving its advisory fee from each Fund, the Advisor may also act
and be compensated as investment manager for its clients with respect to assets
clients invested in each Fund. If you have a separately managed account with the
Advisor with assets invested in a Fund, the Advisor will credit your fees in
respect of such separately managed account such that the Advisor will not be
paid twice on separately managed account assets which are invested in the Fund.
The
Advisor may also receive compensation from certain omnibus account providers for
providing shareholder services to Fund shareholders.
The
Credit Opportunities Fund paid the following fees to the Advisor for the fiscal
years shown:
|
|
|
|
|
|
|
|
|
|
|
| |
| Credit
Opportunities Fund |
Fiscal
Year Ended
December 31, 2023 |
Fiscal
Year Ended
December 31, 2022 |
Fiscal
Year Ended
December 31, 2021 |
| Advisory
Fee Accrued |
$1,718,171 |
$2,037,239 |
$2,834,154 |
| Fees
and waived and/or expenses absorbed by Advisor |
$486,807 |
$666,995 |
$794,011 |
| Total
Fees Paid to the Advisor |
$1,231,364 |
$1,370,244 |
$2,040,143 |
The
U.S. High Yield Fund paid the following fees to the Advisor for the fiscal years
shown:
|
|
|
|
|
|
|
|
|
|
|
| |
| U.S.
High Yield Fund |
Fiscal
Year Ended
December 31, 2023 |
Fiscal
Year Ended
December 31, 2022 |
Fiscal
Year Ended
December 31, 2021 |
| Advisory
Fee Accrued |
$198,552 |
$162,564 |
$198,086 |
| Fees
waived and/or expenses absorbed by Advisor |
$198,552 |
$162,564 |
$198,086 |
| Total
Fees Paid to the Advisor |
$0 |
$0 |
$0 |
The
Low Duration Fund paid the following fees to the Advisor for the fiscal years
shown:
|
|
|
|
|
|
|
|
|
|
|
| |
| Low
Duration Fund |
Fiscal
Year Ended
December 31, 2023 |
Fiscal
Year Ended
December 31, 2022 |
Fiscal
Year Ended
December 31, 2021 |
| Advisory
Fee Accrued |
$4,655,683 |
$2,353,288 |
$1,649,575 |
| Fees
waived and/or expenses absorbed by Advisor |
$838,624 |
$596,208 |
$479,636 |
| Total
Fees Paid to the Advisor |
$3,817,059 |
$1,757,080 |
$1,169,939 |
Other
Provisions of Advisory Agreement
The
Advisor is not affiliated with Fund Services or any company affiliated with Fund
Services. The Advisory Agreement is initially in effect for a period of two
years from the date of its effectiveness. Subsequently, the Advisory Agreement
must be approved at least annually by the Board or by majority vote of the
shareholders, and in either case by a majority of the Trustees who are not
parties to the agreements or interested persons of any such party (other than as
Trustees of the Trust).
The
Advisory Agreement is terminable without penalty by the Trust with respect to a
Fund on 60 days’ written notice when authorized either by vote of the
Fund’s shareholders or by a majority vote of the Board, or by the Advisor on
60 days’ written notice to the Trust. The Advisory Agreement terminates
immediately upon assignment.
Under
the Advisory Agreement, the Advisor is not liable for any error of judgment,
mistake of law, or in any event whatsoever except for willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the agreement.
In
consideration of the services provided by the Advisor pursuant to the Investment
Advisory Agreement, the Advisor is entitled to receive from the Funds an
investment advisory fee computed daily and paid monthly, based on a rate equal
to 0.60% of the Credit Opportunities Fund’s, 0.55% of the U.S. High Yield
Fund’s, and 0.45% of the Low Duration Fund’s average daily net assets as
specified in each Fund’s Prospectus. However, the Advisor may voluntarily agree
to reduce a portion of the fees payable to it on a month to month
basis.
The
Funds are responsible for their own operating expenses. The Advisor has
contractually agreed to reduce fees and/or pay Fund expenses (excluding taxes,
interest expenses, interest on short positions, portfolio transaction expenses,
acquired fund fees and expenses, extraordinary expenses, Rule 12b-1 fees,
shareholder servicing fees and any other class specific expenses) in order to
limit the Total Annual Fund Operating Expenses After Fee Waiver and/or Expense
Reimbursement for shares of the Credit Opportunities Fund to 0.60% of the Fund’s
average net assets (the “Expense Cap”). The Expense Cap for the U.S. High Yield
Fund is 0.58% of the Fund’s average net assets. The Expense Cap for the Low
Duration Fund is 0.50% of the Fund’s average net assets. The Expense Caps are
indefinite, but will remain in effect until at least April 30, 2025, and may
continue thereafter as determined by the Board. The Advisor is permitted, with
Board approval, to be reimbursed for fee reductions and/or expenses payments
made in the prior three years from the date the fees were waived and/or expenses
were paid. This reimbursement may be requested if the aggregate amount actually
paid by the Fund toward operating expenses for such period (taking into account
any reimbursement) does not exceed the lesser of the Expense Cap in place at the
time of the waiver or at the time of reimbursement.
Other
Fund Service Providers
Administrator
and Accountant
U.S.
Bank Global Fund Services (“Fund Services”), 615 East Michigan Street,
Milwaukee, Wisconsin 53202, acts as administrator to the Funds pursuant to an
administration agreement (the “Administration Agreement”). Fund Services
provides certain administrative services to the Funds, including, among other
responsibilities, coordinating the negotiation of contracts and fees with, and
the monitoring of performance and billing of, the Funds’ independent contractors
and agents; preparation for signature by an officer of the Trust of all
documents required to be filed for compliance by the Trust and the Funds with
applicable laws and regulations excluding those of the securities laws of
various states; arranging for the computation of performance data, including 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, the Administrator will receive a portion of
fees from the Funds as part of a bundled-fees agreement for services performed
as Administrator, fund accountant and transfer agent. Additionally, Fund
Services provides Chief Compliance Officer services to the Trust under a
separate agreement. The cost for the Chief Compliance Officer’s services is
charged to the Funds and approved by the Board annually.
For
the fiscal year and period ended December 31, Fund Services received the
following amounts as compensation with respect to the Funds for its services as
Fund Administrator and Accountant:
|
|
|
|
|
| |
| Administration
Fees Paid by Credit Opportunities Fund |
|
| Fiscal
Year Ended December 31, 2023 |
$110,466 |
|
| Fiscal
Year Ended December 31, 2022 |
$157,707 |
|
| Fiscal
Year Ended December 31, 2021 |
$210,416 |
|
|
|
|
|
|
| |
| Administration
Fees Paid by U.S. High Yield Fund |
|
| Fiscal
Year Ended December 31, 2023 |
$29,519 |
|
| Fiscal
Year Ended December 31, 2022 |
$33,218 |
|
| Fiscal
Year Ended December 31, 2021 |
$32,753 |
|
|
|
|
|
|
| |
| Administration
Fees Paid by Low Duration Fund |
|
| Fiscal
Year Ended December 31, 2023 |
$397,036 |
|
| Fiscal
Year Ended December 31, 2022 |
$215,197 |
|
| Fiscal
Year Ended December 31, 2021 |
$151,911 |
|
Custodian
U.S.
Bank N.A. is the Custodian for the Funds and safeguards and controls the Funds’
cash and securities, determines income and collects interest on Fund
investments. The Custodian’s address is 1555 North RiverCenter Drive, Suite 302,
Milwaukee, Wisconsin 53212. The Custodian does not participate in decisions
relating to the purchase and sale of securities by the Funds. U.S. Bank Global
Fund Services and U.S. Bank N.A., are affiliated entities under the common
control of U.S. Bancorp. The Custodian and its affiliates may participate in
revenue sharing arrangements with the service providers of mutual funds in which
the Funds may invest.
Legal
Counsel
Sullivan
& Worcester LLP, 1251 Avenue of the Americas, 19th Floor, New York, New York
10020, serves as legal counsel to the Trust. Sullivan & Worcester also
serves as independent legal counsel to the Board of Trustees.
Independent
Registered Public Accounting Firm
Tait,
Weller & Baker LLP, Two Liberty Place, 50 South 16th Street, Suite 2900,
Philadelphia, Pennsylvania 19102 is the Funds’ independent registered public
accounting firm, providing audit services, tax services and assistance with
respect to the preparation of filings with the U.S. Securities and Exchange
Commission.
PORTFOLIO
TRANSACTIONS
How
Securities are Purchased and Sold
Purchases
and sales of portfolio securities that are fixed income securities (for
instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom a Fund
purchases or to whom a Fund sells is acting on its own behalf (and not as the
agent of some other party such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for these
securities.
Purchases
and sales of portfolio securities that are equity securities (for instance
common stock and preferred stock) are generally effected: (1) if the
security is traded on an exchange, through brokers who charge commissions; and
(2) if the security is traded in the “over-the-counter” markets, in a
principal transaction directly from a market maker. In transactions on stock
exchanges, commissions are
negotiated.
When transactions are executed in an over-the-counter market, the Advisor will
seek to deal with the primary market makers; but when necessary in order to
obtain best execution, the Advisor will utilize the services of
others.
The
price of securities purchased from underwriters includes a disclosed fixed
commission or concession paid by the issuer to the underwriter, and prices of
securities purchased from dealers serving as market makers reflects the spread
between the bid and asked price.
In
the case of fixed income and equity securities traded in the over-the-counter
markets, there is generally no stated commission, but the price usually includes
an undisclosed commission or markup.
Advisor
Responsibility for Purchases and Sales
The
Advisor places orders for the purchase and sale of securities with
broker-dealers selected by and in the discretion of the Advisor. The Fund does
not have any obligation to deal with a specific broker or dealer in the
execution of portfolio transactions. Allocations of transactions to brokers and
dealers and the frequency of transactions are determined by the Advisor in its
best judgment and in a manner deemed to be in the best interest of each Fund
rather than by any formula.
The
Advisor seeks “best execution” for all portfolio transactions. This means that
the Advisor seeks the most favorable price and execution available. The
Advisor’s or Sub-Advisor’s primary consideration in executing transactions for
the Fund is prompt execution of orders in an effective manner and at the most
favorable price available.
Choosing
Broker-Dealers
The
Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commissions (including certain dealer spreads) paid in
connection with securities transactions, the Advisor takes into account factors
such as size of the order, difficulty of execution, efficiency of the executing
broker’s facilities (including the research services described below) and any
risk assumed by the executing broker.
Consistent
with applicable rules and the Advisor’s duties, the Advisor may consider
payments made by brokers effecting transactions for a Fund. These payments may
be made to a Fund or to other persons on behalf of a Fund for services provided
to a Fund for which those other persons would be obligated to pay.
The
Advisor may also utilize a broker and pay a slightly higher commission or price
if, for example, the broker has specific expertise in a particular type of
transaction (due to factors such as size or difficulty), or it is efficient in
trade execution.
The
Fund may also be prohibited from placing trades with certain brokers if those
brokers should become affiliates of the Fund, for example, through significant
investments by their clients in the Fund—even if such broker could otherwise
provide “best execution” with regard to a particular trade, and may be doing so
on behalf of other accounts or funds advised by the Advisor.
For
the fiscal years shown below, the Credit Opportunities Fund paid aggregate
brokerage commissions in the amount of:
|
|
|
|
|
| |
|
|
Aggregate
Brokerage Commissions |
| Fiscal
Year Ended December 31, 2023 |
$9,186 |
| Fiscal
Year Ended December 31, 2022 |
$8,368 |
| Fiscal
Year Ended December 31, 2021 |
$7,219 |
For
the fiscal period shown below, the U.S. High Yield Fund paid aggregate brokerage
commissions in the amount of:
|
|
|
|
|
| |
|
|
Aggregate
Brokerage Commissions |
| Fiscal
Year Ended December 31, 2023 |
$0 |
| Fiscal
Year Ended December 31, 2022 |
$0 |
| Fiscal
Year Ended December 31, 2021 |
$0 |
For
the fiscal period shown below, the Low Duration Fund paid aggregate brokerage
commissions in the amount of:
|
|
|
|
|
| |
|
|
Aggregate
Brokerage Commissions |
| Fiscal
Year Ended December 31, 2023 |
$32,334 |
| Fiscal
Year Ended December 31, 2022 |
$0 |
| Fiscal
Year Ended December 31, 2021 |
$0 |
Obtaining
Research from Brokers
The
Advisor has full brokerage discretion. The Advisor evaluates the range and
quality of a broker’s services in placing trades such as securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. The Advisor may give
consideration to research services furnished by brokers to the Advisor for its
use and may cause a Fund to pay these brokers a higher amount of commission than
may be charged by other brokers. This research is designed to augment the
Advisor’s own internal research and investment strategy capabilities. This
research may include reports that are common in the industry such as industry
research reports and periodicals, quotation systems, software for portfolio
management and formal databases. Typically, the research will be used to service
all of the Advisor accounts, although a particular client may not benefit from
all the research received on each occasion. The Advisor’s fees are not reduced
by reason of receipt of research services.
Pursuant
to the second Markets in Financial Instruments Directive (“MiFID II”),
investment managers in the European Union (“EU”), including a segment of the
operations of the Advisor, are required to either pay for research out of their
own resources or agree with clients to have research costs paid by clients
through research payment accounts that are funded out of trading commissions or
by a specific client research charge, provided that the payments for research
are unbundled from the payments for execution. Where such a restriction applies,
the Advisor will pay for any research out of its own resources and not through
soft dollars or client commission agreements (CCAs). Additionally, MiFID II may
have practical ramifications outside the EU. For example, U.S. asset managers
acting under the delegated authority of an EU-based asset manager and U.S. asset
managers that are part of a global asset management group with one or more EU
affiliates may, in practice, have to restructure the way they procure, value and
pay for research under U.S. laws and regulations to more closely align with the
requirements under MiFID II. It is
difficult
to predict the full impact of MiFID II on the Funds and the Advisor, but it
could increase the overall costs of entering into investments, increase the
overall price of research and/or reduce access to research.
Counterparty
Risk
The
Advisor monitors the creditworthiness of counterparties to each Fund’s
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal and appropriate credit risks.
Other
Accounts of the Advisor
Investment
decisions for the Funds are made independently from those for any other account
or investment company that is or may in the future become advised by the Advisor
or its affiliates. Investment decisions are the product of many factors,
including basic suitability for the particular client involved. Likewise, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the security. In some instances, one client may sell a
particular security to another client. In addition, two or more clients may
simultaneously purchase or sell the same security, in which event, each day’s
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which, in the Advisor’s opinion,
is in the best interest of the affected accounts and is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of a portfolio security for one client
could have an adverse effect on another client that has a position in that
security. In addition, when purchases or sales of the same security for the Fund
and other client accounts managed by the Advisor occurs contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales.
Portfolio
Turnover
The
frequency of portfolio transactions of each Fund (the portfolio turnover rate)
will vary from year to year depending on many factors. From time to time, a Fund
may engage in active short-term trading to take advantage of price movements
affecting individual issues, groups of issues or markets. An annual portfolio
turnover rate of 100% would occur if all the securities in a Fund were replaced
once in a period of one year. Higher portfolio turnover rates may result in
increased brokerage costs to a Fund and a possible increase in short-term
capital gains or losses. Each Fund’s annual portfolio turnover rates for the
last five years will be included in the “Financial Highlights” section of the
Funds’ prospectus.
Following
is the Credit Opportunities Fund’s portfolio turnover rate for the two most
recent fiscal years:
|
|
|
|
|
| |
| Portfolio
Turnover Rate |
|
| Year
Ended December 31, 2023 |
135 |
% |
| Year
Ended December 31, 2022 |
168 |
% |
Following
is the U.S. High Yield Fund’s portfolio turnover rate for the two most recent
fiscal years:
|
|
|
|
|
| |
| Portfolio
Turnover Rate |
|
| Year
Ended December 31, 2023 |
76 |
% |
| Year
Ended December 31, 2022 |
59 |
% |
Following
is the Low Duration Fund’s portfolio turnover rate for the two most recent
fiscal years:
|
|
|
|
|
| |
| Portfolio
Turnover Rate |
|
| Year
Ended December 31, 2023 |
49 |
% |
| Year
Ended December 31, 2022 |
26 |
% |
Securities
of Regular Broker-Dealers
From
time to time, a Fund may acquire and hold securities issued by its “regular
brokers and dealers” or the parents of those brokers and dealers. For this
purpose, regular brokers and dealers are the 10 brokers or dealers that:
(1) received the greatest amount of brokerage commissions during a Fund’s
last fiscal year; (2) engaged in the largest amount of principal
transactions for portfolio transactions of a Fund during the Fund’s last fiscal
year; or (3) sold the largest amount of a Fund’s shares during the Fund’s
last fiscal year.
During
the fiscal year ended December 31, 2023, the Credit Opportunities Fund, U.S.
High Yield Fund, and Low Duration Fund did not acquire or hold securities issued
by their regular brokers or dealers.
Portfolio
Holdings
The
Trust, on behalf of the Funds, has adopted a portfolio holdings disclosure
policy that governs the timing and circumstances of disclosure of portfolio
holdings of each Fund. The Advisor has also adopted a policy with respect to
disclosure of portfolio holdings of each Fund (the “Advisor’s Policy”).
Information about each Fund’s portfolio holdings will not be distributed to any
third party except in accordance with the portfolio holdings policies and the
Advisor’s Policy (the “Disclosure Policies”). The Advisor and the Board
considered the circumstances under which each Fund’s portfolio holdings may be
disclosed under the Disclosure Policies and the actual and potential material
conflicts that could arise in such circumstances between the interests of a
Fund’s shareholders and the interests of the Advisor, distributor or any other
affiliated person of a Fund. After due consideration, the Advisor and the Board
determined that each Fund has a legitimate business purpose for disclosing
portfolio holdings to persons described in the Disclosure Policies, including
mutual fund rating or statistical agencies, or persons performing similar
functions, and internal parties involved in the investment process,
administration or custody of a Fund. Pursuant to the Disclosure Policies, the
Trust’s Chief Compliance Officer (“CCO”), President and Treasurer are each
authorized to consider and authorize dissemination of portfolio holdings
information to additional third parties, after considering the best interests of
each Fund’s shareholders and potential conflicts of interest in making such
disclosures.
The
Board exercises continuing oversight of the disclosure of each Fund’s portfolio
holdings by (1) overseeing the implementation and enforcement of the
Disclosure Policies, Codes of Ethics and other relevant policies of the Fund and
its service providers by the Trust’s CCO, (2) by considering reports and
recommendations by the Trust’s CCO concerning any material compliance matters
(as defined in Rule 38a‑1 under the 1940 Act), and (3) by considering to
approve any amendment to the Disclosure Policies. The Board reserves the right
to amend the Disclosure Policies at any time without prior notice to
shareholders in its sole discretion.
Disclosure
of each Fund’s complete holdings is required to be made after the periods
covered by the Funds’ Annual Report and Semi-Annual Report to Fund shareholders
and in the monthly holdings report on Form N-PORT. These reports are available,
free of charge, on the EDGAR database on the SEC’s website at www.sec.gov. The
Funds disclose their complete portfolio holdings on their website at
www.MuzinichUSFunds.com within 10 business days after the calendar month-end.
Portfolio holdings
information
posted on the Funds’ website may be separately provided to any person,
commencing on the day after it is first published on the Funds’ website. In
addition, each Fund may provide its complete portfolio holdings at the same time
that it is filed with the SEC.
In
the event of a conflict between the interests of a Fund and the interests of the
Advisor or an affiliated person of the Advisor with respect to the disclosure of
portfolio holdings, the CCO of the Advisor, in consultation with the Trust’s
CCO, shall make a determination in the best interests of the Fund, and shall
report such determination to the Board at the end of the quarter in which such
determination was made. Any employee of the Advisor who suspects a breach of
this obligation must report the matter immediately to the Advisor’s CCO or to
his or her supervisor.
In
addition, material non-public holdings information may be provided without lag
as part of the normal investment activities of a Fund to each of the following
entities, which, by explicit agreement or by virtue of their respective duties
to the Fund, are required to maintain the confidentiality of the information
disclosed, including a duty not to trade on non-public information: the fund
administrator, fund accountant, custodian, transfer agent, auditors, counsel to
the Fund or the Board, broker-dealers (in connection with the purchase or sale
of securities or requests for price quotations or bids on one or more
securities) and regulatory authorities. Portfolio holdings information not
publicly available with the SEC or through the Fund’s website may only be
provided to additional third parties, including mutual fund ratings or
statistical agencies, in accordance with the Disclosure Policies, when a Fund
has a legitimate business purpose and the third-party recipient is subject to a
confidentiality agreement that includes a duty not to trade on non-public
information.
In
no event shall the Advisor, its affiliates or employees, a Fund, or any other
party receive any direct or indirect compensation in connection with the
disclosure of information about the Fund’s portfolio holdings.
There
can be no assurance that the Disclosure Policies will protect the Funds from
potential misuse of portfolio holdings information by individuals or entities to
which it is disclosed.
From
time to time, the Advisor may make additional disclosure of the Funds’ portfolio
holdings on the Funds’ website. Shareholders can access the Funds’ website at
www.MuzinichUSFunds.com for additional information about the Funds, including,
without limitation, the periodic disclosure of their portfolio
holdings.
ADDITIONAL
PURCHASE AND REDEMPTION INFORMATION
The
information provided below supplements the information contained in the
Prospectus regarding the purchase and redemption of a Fund’s
shares.
How
to Buy Shares
In
addition to purchasing shares directly from the Funds, you may purchase shares
of the Funds through certain financial intermediaries and their agents that have
made arrangements with a Fund and are authorized to buy and sell shares of the
Fund (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. If you transmit your order to these Financial Intermediaries before
the close of regular trading (generally 4:00 p.m., Eastern time) on a day that
the NYSE is open for business, your order will be priced based on the Fund’s NAV
next computed after it is received by the Financial Intermediary. Investors
should check with their Financial Intermediary to determine if it participates
in these arrangements.
The
public offering price of a Fund’s shares is the NAV plus any applicable sales
charge. Shares are purchased at the public offering price next determined after
Fund Services receives your order in proper form, as discussed in the Funds’
Prospectus. In order to receive that day’s public offering price, Fund Services
must receive your order in proper form 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 a Fund’s shares, (ii) to reject purchase orders in
whole or in part when in the judgment of the Advisor or the distributor such
rejection is in the best interest of a Fund, 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 a Fund’s shares.
In
addition to cash purchases, a Fund’s shares may be purchased by tendering
payment in-kind in the form of shares of stock, bonds or other securities. Any
securities used to buy a Fund’s shares must be readily marketable, their
acquisition consistent with each Fund’s objective and otherwise acceptable to
the Advisor and the Board.
Notice
to Non-U.S. Individual Shareholders
Each
Fund and its shares are only registered in the United States of America.
Regulations outside of the United States may restrict the sale of shares to
certain non-U.S. residents or subject certain shareholder accounts to additional
regulatory requirements. Each Fund reserves the right, however, to sell shares
to certain non-U.S. investors in compliance with applicable law. If a current
shareholder in a Fund provides a non-U.S. address, this will be deemed a
representation and warranty from such investor that he/she is not a U.S.
resident and will continue to be a non-U.S. resident unless and until the Fund
is notified of a change in the investor’s resident status. Any current
shareholder that has a resident address outside of the United States may be
restricted from purchasing additional shares.
In
the course of its business, each Fund (and/or its service providers) may
collect, record, store, adapt, transfer and otherwise process information by
which prospective and current natural person investors may be directly or
indirectly identified. The Funds shall comply with all applicable data
protection regulation in processing personal data, including the EU General Data
Protection Regulation (EU/2016/679) (GDPR). For European Union resident
shareholders, personal data will be generally processed to open an
account,
manage and administer holding(s), including further subscriptions, redemptions,
transfers or conversions, or otherwise as necessary to comply with the Funds’
legal obligations under GDPR.
Automatic
Investment Plan
As
discussed in the Prospectus, the Funds provide an Automatic Investment Plan
(“AIP”) for the convenience of investors who wish to purchase shares of a Fund
on a regular basis. All record keeping and custodial costs of the AIP are paid
by a Fund. The market value of a Fund’s shares is subject to fluctuation. Prior
to participating in the AIP the investor should keep in mind that this plan does
not assure a profit nor protect against depreciation in declining
markets.
How
to Sell Shares and Delivery of Redemption Proceeds
You
can sell your Fund shares any day the NYSE is open for regular trading, either
directly to a Fund or through your Financial Intermediary.
Payments
to shareholders for shares of a Fund redeemed directly from the Fund will be
made as promptly as possible, but no later than seven days after receipt by the
Fund’s transfer agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that a Fund may
suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC
or the NYSE is closed for other than weekends and holidays; (b) an
emergency exists as determined by the SEC, making disposal of portfolio
securities or valuation of net assets of the Fund not reasonably practicable; or
(c) for such other period as the SEC may permit for the protection of a
Fund’s shareholders. Under unusual circumstances, a Fund may suspend
redemptions, or postpone payment for more than seven days, but only as
authorized by SEC rules.
The
value of shares on redemption or repurchase may be more or less than the
investor’s cost, depending upon the market value of a Fund’s portfolio
securities at the time of redemption or repurchase.
Telephone
Redemptions
Shareholders
with telephone transaction privileges established on their account may redeem a
Fund’s shares by telephone. Upon receipt of any instructions or inquiries by
telephone from the shareholder a Fund or its authorized agents may carry out the
instructions and/or to 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, a Fund and its
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.
Fund
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If Fund Services fails to employ
reasonable procedures, a Fund and Fund Services may be liable for any losses due
to unauthorized or fraudulent instructions. If these procedures are followed,
however, that to the extent permitted by applicable law, neither a Fund nor its
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 Fund Services.
Redemptions
In-Kind
The
Trust has elected to be governed by Rule 18f-1 under the 1940 Act so that each
Fund is obligated to redeem its shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any
shareholder of a Fund. Each Fund has reserved the right to pay the redemption
price of its shares in excess of $250,000 or l% of its net asset value, either
totally or partially, by a distribution in-kind of portfolio securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the NAV for the shares being sold. If a
shareholder receives a distribution in-kind, the shareholder 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. A redemption in-kind is treated as a taxable transaction and a sale of the
redeemed shares, generally resulting in capital gain or loss to you, subject to
certain loss limitation rules.
Each
Fund does not intend to hold any significant percentage of its portfolio in
illiquid securities, although a Fund, like virtually all mutual funds, may from
time to time hold a small percentage of securities that are illiquid. In the
unlikely event a Fund were to elect to make an in-kind redemption, a Fund
expects that it would follow the Trust protocol of making such distribution by
way of a pro rata distribution of securities that are traded on a public
securities market or are otherwise considered liquid pursuant to the Fund’s
liquidity policies and procedures. Except as otherwise may be approved the
Trustees, the securities that would not be included in an in-kind distribution
include (1) unregistered securities which, if distributed, would be required to
be registered under the Securities Act of 1933 (the “1933 Act”), as amended; (2)
securities issued by entities in countries which (a) restrict or prohibit the
holding of securities by non-nationals other than through qualified investment
vehicles, such as a fund, or (b) permit transfers of ownership of securities to
be effected only by transactions conducted on a local stock exchange; and (3)
certain Fund assets that, although they may be liquid and marketable, must be
traded through the marketplace or with the counterparty to the transaction in
order to effect a change in beneficial ownership.
Distributions
Distributions
of net investment income will be reinvested at the Fund’s NAV (unless you elect
to receive distributions in cash) as of the last day of the period with respect
to which the distribution is paid. Distributions of capital gain will be
reinvested at the NAV of the Fund (unless you elect to receive distributions in
cash) on the payment date for the distribution. Cash payments may be made more
than seven days following the date on which distributions would otherwise be
reinvested. A dividend declared by a Fund in October, November or December to
shareholders of record on a specified date in such a month and paid during the
following January will be treated for tax purposes as paid in
December.
TAXATION
The
tax information set forth in the Prospectus and the information in this section
relates solely to Federal income tax law and assumes that each Fund qualifies as
a regulated investment company (as discussed below). Such information is only a
summary of certain key Federal income tax considerations affecting a Fund and
its shareholders and is in addition to the information provided in the
Prospectus. No attempt has been made to present a complete explanation of the
Federal tax treatment of a Fund or the tax implications to shareholders. The
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning. The Funds do not consider tax consequences to be of
primary importance in making investment decisions. You may receive taxable
distributions from a Fund during periods in which the share price has
declined.
This
“Taxation” section is based on the Code and applicable regulations in effect on
the date of the Prospectus. Future legislative or administrative changes or
court decisions may significantly change the tax rules applicable to the Fund
and its shareholders. Any of these changes or court decisions may have a
retroactive effect.
All
investors should consult their own tax advisors as to the Federal, state, local
and foreign tax consequences of an investment in a Fund.
Qualification
as a Regulated Investment Company
Each
Fund intends, for each tax year, to qualify as a “regulated investment company”
under the Code.
Federal
Income Tax Consequences of Qualification
As
a regulated investment company, a Fund will not be subject to Federal income tax
on the portion of its net taxable income (that is, taxable interest, dividends,
net short-term capital gains and other taxable ordinary income, net of expenses)
and net capital gain (that is, the excess of net long-term capital gains over
net short-term capital losses) that it distributes to shareholders. In order to
qualify to be taxed as a regulated investment company, generally a Fund must
satisfy the following requirements:
•A
Fund must distribute at least 90% of its net taxable income and 90% of its net
tax-exempt interest, if any, each tax year (certain distributions made by the
Fund after the close of its tax year are considered distributions attributable
to the previous tax year for purposes of satisfying this requirement
(“Distribution Requirement”)).
•A
Fund must derive at least 90% of its gross income each year from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities, or other income (including gains from options
and futures contracts) derived from its business of investing in securities and
net income derived from interests in qualified publicly traded
partnerships.
•A
Fund must satisfy the following asset diversification test at the close of each
quarter of the Fund’s tax year: (1) at least 50% of the value of the Fund’s
assets must consist of cash, cash items, U.S. Government securities, securities
of other regulated investment companies, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of the Fund’s total
assets in securities of an issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of the issuer); and (2) no
more than 25% of the value of the Fund’s total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses or in the securities of one or more qualified publicly traded
partnerships.
While
each Fund presently intends to make cash distributions (including distributions
reinvested in Fund shares) for each tax year in an aggregate amount sufficient
to satisfy the Distribution Requirement and eliminate Federal income tax, a Fund
may use “equalization accounting” (in lieu of making some or all cash
distributions) for those purposes. A Fund that uses equalization accounting will
allocate a portion of its undistributed net taxable income and net capital gain
to redemptions of Fund shares and will correspondingly reduce the amount of such
income and gain that it distributes in cash. If the IRS determines that a Fund’s
allocation is improper and that the Fund has under-distributed its income and
gain for any tax year, the Fund may be liable for Federal income and/or excise
tax, and, if the Distribution
Requirement
has not been met, may also be unable to continue to qualify for treatment as a
regulated investment company (see discussion below on what happens if a Fund
fails to qualify for that treatment).
Failure
to Qualify
If
for any tax year a Fund does not qualify as a regulated investment company, all
of its taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for dividends paid to
shareholders, and the dividends will be taxable to the shareholders as ordinary
income to the extent of the Fund’s current and accumulated earnings and
profits.
Failure
to qualify as a regulated investment company would thus have a negative impact
on a Fund’s income and performance. It is possible that a Fund will not qualify
as a regulated investment company in any given tax year.
Fund
Distributions
Each
Fund anticipates distributing substantially all of its net taxable income for
each tax year. These distributions are taxable to you as ordinary income.
Each
Fund anticipates distributing substantially all of its net capital gain for each
tax year. Distributions for the Credit Opportunities Fund generally are made
quarterly, usually in March, June, September and December, but the Fund may make
additional distributions of net capital gain at any time during the year.
Distributions for the U.S. High Yield Fund and Low Duration Fund are made at
least monthly. These distributions are taxable to you as long-term capital gain,
regardless of how long you have held shares. These distributions do not qualify
for the dividends-received deduction.
For
taxable years beginning after 2017 and before 2025, non-corporate taxpayers
generally may deduct 20% of "qualified business income" derived either directly
or through partnerships or S corporations. For this purpose, "qualified business
income" generally includes ordinary real estate investment trust ("REIT")
dividends and income derived from master limited partnership ("MLP")
investments. Regulations recently adopted by the United States Treasury allow
non-corporate shareholders of a Fund to benefit from the 20% deduction with
respect to net REIT dividends received by the Fund if the Fund meets certain
reporting requirements, but do not permit any such deduction with respect to
publicly traded partnerships.
The
Funds will operate on a fiscal, and therefore taxable, year ending December 31
of each year.
Distributions
by a Fund that do not constitute ordinary income dividends or capital gain
dividends will be treated as a return of capital. Return of capital
distributions reduce your tax basis in the shares and are treated as gain from
the sale of the shares to the extent of distributions after your basis has been
reduced to zero.
All
distributions by a Fund will be treated in the manner described above regardless
of whether the distribution is paid in cash or reinvested in additional shares
of the Fund (or of another fund). If you receive distributions in the form of
additional shares, you will be treated as receiving a distribution in an amount
equal to the fair market value of the shares received, determined as of the
reinvestment date.
You
may purchase shares with an NAV at the time of purchase that reflects
undistributed net investment income or recognized capital gain, or unrealized
appreciation in the value of the assets of a Fund.
Distributions
of these amounts are taxable to you in the manner described above, although the
distribution economically constitutes a return of capital to you.
Ordinarily,
you are required to take distributions by a Fund into account in the year in
which they are made. A distribution declared in October, November or December of
any year and payable to shareholders of record on a specified date in those
months, however, is deemed to be paid by the Fund and received by you on
December 31 of that calendar year if the distribution is actually paid in
January of the following year.
Each
Fund will send you information annually as to the Federal income tax
consequences of distributions made (or deemed made) during the
year.
Certain
Tax Rules Applicable to the Funds’ Transactions
For
Federal income tax purposes, when put and call options purchased by a Fund
expire unexercised, the premiums paid by the Fund give rise to short- or
long-term capital losses at the time of expiration (depending on the length of
the respective exercise periods for the options). When put and call options
written by a Fund expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. When a Fund
exercises a call, the purchase price of the underlying security is increased by
the amount of the premium paid by the Fund. When a Fund exercises a put, the
proceeds from the sale of the underlying security are decreased by the premium
paid. When a put or call written by a Fund is exercised, the purchase price
(selling price in the case of a call) of the underlying security is decreased
(increased in the case of a call) for tax purposes by the premium
received.
Certain
listed options, regulated futures contracts and forward currency contracts are
considered “Section 1256 contracts” for Federal income tax purposes.
Section 1256 contracts held by a Fund at the end of each tax year are
“marked to market” and treated for Federal income tax purposes as though sold
for fair market value on the last business day of the tax year. Gains or losses
realized by a Fund on Section 1256 contracts generally are considered 60%
long-term and 40% short-term capital gains or losses. A Fund can elect to exempt
its Section 1256 contracts that are part of a “mixed straddle” (as
described below) from the application of Section 1256.
Any
option, futures contract or other position entered into or held by a Fund in
conjunction with any other position held by the Fund may constitute a “straddle”
for Federal income tax purposes. A straddle of which at least one, but not all,
the positions are Section 1256 contracts, may constitute a “mixed
straddle.” In general, straddles are subject to certain rules that may affect
the character and timing of a Fund’s gains and losses with respect to straddle
positions by requiring, among other things, that: (1) the loss realized on
disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund’s holding period in straddle positions may be
suspended while the straddle exists (possibly resulting in a gain being treated
as short-term capital gain rather than long-term capital gain); (3) the
losses recognized with respect to certain straddle positions which are part of a
mixed straddle and which are non-Section 1256 contracts may be treated as
60% long-term and 40% short-term capital loss; (4) losses recognized with
respect to certain straddle positions which would otherwise constitute
short-term capital losses may be treated as long-term capital losses; and
(5) the deduction of interest and carrying charges attributable to certain
straddle positions may be deferred. Various elections are available to a Fund,
which may mitigate the effects of the straddle rules, particularly with respect
to mixed straddles. In general, the straddle rules described above do not apply
to any straddles held by a Fund if all of the offsetting positions consist of
Section 1256 contracts.
Under
the Code, gains or losses attributable to fluctuations in exchange rates which
occur between the time a Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies, from the disposition of debt securities
denominated in a foreign currency, or from the disposition of a forward contract
denominated in a foreign currency which are attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the asset and
the date of disposition also are treated as ordinary income or loss. These gains
or losses, referred to under the Code as “Section 988” gains or losses,
increase or decrease the amount of the Fund’s net taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund’s net capital gain.
As
of December 31, 2023, the Credit Opportunities Fund had short-term capital loss
carryovers of $23,526,074 and long-term capital loss carryovers of $9,549,093,
with unlimited expiration. The U.S. High Yield Fund had short-term capital loss
carryovers of $1,140,618 and long-term capital loss carryovers of $2,238,817,
with unlimited expiration. The Low Duration Fund had short-term capital loss
carryovers of $18,172,752 and long-term capital loss carryovers of $31,125,044,
with unlimited expiration.
Federal
Excise Tax
A
4% nondeductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to: (1) 98% of
its ordinary taxable income for the calendar year; and (2) 98.2% of its
capital gain net income for the one-year period ended on October 31 of the
calendar year. The balance of each Fund’s income must be distributed during the
next calendar year. A Fund will be treated as having distributed any amount on
which it is subject to income tax for any tax year ending in the calendar
year.
For
purposes of calculating the excise tax, a Fund: (1) reduces its capital
gain net income (but not below its net capital gain) by the amount of any net
ordinary loss for the calendar year; and (2) excludes foreign currency
gains and losses incurred after October 31 of any year in determining the
amount of ordinary taxable income for the current calendar year. A Fund will
include foreign currency gains and losses incurred after October 31 in
determining ordinary taxable income for the succeeding calendar
year.
Each
Fund intends to make sufficient distributions of its ordinary taxable income and
capital gain net income prior to the end of each calendar year to avoid
liability for the excise tax. Investors should note, however, that a Fund might
in certain circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.
Sale,
Exchange or Redemption of Shares
In
general, you will recognize gain or loss on the sale, exchange or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale, exchange or redemption and your adjusted tax basis in the shares. All
or a portion of any loss so recognized may be disallowed if you purchase (for
example, by reinvesting dividends) Fund shares within 30 days before or after
the sale, exchange or redemption (a “wash sale”). If disallowed, the loss will
be reflected in an upward adjustment to the basis of the shares purchased. In
general, any gain or loss arising from the sale, exchange or redemption of
shares of a Fund will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. Any
capital loss arising from the sale, exchange or redemption of shares held for
six months or less, however, will be treated as a long-term capital loss to
the
extent of the amount of distributions of net capital gain received on such
shares. In determining the holding period of such shares for this purpose, any
period during which your risk of loss is offset by means of options, short sales
or similar transactions is not counted. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
non-corporate taxpayer, $3,000 of ordinary income.
Backup
Withholding
A
Fund will be required in certain cases to withhold and remit to the U.S.
Treasury at a rate under current law of 24% of distributions and the proceeds of
redemptions of shares paid to you if you: (1) have failed to provide your
correct taxpayer identification number; (2) are otherwise subject to backup
withholding by the IRS for failure to report the receipt of interest or dividend
income properly; or (3) have failed to certify to the Fund that you are not
subject to backup withholding or that you are a corporation or other “exempt
recipient.” Backup withholding is not an additional tax; rather any amounts so
withheld may be credited against your Federal income tax liability or refunded
if proper documentation is provided.
State
and Local Taxes
The
tax rules of the various states of the U.S. and their local jurisdictions with
respect to an investment in a Fund can differ from the Federal income taxation
rules described above. These state and local rules are not discussed herein. You
are urged to consult your tax advisor as to the consequences of state and local
tax rules with respect to an investment in the Fund.
Foreign
Income Tax
Investment
income received by a Fund from sources within foreign countries may be subject
to foreign income taxes withheld at the source. The United States has entered
into tax treaties with many foreign countries that may entitle the Fund to a
reduced rate of such taxes or exemption from taxes on such income. It is
impossible to know the effective rate of foreign tax in advance since the amount
of a Fund’s assets to be invested within various countries cannot be determined.
If more than 50% of the value of a Fund’s total assets at the close of its
taxable year consists of stocks or securities of foreign corporations, the Fund
will be eligible and intends to file an election with the IRS to pass through to
its shareholders the amount of foreign taxes paid by the Fund subject to certain
exceptions. However, there can be no assurance that a Fund will be able to do
so. Pursuant to this election, you will be required to (1) include in gross
income (in addition to taxable dividends actually received) your pro rata share
of foreign taxes paid by the Fund, (2) treat your pro rata share of such
foreign taxes as having been paid by you and (3) either deduct such pro
rata share of foreign taxes in computing your taxable income or treat such
foreign taxes as a credit against Federal income taxes. You may be subject to
rules which limit or reduce your ability to fully deduct, or claim a credit for,
your pro rata share of the foreign taxes paid by the Fund.
The
Foreign Account Tax Compliance Act (“FATCA”).
A
30% withholding tax on a Fund’s ordinary income distributions generally applies
if paid to a foreign entity unless: (i) if the foreign entity is a “foreign
financial institution,” it undertakes certain due diligence, reporting,
withholding and certification obligations, (ii) if the foreign entity is
not a “foreign financial institution,” it identifies certain of its U.S.
investors or (iii) the foreign entity is otherwise excepted under FATCA. If
applicable, and subject to any intergovernmental agreement, withholding under
FATCA is required generally with respect to ordinary income distributions
from the Funds. If withholding is required under FATCA on a payment related to
your shares, investors that otherwise would not be subject to withholding (or
that otherwise would be entitled to a reduced rate of withholding)
on
such payment generally will be required to seek a refund or credit from the IRS
to obtain the benefits of such exemption or reduction. The Funds will not pay
any additional amounts in respect of amounts withheld under FATCA. You should
consult your tax advisor regarding the effect of FATCA based on your individual
circumstances.
OTHER
MATTERS
Control
Persons and Principal Shareholders
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of a Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of a Fund or acknowledges the existence of control.
As
of April 1, 2024, the following shareholders were considered to be either a
control person or principal shareholder of the following Funds:
Principal
Shareholders of the Credit Opportunities Fund - Supra Institutional
Class
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
SEI
Private Trust Company
One Freedom Valley Drive
Oaks, Pennsylvania
19456-9989
|
35.95% |
Record |
Mac
& Co.
Attention Mutual Fund Operations
500 Grant Street Room
151-1010
Pittsburgh, Pennsylvania 15219-2502
|
35.88% |
Record |
Charles
Schwab & Co., Inc.
Special Custody Account
FBO
Customers
Attn: Mutual Funds
211 Main Street
San Francisco,
California 94105-1901
|
14.18% |
Record |
Pershing,
LLC
1 Pershing Plaza, 14th Floor
Jersey City, New Jersey
07399-0002
|
7.61% |
Record |
Principal
Shareholders of the Credit Opportunities Fund - Institutional Class
|
|
|
|
|
|
|
|
| |
| Name
and Address |
%
Ownership |
Type
of Ownership |
UBS
WM USA
1000 Harbor Boulevard
Weehawken, New Jersey
07086-6761
|
44.44% |
Record |
Attn:
NPIO Trade Desk
FBO PLIC Various Retirement Plans
Omnibus
711
High Street
Des Moines, Iowa 50392-0001
|
23.39% |
Beneficial |
|
|
|
|
|
|
|
|
| |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Charles
Schwab & Co., Inc.
Special Custody Account
FBO
Customers
Attn: Mutual Funds
211 Main Street
San Francisco,
California 94105-1901
|
19.05% |
Record |
Pershing,
LLC
1 Pershing Plaza, 14th Floor
Jersey City, New Jersey
07399-0002
|
8.32% |
Record |
Control
Persons of the U.S. High Yield Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
Capinco
c/o
U.S. Bank N.A.
1555 N. Rivercenter Dr., Suite 302
Milwaukee,
Wisconsin 53212-3958
|
U.S.
Bank |
DE |
41.74% |
Record |
Band
& Co.
c/o U.S. Bank N.A.
P.O. Box 1787
Milwaukee, Wisconsin
53201-1787 |
U.S.
Bank |
DE |
28.57% |
Record |
Principal
Shareholders of the U.S. High Yield Fund - Supra Institutional
Class
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Capinco
c/o U.S. Bank N.A.
1555 N. Rivercenter Dr., Suite 302
Milwaukee,
Wisconsin 53212-3958
|
38.67% |
Record |
Band
& Co.
c/o U.S. Bank N.A.
P.O. Box 1787
Milwaukee, Wisconsin
53201-1787
|
30.33% |
Record |
Attn:
Mutual Funds
c/o ID
SEI Private Trust Company
One Freedom Valley
Drive
Oaks, Pennsylvania 19456-9989
|
9.10% |
Record |
Maril
& Co FBO NG
c/o Reliance Trust Company WI
4900 W. Brown Deer
Rd.
Milwaukee, WI 53223-2422
|
8.45% |
Beneficial |
Principal
Shareholders of the U.S. High Yield Fund - Institutional Class
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Capinco
c/o U.S. Bank N.A.
1555 N. Rivercenter Dr., Suite 302
Milwaukee,
Wisconsin 53212-3958
|
91.47% |
Record |
Brown
Brothers Harriman & Co.
140 Broadway
New York, New York
10005-1108
|
5.54% |
Record |
Control
Persons of the Low Duration Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
JP
Morgan Securities LLC
For Exclusive Benefit of Customers
Attn: 3rd
Floor Mutual Fund Dept.
4 Chase Metrotech Center
Brooklyn, New York
11245-0003
|
J.P.
Morgan Broker-Dealer Holdings Inc. |
DE |
99.38% |
Record |
Principal
Shareholders of the Low Duration Fund - Supra Institutional Class
|
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
JP
Morgan Securities LLC
For Exclusive Benefit of Customers
Attn: 3rd
Floor Mutual Fund Dept.
4 Chase Metrotech Center
Brooklyn, New York
11245-0003
|
99.38% |
Record |
The
Credit Opportunities Fund does not have any control persons as of April 1,
2024.
As
of April 1, 2024, the Trustees and Officers as a group did not own more than 1%
of the outstanding shares of the Funds.
Proxy
Voting Procedures
The
Board has adopted Proxy Voting Policies and Procedures (the “Policies”) on
behalf of the Trust which delegate the responsibility for voting proxies to the
Advisor, subject to the Board’s continuing oversight. The Policies require that
the Advisor vote proxies received in a manner consistent with the best interests
of the Funds and their shareholders. The Policies also require the Advisor to
present to the Board, at least annually, the Advisor’s Proxy Policies (as
defined below) and a record of each proxy voted by the Advisor on behalf of the
Funds, including a report on the resolution of all proxies identified by the
Advisor as involving a conflict of interest. The Advisor has also adopted Proxy
Voting Policies and Procedures (“Advisor’s Proxy Policies”) which are attached
as Appendix B to this SAI.
The
Trust will file a Form N-PX, with each Fund’s complete proxy voting record for
the 12 months ended June 30, no later than August 31st of each year. Form
N‑PX for the Funds will be available without charge, upon request, by calling
toll-free 1-855-MUZINICH and on the SEC’s website at www.sec.gov.
Code
of Ethics
The
Trust and the Advisor have each adopted separate Codes of Ethics under Rule
17j-1 of the 1940 Act. These codes permit, subject to certain conditions, access
persons of the Advisor to invest in securities that may be purchased or held by
the Funds. The Distributor, as defined below, relies on the principal
underwriter’s exception under Rule 17j-1(c)(3), of the 1940 Act, specifically
where the Distributor is not affiliated with the Trust or the Advisor, and no
officer, director or general partner of the Distributor serves as an officer,
director or general partner of the Trust or the Advisor.
Registration
Statement
This
SAI and the Prospectus do not contain all the information included in the
Trust’s registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby. The registration statement, including
the exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements
contained herein and in the Prospectus as to the contents of any contract or
other documents are not necessarily complete, and, in each instance, are
qualified by, reference to the copy of such contract or other documents filed as
exhibits to the registration statement.
Distributor
Distribution
Services
Quasar
Distributors, LLC, Three Canal Plaza, Suite 100, Portland, Maine 04101
(“Quasar”), serves as the Fund’s principal underwriter in a continuous public
offering of the Fund’s shares. Pursuant to a distribution agreement between the
Fund and Quasar (the “Distribution Agreement”), Quasar acts as the Fund’s
principal underwriter and distributor (the “Distributor”) and provides certain
administration services and promotes and arranges for the sale of the Fund’s
shares. Quasar is a registered broker-dealer under the Securities Exchange Act
of 1934, as amended, and is a member of the Financial Industry Regulatory
Authority (“FINRA”).
The
Distribution Agreement between each Fund and Quasar will continue in effect only
if such continuance is specifically approved at least annually by the Board or
by vote of a majority of the Fund’s outstanding voting securities and, in either
case, by a majority of the Independent Trustees. The Distribution Agreement is
terminable without penalty by the Trust on behalf of the Fund on a 60-day
written notice when authorized either by a majority vote of the Fund’s
shareholders or by vote of a majority of the Board, including a majority of the
Independent Trustees, or by Quasar on a 60-day written notice, and will
automatically terminate in the event of its “assignment” (as defined in the
1940 Act).
Shareholder
Servicing Plan – (Institutional Shares)
Pursuant
to a Shareholder Service Plan (the “Plan”) adopted by the Trust and established
by the Funds with respect to the Institutional Class shares of the Funds, the
Advisor is authorized to provide, or arrange for others to provide, personal
shareholder services relating to the servicing and maintenance of shareholder
accounts not otherwise provided to the Funds (“Shareholder Servicing
Activities”). Under the Plan, the Advisor may enter into shareholder service
agreements with securities broker-dealers and other securities professionals
(“Service Organizations”) who provide Shareholder Servicing Activities for their
clients invested in the Funds.
Shareholder
Servicing Activities shall include one or more of the following:
(1) establishing and maintaining accounts and records relating for
shareholders of the Funds; (2) aggregating and processing orders involving
the shares of the Funds; (3) processing dividend and other distribution
payments from the Funds on behalf of shareholders; (4) providing
information to shareholders as to their ownership of Fund shares or about other
aspects of the operations of the Funds; (5) preparing tax reports or forms
on behalf of shareholders; (6) forwarding communications from the Funds to
shareholders; (7) assisting shareholders in changing the Funds’ records as
to their addresses, dividend options, account registrations or other data;
(8) providing sub-accounting with respect to shares beneficially owned by
shareholders, or the information to the Funds necessary for sub-accounting;
(9) responding to shareholder inquiries relating to the services performed;
(10) providing shareholders with a service that invests the assets of their
accounts in shares pursuant to specific or pre-authorized instructions; and
(11) providing such other similar services as the Advisor may reasonably
request to the extent the Service Organization is permitted to do so under
applicable statutes, rules or regulations.
As
compensation for the Shareholder Servicing Activities, each Fund pays the
Advisor a fee of up to 0.10% annually of each Fund’s Institutional Class shares’
average daily net assets of the shares owned by investors for which the
shareholder servicing agent maintains a servicing relationship or $22 per
account.
Any
material amendment to the Plan must be approved by the Board, including a
majority of the Independent Trustees, or by a vote of a “majority” (as defined
in the 1940 Act) of the outstanding voting securities of the applicable
class or classes. The Plan may be terminated, with respect to a class or classes
of the Funds, without penalty at any time: (1) by vote of a majority of the
Board, including a majority of the Independent Trustees; or (2) by a vote
of a “majority” (as defined in the 1940 Act) of the outstanding voting
securities of the applicable class or classes.
Institutional
Class shares are not offered for the Low Duration Fund. Institutional Class
shares that were open for the Low Duration Fund have since closed and been
converted into the Low Duration Fund Supra Institutional Class shares on close
of business November 25, 2022.
The
Credit Opportunities Fund and U.S. High Yield Fund paid the following amounts in
Plan fees for the periods ended December 31 shown below:
|
|
|
|
|
|
|
|
|
|
|
| |
| Shareholder
Servicing Plan Fees Paid |
2023 |
2022 |
2021 |
| Credit
Opportunities Fund |
$69,364 |
$87,929 |
$148,247 |
| U.S.
High Yield Fund |
$0 |
$0 |
$338 |
Marketing,
Support and Other Payments
The
Advisor, out of its own resources and without additional cost to the Fund or its
shareholders, may provide additional cash payments or other compensation to
certain Financial Intermediaries who sell shares of the Fund or provide
shareholder servicing to their customers holding shares of the Fund.
The
prospect of receiving, or the receipt of additional payments or other
compensation as described below by Financial Intermediaries, may provide such
intermediaries and/or their salespersons with an incentive to favor sales of
shares of the Fund, and other mutual funds whose affiliates make similar
compensation available, over sale of shares of mutual funds (or non-mutual fund
investments) not making such payments. You may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to the Fund shares.
These
payments may be divided into categories as follows:
Support
Payments.
Payments
may be made by the Advisor to certain Financial Intermediaries in connection
with the eligibility of the Fund to be offered in certain programs and/or in
connection with meetings between the Fund’s representatives and Financial
Intermediaries and their sales representatives. Such meetings may be held for
various purposes, including providing education and training about the Fund and
other general financial topics to assist Financial Intermediaries’ sales
representatives in making informed recommendations to, and decisions on behalf
of, their clients.
Entertainment,
Conferences, and Events.
The
Advisor also may pay cash or non-cash compensation to sales representatives of
Financial Intermediaries in the form of: (1) occasional gifts;
(2) occasional meals, tickets, or other entertainments; and/or
(3) sponsorship support for the Financial Intermediary’s client seminars
and cooperative advertising. In addition, the Advisor pays for exhibit space or
sponsorships at regional or national events of Financial
Intermediaries.
During
the Funds’ fiscal year, the following financial intermediaries were paid out of
the Adviser’s revenues:
|
|
| |
| Firm |
| Charles
Schwab |
| Pershing |
| TD
Ameritrade |
| National
Financial Services, LLC |
| UBS |
| RBC
Capital Markets LLC |
Shareholder
Servicing.
Many
Fund shares are owned by Financial Intermediaries for the benefit of their
customers. In those cases, the Fund may not maintain an account for the
shareholder. Thus, some or all of the transfer agency and administrative
functions for these accounts are performed by the Financial Intermediaries. A
portion of the fees charged by the Financial Intermediaries for these services
is paid out of the Advisor’s revenues. These amounts include, but are not
necessarily limited to, fees for shareholder servicing, sub-transfer agency,
sub-accounting and recordkeeping services. The amounts paid by the Advisor do
not include fees for shareholder servicing that may be paid separately by the
Fund pursuant to the Fund’s Distribution Plan and Shareholder Servicing
Plan.
Financial
Statements
The
Funds’ Annual
Report
to shareholders for the fiscal year ended December 31, 2023, is a separate
document available without charge, upon request, by calling 1-855-MUZINICH or
1-855-689-4642 and the financial statements, accompanying notes and report of
the independent registered public accounting firm appearing therein are
incorporated by reference into this SAI.
APPENDIX
A – DESCRIPTION OF SECURITIES RATINGS
A.
Long-Term Ratings
1.
Moody’s Investors Service – Long-Term Corporate Obligation Ratings
Moody’s
long-term obligation ratings are opinions of the relative credit risk of
fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings use Moody’s Global Scale and reflect both the likelihood
of default and any financial loss suffered in the event of default.
Aaa Obligations
rated Aaa are judged to be of the highest quality, with minimal credit
risk.
Aa Obligations
rated Aa are judged to be of high quality and are subject to very low credit
risk.
A Obligations
rated A are considered upper-medium grade and are subject to low credit
risk.
Baa Obligations
rated Baa are subject to moderate credit risk. They are considered medium grade
and as such may possess certain speculative characteristics.
Ba Obligations
rated Ba are judged to have speculative elements and are subject to substantial
credit risk.
B Obligations
rated B are considered speculative and are subject to high credit
risk.
Caa Obligations
rated Caa are judged to be of poor standing and are subject to very high credit
risk.
Ca Obligations
rated Ca are highly speculative and are likely in, or very near, default, with
some prospect of recovery of principal and interest.
C Obligations
rated C are the lowest rated class of bonds and are typically in default, with
little prospect for recovery of principal or interest.
Note
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
2.
Standard and Poor’s – Long-Term Issue Credit Ratings (including Preferred
Stock)
Issue
credit ratings are based, in varying degrees, on the following considerations:
•Likelihood
of payment—capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the
obligation;
•Nature
of and provisions of the obligation;
•Protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors’ rights.
Issue
ratings are an assessment of default risk, but may incorporate an assessment of
relative seniority or ultimate recovery in the event of default. Junior
obligations are typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company
obligations.)
AAA An
obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s.
The obligor’s capacity to meet its financial commitment on the obligation is
extremely strong.
AA An
obligation rated ‘AA’ differs from the highest-rated obligations only to a small
degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
A An
obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
BBB An
obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Note Obligations
rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant
speculative characteristics. ‘BB’ indicates the least degree of speculation and
‘C’ the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB An
obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the
obligation.
B An
obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated
‘BB’, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitment on the obligation.
CCC An
obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC An
obligation rated ‘CC’ is currently highly vulnerable to nonpayment.
C A
‘C’ rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of the
documents, or obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment default. Among
others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or
other obligations on which cash payments have been suspended in accordance with
the instrument’s terms.
D An
obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless Standard & Poor’s believes that such
payments will be made during such grace period. The ‘D’ rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Note Plus
(+) or minus (-). The ratings from ‘AA’ to ‘CCC’ may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within the major
rating categories.
NR This
indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor’s does not
rate a particular obligation as a matter of policy.
3.
Fitch – International Long-Term Credit Ratings
International
Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings.
When assigned to most issuers, it is used as a benchmark measure of probability
of default and is formally described as an Issuer Default Rating (IDR). The
major exception is within Public Finance, where IDRs will not be assigned as
market convention has always focused on timeliness and does not draw analytical
distinctions between issuers and their underlying obligations. When applied to
issues or securities, the LTCR may be higher or lower than the issuer rating
(IDR) to reflect relative differences in recovery expectations.
The
following rating scale applies to foreign currency and local currency
ratings:
Investment
Grade
AAA Highest
credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They
are assigned only in case of exceptionally strong capacity for payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
AA Very
high credit quality. ‘AA’ ratings denote expectations of very low credit risk.
They indicate very strong capacity for payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
A High
credit quality. ‘A’ ratings denote expectations of low credit risk. The capacity
for payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB Good
credit quality. ‘BBB’ ratings indicate that there are currently expectations of
low credit risk. The capacity for payment of financial commitments is considered
adequate but adverse changes in circumstances and economic conditions are more
likely to impair this capacity. This is the lowest investment grade
category.
Speculative
Grade
BB Speculative.
‘BB’ ratings indicate that there is a possibility of credit risk developing,
particularly as the result of adverse economic change over time; however,
business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B Highly
speculative. ‘B’ ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.
CCC Default
is a real possibility. Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic conditions.
CC Default
of some kind appears probable.
C Default
is imminent.
RD Indicates
an entity that has failed to make due payments (within the applicable grace
period) on some but not all material financial obligations, but continues to
honor other classes of obligations.
D Indicates
an entity or sovereign that has defaulted on all of its financial obligations.
Default generally is defined as one of the following:
•Failure
of an obligor to make timely payment of principal and/or interest under the
contractual terms of any financial obligation;
•The
bankruptcy filings, administration, receivership, liquidation or other
winding-up or cessation of business of an obligor;
•The
distressed or other coercive exchange of an obligation, where creditors were
offered securities with diminished structural or economic terms compared with
the existing obligation.
Default
ratings are not assigned prospectively; within this context, non-payment on an
instrument that contains a deferral feature or grace period will not be
considered a default until after the expiration of the deferral or grace
period.
Issuers
will be rated ‘D’ upon a default. Defaulted and distressed obligations typically
are rated along the continuum of ‘C’ to ‘B’ ratings categories, depending upon
their recovery prospects and other relevant characteristics. Additionally, in
structured finance transactions, where analysis indicates that an instrument is
irrevocably impaired such that it is not expected to meet pay interest and/or
principal in full in accordance with the terms of the obligation’s documentation
during the life of the transaction, but where no payment default in accordance
with the terms of the documentation is imminent, the obligation may be rated in
the ‘B’ or ‘CCC-C’ categories.
Default
is determined by reference to the terms of the obligations’ documentation. Fitch
will assign default ratings where it has reasonably determined that payment has
not been made on a material obligation in accordance with the requirements of
the obligation’s documentation, or where it believes that default ratings
consistent with Fitch’s published definition of default are the most appropriate
ratings to assign.
Note The
modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the ‘AAA’
Long-term rating category, to categories below ‘CCC’, or to Short-term ratings
other than ‘F1’. (The +/- modifiers are only used to denote issues within the
CCC category, whereas issuers are only rated CCC without the use of
modifiers.)
B.
Preferred Stock Ratings
1.
Moody’s Investors Service
Aaa An
issue which is rated “Aaa” is considered to be a top-quality preferred stock.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
Aa An
issue which is rated “Aa” is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well-maintained in the foreseeable
future.
A An
issue which is rated “A” is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater than in the “aaa” and “aa”
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
Baa An
issue which is rated “Baa” is considered to be a medium-grade preferred stock,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
Ba An
issue which is rated “Ba” is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
B An
issue which is rated “B” generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
Caa An
issue which is rated “Caa” is likely to be in arrears on dividend payments. This
rating designation does not purport to indicate the future status of
payments.
Ca An
issue which is rated “Ca” is speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payments.
C This
is the lowest rated class of preferred or preference stock. Issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note Moody’s
applies numerical modifiers 1, 2, and 3 in each rating classification; The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
C.
Short Term Ratings
1.
Moody’s Investors Service
Moody’s
short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs
or to individual short-term debt instruments. Such obligations generally have an
original maturity not exceeding thirteen months, unless explicitly
noted.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
P-1 Issuers
(or supporting institutions) rated Prime-1 have a superior ability to repay
short-term debt obligations.
P-2 Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations.
P-3 Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to repay
short-term debt obligations.
NP Issuers
(or supporting institutions) rated Not Prime do not fall within any of the Prime
rating categories.
Note Canadian
issuers rated P-1 or P-2 have their short-term ratings enhanced by the
senior-most long-term rating of the issuer, its guarantor or
support-provider.
2.
Standard and Poor’s
A-1 A
short-term obligation rated ‘A-1’ is rated in the highest category by Standard
& Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitment on these obligations is extremely strong.
A-2 A
short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is satisfactory.
A-3 A
short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A
short-term obligation rated ‘B’ is regarded as having significant speculative
characteristics. Ratings of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned to indicate
finer distinctions within the ‘B’ category. The obligor currently has the
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor’s inadequate
capacity to meet its financial commitment on the obligation.
B-1 A
short-term obligation rated ‘B-1’ is regarded as having significant speculative
characteristics, but the obligor has a relatively stronger capacity to meet its
financial commitments over the short-term compared to other speculative-grade
obligors.
B-2 A
short-term obligation rated ‘B-2’ is regarded as having significant speculative
characteristics, and the obligor has an average speculative-grade capacity to
meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-3 A
short-term obligation rated ‘B-3’ is regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its
financial commitments over the short-term compared to other speculative-grade
obligors.
C A
short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D A
short-term obligation rated ‘D’ is in payment default. The ‘D’ rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor’s believes
that such payments will be made during such grace period. The ‘D’ rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Note Dual
Ratings. Standard & Poor’s assigns “dual” ratings to all debt issues that
have a put option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term rating symbols
are used for bonds to denote the long-term maturity and the short-term rating
symbols for the put option (for example, ‘AAA/A-1+’). With U.S. municipal
short-term demand debt, note rating symbols are used with the short-term issue
credit rating symbols (for example, ‘SP-1+/A-1+’).
3.
Fitch
The
following ratings scale applies to foreign currency and local currency ratings.
A Short-term rating has a time horizon of less than 13 months for most
obligations, or up to three years for US public finance, in line with industry
standards, to reflect unique risk characteristics of bond, tax, and revenue
anticipation notes that are commonly issued with terms up to three years.
Short-term ratings thus place greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
F1 Highest
credit quality. Indicates the strongest capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong credit
feature.
F2 Good
credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair
credit quality. The capacity for timely payment of financial commitments is
adequate; however, near term adverse changes could result in a reduction to non
investment grade.
B Speculative.
Minimal capacity for timely payment of financial commitments, plus vulnerability
to near term adverse changes in financial and economic conditions.
C High
default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
D Indicates
an entity or sovereign that has defaulted on all of its financial
obligations.
Note The
modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the ‘AAA’
Long-term rating category, to categories below ‘CCC’, or to Short-term ratings
other than ‘F1’. (The +/- modifiers are only used to denote issues within the
CCC category, whereas issuers are only rated CCC without the use of
modifiers.)
APPENDIX
B – ADVISOR PROXY VOTING POLICIES AND PROCEDURES
Muzinich
& Co., Inc.
Proxy
Voting Policy
Policy
Summary
This
Policy is designed to ensure that the Firm complies with the requirements under
Rule 206(4)-6 promulgated under the Advisers Act and fulfills its obligation
thereunder with respect to proxy voting, disclosure, and recordkeeping. This
Policy is also designed to ensure that all proxy voting and corporate actions
are voted in the best interest of each client, provide disclosure to investors
and ensure that certain documentation is retained.
The
advisory contract or Investment Management Agreement will dictate whether the
Firm retains discretionary voting authority to vote proxies on behalf of the
client. If an advisory contract or Investment Management Agreement does not
dictate whether the Firm retains discretionary voting authority to vote proxies
on behalf of the client, or not, (i.e. the document is silent) Muzinich will act
as though the Firm does retain such authority. The COO or a designated
supervisor (“Voting Officer”) has been delegated the authority for monitoring
corporate actions, obtaining voting decisions from portfolio managers in
accordance with these policies, and ensuring that proxies are submitted in a
timely manner. The Voting Officer will also be responsible for ensuring that
clients’ requests for these proxy voting policies and procedures and/or their
voting information is responded to effectively within a prompt time period. The
Firm may utilize a third party service provider through the account’s
administrator to assist in proxy voting matters.
Proxy
Voting Policy
It
is the policy of the Firm to vote proxies issued by the company in accordance
with the following guidelines (to the extent each is applicable):
|
|
|
|
|
|
|
|
|
|
|
| |
| Proxy
Proposal Issue |
Adviser’s
Voting Policy Routine |
| Election
of Directors |
| For |
|
| Issuance
of Authorized Common Stock |
| For |
|
| Stock
Repurchase Plans |
| For |
|
| Reincorporation |
| For |
|
| Director
Indemnification |
| For |
|
| Require
Shareholder approval to issue Preferred Stock |
| For |
|
| Require
Shareholder approval to issue Golden Parachutes |
| For
|
|
| Require
Shareholder approval of Poison Pill |
| For |
|
| Shareholders’
Right to Call Special Meetings |
| For |
|
| Shareholders’
Right to Act by Written Consent |
| For |
|
| Shareholder
Ability to Remove Directors With or Without Cause |
| For |
|
| Shareholders
Electing Directors to Fill Boar Vacancies |
| For |
|
| Majority
of Independent Directors |
| For |
|
| Board
Committee Membership exclusively of Independent Directors |
| For |
|
| 401(k)
Savings Plans for Employees |
| For |
|
| Anti-greenmail
Charter or By-laws Amendments |
| For |
|
| Corporate
Name Change |
| For |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Proxy
Proposal Issue |
Adviser’s
Voting Policy Routine |
| Ratification
of Auditors |
| For |
|
| Approval
of Financial Statements and Statutory Reports |
| For |
|
| Approve
Consolidated Financial Statements and Statutory Reports |
| For |
|
| Supermajority
Vote Requirement |
| Against |
|
| Blank
Check Preferred |
| Against |
|
| Dual
Classes of Stock |
| Against |
|
| Staggered
or Classified Boards |
| Against |
|
| Fair
Price Requirements |
| Against |
|
| Limited
Terms for Directors |
| Against |
|
| Require
Director Stock Ownership |
| Against |
|
| Accept
Plan of Reorganization |
| Case
by Case |
|
| Reprice
Management Options |
| Case
by Case |
|
| Adopt/Amend
Stock Option Plan |
| Case
by Case |
|
| Adopt/Amend
Employee Stock Purchase Plan |
| Case
by Case |
|
| Approve
Merger/Acquisitions |
| Case
by Case |
|
| Spin-offs |
| Case
by Case |
|
| Corporate
Restructurings |
| Case
by Case |
|
| Asset
Sales |
| Case
by Case |
|
| Liquidations |
| Case
by Case |
|
| Adopt
Poison Pill |
| Case
by Case |
|
| Golden
Parachutes |
| Case
by Case |
|
| Executive/Director
Compensation |
| Case
by Case |
|
| Social
Issues |
| Case
by Case |
|
| Contested
Election of Directors |
| Case
by Case |
|
| Stock
Based Compensation for Directors |
| Case
by Case |
|
| Increase
authorized shares |
| Case
by Case |
|
| Tender
Offers |
| Case
by Case |
|
| Exchange
Offers |
| Case
by Case |
|
| Preemptive
Rights |
| Case
by Case |
|
| Debt
Restructuring |
| Case
by Case |
|
| Loan
Waivers and Consents |
| Case
by Case |
|
Proxy
Voting Procedures
The
Voting Officer will have the responsibility of voting proxies received by the
Firm on behalf of its Clients. Proxy proposals received by the Firm and
designated above in the proxy voting policies as “For” or “Against” will be
voted by the Voting Officer in accordance with the proxy voting policies. Proxy
proposals received by the Firm and designated above in the proxy voting policies
as “Case by Case” (or not addressed in the proxy voting policies) will be
reviewed by the Firm, and voted in the best interests of each Client. In
accordance with Rule 204-2, with respect to “Case by Case” issues, the portfolio
manager and/or the analyst who is in charge of the issuer will document the
basis for the Firm’s voting decision in writing.
Notwithstanding
the foregoing, the Firm may vote a proxy contrary to the proxy voting guidelines
if the portfolio manager or analyst who is in charge of the issuer determines
that such action is in the best interest of the Client. In the event that the
Firm votes contrary to the proxy voting guidelines, the portfolio manager and/or
the analyst who is in charge of the issuer will document the basis for the
Firm’s contrary voting decision in writing.
Social
Issues
These
proposals range, for example, from those arguing for divestment from companies
doing business in certain geographies or industries, to those calling for
changes in a company’s environmental impact or hiring practices. Social issues
may be either internal within a company, or external by describing a company’s
impact or interaction with non-company constituents. Social issues may also lead
to positive or negative financial impacts. Muzinich’s policy is that when a
Client’s investment guidelines express a clear perspective on a social issue
proposal, Muzinich will vote in a manner it deems best aligned with or which
best balances the Client’s perspective and financial investment goals. Absent
such perspective in a Client’s investment guidelines, the merit of the social
issues should not take precedence over financial ones. Muzinich will consider
voting for issues that, in our view, have redeeming social merit and which do
not contradict our obligations of prudent financial and social management for
each client according to the purpose for which each individual account was
created.
Conflicts
of Interest
In
cases where an issuer in which multiple Clients hold interests acquired at
different points in time or in different positions within the issuer’s capital
structure experiences financial distress, there is a potential for conflicts of
interest (including, for example, conflicts over proposed waivers and amendments
to debt covenants). When called upon to take action with respect to an
investment (e.g., to sell, to vote, or to exercise a right or remedy) a Client’s
overall holdings, and related rights, may be such that it is in the Client’s
best interest to take action (or refrain from taking action) in a manner that
would be contrary to the interest of a person holding only the particular class
of interest on which the right is conferred. In these circumstances, Clients
that have invested in some, but not all, of the relevant classes of interests of
the issuer held may be disadvantaged.
When
considering whether to pursue a particular course of action, including asserting
available claims or remedies, factors that may be considered include the costs
of pursuing the course of action (or alternative courses of action) and the
likelihood of a favorable outcome. As a result, not every potential claim or
course of action will be pursued and it will not always be the case that
conflicts will be able to be resolved in the best interest of any particular
Client nor can there be any assurance that actual or potential conflicts of
interest can be resolved such that the ultimate terms of an investment (or an
amendment to such terms) will be as favorable as they would be in the absence of
such conflicts.
For
those Clients for which the Firm is authorized to vote proxies, the Firm will
record the date proxies are voted, and those not voted will be specified with
the underlying reason. Each item to be voted on should be voted separately and
individually, not voted in blank.
The
Firm may occasionally be subject to conflicts of interest in the voting of
proxies due to business or personal relationships it maintains with persons
having an interest in the outcome of certain votes. The Firm, its affiliates
and/or its Employees may also occasionally have business or personal
relationships with the proponents of proxy proposals, participants in proxy
contests, corporate directors and officers, or candidates for
directorships.
The
CCO with consultation of the Firm’s General Counsel, at his or her discretion,
will determine whether any proxy vote would result in an actual conflict of
interest between the Firm and its Client(s). If at any time, the Firm becomes
aware of an actual conflict of interest relating to a particular proxy proposal,
the Firm will handle the proposal as follows:
1.If
the proposal is designated in proxy voting policies above as “For” or “Against,”
the proposal will be voted by the Firm in accordance with the proxy voting
policy; or
2.If
the proposal is designated in the proxy voting policies above as “Case by Case”
(or not addressed in the proxy voting policies or is a corporate action), if it
is clear how to vote in the best interest of the Client entitled to vote then
the vote may proceed, otherwise:
a) Disclose
the conflict to the Client(s), providing sufficient information regarding the
matter and the nature of the Firm’s conflict, and obtain Client consent before
voting;
b) Employ
an outside service provider to advise in the voting of the proxy;
c) Employ
an outside service provider to vote the proxy on behalf of the Firm and its
Client(s); or
d) Decline
to vote the proxy because the cost of addressing the potential conflict of
interest is greater than the benefit to the client(s) voting the
proxy.
The
Voting Officer will document all instances where a proxy involved a conflict of
interest, including the nature and the circumstances of the conflict, the steps
taken by the Firm to resolve the conflict of interest, and the vote(s) as a
result.
Notwithstanding
anything to the contrary in this Policy Muzinich will not be required to vote
the proxy if (i) the Client no longer owns the security at the voting deadline;
(ii) the Client has tendered the security before the voting deadline; (iii) the
Client has informed the Firm that it wishes to retain the right to vote the
proxy, (iv) the Firm deems the cost of voting would exceed any anticipated
benefit to the Client; or (v) the proxy is received for an account for
which the Firm no longer acts as investment manager, investment adviser or
sub-adviser at the voting deadline. The Firm, with the assistance of the
portfolio manager and/or analyst who is in charge of the issuer, will document
in writing the basis for the Firm’s decision not to vote.
Class
Actions
Muzinich
does not direct Clients’ participation in class actions, as disclosed in Part 2
of Form ADV, unless contractually agreed to. The Voting Officer will determine
whether to return any documentation inadvertently received regarding Clients’
participation in class actions to the sender, or to forward such information to
the appropriate Clients.
Investment
Firm Proxy Voting -Form N-PX
Pursuant
to Rule 30b1-4 of the Investment Company Act a registered management investment
company shall file with the SEC a report on Form N-PX, not later than August 31
of each year, containing the registrant’s proxy voting record for the most
recent twelve-month period ended June 30.
Records
The
Voting Officer is responsible for ensuring that the following proxy records are
maintained for 7 (seven) years, the first two in an appropriate office of
the Firm:
1. Records
of proxy statements received regarding client securities;
2. Records
of each vote cast by the Firm on behalf of a client;
3. Copies
of any document created by the Firm that was material to making a decision on
voting clients’ securities;
4. Records
of all communications received and internal documents created that were material
to the voting decision; and
5. Each
written client request for proxy voting information and the Firm’s written
response to such client request (written or oral) for proxy voting
information.
If
the Firm utilizes a third party service provider for proxy voting, the Firm will
rely on the provider to maintain proxy statements and records of proxy votes
cast. The Firm will obtain an undertaking from the third party to provide a copy
of the documents promptly upon request.
Where
appropriate, the CCO shall collect the relevant information for the completion
of Form N- PX in relation to Muzinich 40 Act Funds and shall work with the
administrator or other appropriate persons with respect to investment companies
for which it is the adviser to prepare and file the Form on behalf of the
investment company.
