ck0001511699-20221231
Ticker
Symbol — MUHLX
Statement
of Additional Information
April 30,
2023
This
Statement of Additional Information (“SAI”) provides general information about
the Muhlenkamp Fund (the “Fund”), a series of Managed Portfolio Series (the
“Trust”). This SAI is not a prospectus and should be read in conjunction with
the Fund’s current prospectus dated April 30, 2023 (the “Prospectus”), as
supplemented and amended from time to time. In addition, the Fund’s financial
statements for the fiscal year ended December 31, 2022 are incorporated herein
by reference to the Fund’s annual
report
dated December 31, 2022. To obtain a copy of the Prospectus and/or annual
report, free of charge, please write or call the Fund at the address or
toll-free telephone number below, or visit the Fund’s website at
https://muhlenkamp.com/muhlx/.
Muhlenkamp
Fund
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
800-860-3863
The
Trust and the Fund
The
Trust is a Delaware statutory trust organized on January 27, 2011, and is
registered with the U.S. Securities and Exchange Commission (“SEC”) as an
open-end management investment company. The Fund is one series, or mutual fund,
of the Trust. The Fund has one class of shares: Institutional Class. The Fund is
a diversified series and has its own investment objective and policies. Shares
of other series of the Trust are offered in separate prospectuses and SAIs. The
Fund does not hold itself out as related to any other series within the Trust
for purposes of investment and investor services, nor does it share the same
investment adviser with any other series of the Trust. The Fund’s 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 https://www.sec.gov/.
As permitted by Delaware law, the Trust’s Board of Trustees (the “Board”) may
create additional classes of the Fund and may create additional series (and
classes thereof) of the Trust and offer shares of these series and classes under
the Trust at any time without the vote of shareholders.
All
shares of a series shall represent an equal proportionate interest in the assets
held with respect to that series (subject to the liabilities held with respect
to that series and such rights and preferences as may have been established and
designated with respect to classes of shares of such series), and each share of
a series shall be equal to each other share of that series.
Shares
are voted in the aggregate and not by series or class, except in matters where a
separate vote is required by the Investment Company Act of 1940, as amended (the
“1940 Act”), or when the matters affect only the interest of a particular series
or class. When matters are submitted to shareholders for a vote, each
shareholder is entitled to one vote for each full share owned and fractional
votes for fractional shares owned.
The
Trust does not normally hold annual meetings of shareholders. Meetings of the
shareholders shall be called by any member of the Board upon written request of
shareholders holding, in the aggregate, not less than 10% of the shares, such
request specifying the purpose or purposes for which such meeting is to be
called.
Interests
in the Fund are represented by shares of beneficial interest, each with no par
value per share. Each share of the Fund represents an equal proportionate
interest in the assets and liabilities belonging to the Fund and is entitled to
such distributions out of the income belonging to the Fund as may be declared by
the Board.
The
Board has the authority from time to time to divide or combine the shares of any
series into a greater or lesser number of shares of that series without
materially changing the proportionate beneficial interest of the shares of that
series in the assets belonging to that series or materially affecting the rights
of shares of any other series. In case of the liquidation of a series, the
holders of shares of the series being liquidated are entitled to receive a
distribution out of the assets, net of the liabilities, belonging to that
series. Expenses attributable to any series (or class thereof) are borne by that
series (or class). Any general expenses of the Trust not readily identifiable as
belonging to a particular series are allocated by, or under the direction of,
the Board to all applicable series (and classes thereof) in such manner and on
such basis as deemed fair and equitable. No shareholder is liable to further
calls for the payment of any sum of money or assessment whatsoever with respect
to the Trust or any series of the Trust without his or her express
consent.
All
consideration received by the Trust for the issue or sale of the Fund’s shares,
together with all assets in which such consideration is invested or reinvested,
and all income, earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds, subject only to the
rights of creditors, shall constitute the underlying assets of the
Fund.
Muhlenkamp
& Company, Inc. (the “Adviser”) serves as the investment adviser for the
Fund.
Effective
September 5, 2014, the Fund acquired all of the assets of the Muhlenkamp Fund, a
series of Wexford Trust (the “Predecessor Fund”), which had the same portfolio
managers and substantially similar investment strategies as the Fund. The
Predecessor Fund commenced operations on November 1, 1988.
Investment
Objective, Policies, Strategies and Associated Risks
The
following discussion supplements the description of the Fund’s investment
objective and principal investment strategies and principal risks set forth in
the Prospectus. Except for the fundamental investment limitations listed below
(see “Fundamental Investment Limitations”), the Fund’s investment strategies and
policies are not fundamental and may be changed by sole action of the Board of
Trustees, without shareholder approval. While the Fund is permitted to hold
securities and engage in various strategies as described hereafter, it is not
obligated to do so. The Fund might not invest in all of these types of
securities or use all of these techniques at any one time. The Fund's
transactions in a particular type of security or use of a particular technique
is subject to limitations imposed by the Fund's investment objective, policies
and restrictions described in the Fund's Prospectus and/or this SAI, as well as
the federal securities laws.
Investment
Objective
The
investment objective of the Fund is set forth under the “Summary Section” in the
Fund’s prospectus.
Diversification
The
Fund is diversified. A “diversified company” means that as to 75% of the Fund’s
total assets, excluding cash, government securities and securities of other
investment companies, (1) no more than 5% may be invested in the securities of a
single issuer, and (2) the Fund may not hold more than 10% of the outstanding
voting securities of a single issuer.
Because
the Fund intends to qualify as a “regulated investment company” (“RIC”) under
Subchapter M of the Internal Revenue Code of 1986, as amended, (the “Code”), the
Fund will limit its investments, excluding cash, cash items (including
receivables), U.S. government securities and securities of other regulated
investment companies, so that at the close of each quarter of the taxable year,
(1) not more than 25% of the Fund’s total assets will be invested in the
securities of a single issuer, and (2) with respect to 50% of its total assets,
not more than 5% of the Fund’s total assets will be invested in the securities
of a single issuer and the Fund will not hold more than 10% of such issuer’s
outstanding voting securities.
Percentage
Limitations
The
Fund’s compliance with its investment policy and limitation will be determined
immediately after and as a result of the Fund’s acquisition of such security or
other asset. Accordingly, except with respect to borrowing or illiquid
investments, any subsequent change in values, net assets or other circumstances
will not be considered when determining whether an investment complies with the
Fund’s investment policies and limitations. In addition, if a bankruptcy or
other extraordinary event occurs concerning a particular investment by the Fund,
the Fund may receive stock, real estate or other investments that the Fund would
not, or could not, buy. If this happens, the Fund will sell such investments as
soon as practicable while trying to maximize the return to its
shareholders.
Market
Volatility
U.S.
and international markets have from time to time experienced significant
volatility. Certain social, political, economic, environmental and other
conditions and events (such as natural disasters and weather-related phenomena
generally, epidemics and pandemics, terrorism, conflicts and social unrest) may
adversely interrupt the global economy and result in prolonged periods of
significant market volatility. During certain volatile periods, the fixed income
markets have experienced substantially lower valuations, reduced liquidity,
price volatility, credit downgrades, increased likelihood of default and
valuation difficulties. At times, concerns have spread to domestic and
international equity markets. In some cases, the stock prices of individual
companies have been negatively impacted even though there may be little or no
apparent degradation in the financial conditions or prospects of that company.
Continued volatility may have adverse effects on the Funds, thus the risks
discussed below and in the Prospectus may increase.
The
outbreak of the coronavirus COVID-19 has significantly disrupted the global
economy and negatively impacted economic growth prospects. It is not possible to
estimate the impact that COVID-19 outbreak will continue to have on the
companies in the Fund’s portfolio, but the prolonged effect on the global
economy will largely depend upon the duration of the pandemic. Such events may
adversely affect the Fund’s performance. The Adviser continues to monitor this
situation closely.
Equity
Securities
An
equity security represents a proportionate share of the ownership of a company.
Its value is based on the success of the company’s business, any income paid to
stockholders, the value of its assets and general market conditions. Common
stocks and preferred stocks are examples of equity securities. The fundamental
risk of investing in common and preferred stock is the risk that the value of
the stock might decrease.
Common
Stock
Common
stock represents an ownership interest in a company. In addition to the general
risks set forth above, investments in common stocks are subject to the risk that
in the event a company in which the Fund invests is liquidated, the holders of
preferred stock and creditors of that company will be paid in full before any
payments are made to the Fund as holders of common stock. It is possible that
all assets of that company will be exhausted before any payments are made to the
Fund.
Preferred
Stock
Preferred
stock represents an ownership interest in a company, often pays dividends at a
specific rate and has a preference over common stocks in dividend payments and
liquidation of assets. A preferred stock is a blend of the characteristics of a
bond and common stock. It can offer the higher yield of a bond and has priority
over common stock in equity ownership, but does not have the seniority of a bond
and, unlike common stock its participation in the issuer’s growth may be
limited. Although the dividend is set at a
fixed
annual rate, in some circumstances it can be changed or omitted by the issuer.
In addition, preferred stock usually does not have voting rights.
Foreign
Investments and Currencies
The
Fund may invest in securities of foreign issuers that are not traded in the
United States and/or U.S. dollar denominated, and purchase and sell foreign
currency on a spot basis. The Fund may also invest in American Depositary
Receipts (“ADR”s), Global Depositary Receipts (“GDR”s), European Depositary
Receipts (“EDR”s), and foreign securities that are traded on a U.S. exchange.
Investments in ADRs and foreign securities involve certain inherent risks,
including the following:
Depositary
Receipts.
Generally, ADRs, in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. ADRs are receipts typically
issued by a U.S. bank or trust company evidencing ownership of the underlying
securities. GDRs are bank certificates issued in more than one country for
shares in a foreign company. The shares are held by a foreign branch of an
international bank. GDRs trade as domestic shares but are offered for sale
globally through the various bank branches. GDRs are typically used by private
markets to raise capital denominated in either U.S. dollars or foreign
currencies. EDRs are similar to ADRs and GDRs, except they are typically issued
by European banks or trust companies, denominated in foreign currencies and
designed for use outside the U.S. securities markets. ADRs and EDRs may be
purchased through “sponsored” or “unsponsored” facilities. A sponsored facility
is established jointly by the issuer of the underlying security and a
depositary, whereas a depositary may establish an unsponsored facility without
participation by the issuer of the depositary security. Holders of unsponsored
depositary receipts generally bear all the costs of such facilities, and the
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts of the
deposited securities. Accordingly, available information concerning the issuer
may not be current and the prices of unsponsored depositary receipts may be more
volatile than the prices of sponsored depositary receipts. For purposes of the
Fund’s investment policies, ADRs, GDRs and EDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, GDR
and EDR representing ownership of common stock will be treated as common
stock.
Political
and Economic Factors.
Individual
foreign economies of certain countries may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, diversification and
balance of payments position. The internal politics of certain foreign countries
may not be as stable as those of the United States. Governments in certain
foreign countries also continue to participate to a significant degree, through
ownership interest or regulation, in their respective economies. Action by these
governments could include restrictions on foreign investment, nationalization,
expropriation of goods or imposition of taxes, and could have a significant
effect on market prices of securities and payment of interest. The economies of
many foreign countries are heavily dependent upon international trade and are
accordingly affected by the trade policies and economic conditions of their
trading partners. Enactment by these trading partners of protectionist trade
legislation could have a significant adverse effect upon the securities markets
of those countries. In 2020, the United Kingdom (“UK”) withdrew from the
European Union (an event known as “Brexit”). As a result of Brexit, the
financial markets experienced high levels of volatility and there is
considerable uncertainty as to the arrangements that will apply to the UK’s
relationship with the EU and other countries going forward. This prolonged
uncertainty may affect other countries in the EU
and
elsewhere. The exit by the UK or other member states will likely result in
increased uncertainty, volatility, illiquidity, and potentially lower economic
growth in the affected markets.
Currency
Fluctuations.
The Fund may invest in securities denominated in foreign currencies.
Accordingly, a change in the value of any such currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund’s
assets denominated in that currency. Such changes will also affect the Fund’s
income. The value of the Fund’s assets may also be affected significantly by
currency restrictions and exchange control regulations enacted from time to
time.
Market
Characteristics.
The Adviser expects that many foreign securities in which the Fund may invest
could be purchased in over-the-counter markets or on exchanges located in the
countries in which the principal offices of the issuers of the various
securities are located, if that is the best available market. Foreign exchanges
and markets may be more volatile than those in the United States. While growing
in volume, they usually have substantially less volume than U.S. markets, and
the Fund’s investments in foreign securities may be less liquid and more
volatile than investments in U.S. securities. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States. Foreign security
trading practices, including those involving securities settlement where Fund
assets may be released prior to receipt of payment or securities, may expose the
Fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer.
Legal
and Regulatory Matters.
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, non-uniform accounting standards and less
financial information available from issuers, than is available in the United
States. It may be more difficult to obtain and enforce a judgment against a
foreign issuer. Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect to investments
in the United States or in other foreign countries. The laws of some foreign
countries may limit the Fund’s ability to invest in securities of certain
issuers located in those foreign countries. Foreign companies may not be subject
to auditing and financial reporting standards and requirements comparable to
those which apply to U.S. companies.
Taxes.
The interest and dividends payable on certain of the Fund’s foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to Fund shareholders. Foreign
companies may not be subject to auditing and financial reporting standards and
requirements comparable to those which apply to U.S. companies.
Costs.
To the extent that the Fund invests in foreign securities, its expense ratio is
likely to be higher than those of investment companies investing only in
domestic securities, because related brokerage costs and the cost of maintaining
the custody of foreign securities may be higher.
Fixed-Income
Securities
The
Fund may invest in a wide range of fixed-income securities, which may include
obligations of any rating or maturity. The Fund may invest in investment grade
debt securities. Investment grade debt securities are those rated BBB- or better
by Standard & Poor’s Rating Service, Inc. (“S&P”) or Baa3 or better by
Moody’s Investors Service, Inc. (“Moody’s”), each of which are considered a
nationally recognized statistical rating organization (“NRSRO”), or an
equivalent rating by another NRSRO. The Fund may also invest in unrated debt
securities that the Adviser believes are of comparable quality to the rated
securities in which the Fund may purchase. Securities rated BBB- by S&P are
considered investment grade, but Moody’s considers securities rated Baa3 to have
speculative characteristics. The
Fund
will not invest in securities that are rated below D by S&P or Moody’s. The
Fund may hold a debt security rated below D if a downgrade occurs after the
security has been purchased. The Fund may also invest in unrated debt securities
that the Adviser believes are of comparable quality to the rated securities
which the Fund may purchase.
Debt
securities carry credit risk, interest rate risk and prepayment risk. Credit
risk is the risk that the Fund could lose money if the issuer of a debt security
defaults or fails to pay interest or principal when it is due. Some debt
securities that are rated below investment grade are generally considered
speculative because they present a greater risk of loss, including default, than
higher quality debt securities. The credit risk of a particular issuer’s debt
security may vary based on its priority for repayment. For example, higher
ranking (senior) debt securities have a higher priority than lower ranking
(subordinated) securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior securities.
In addition, in the event of bankruptcy, holders of higher-ranking senior
securities may receive amounts otherwise payable to the holders of more junior
securities.
Interest
rate risk is the risk that the value of certain debt securities will tend to
fall when interest rates rise. In general, debt securities with longer terms
tend to fall more in value when interest rates rise than debt securities with
shorter terms.
Prepayment
risk occurs when issuers 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.
Changes
by recognized rating services in their rating of a debt security may affect the
value of these investments. The Fund will not necessarily dispose of a security
when its rating is reduced below its rating at the time of purchase. However,
the Adviser will monitor the investment to determine whether continued
investment in the security will assist in meeting the Fund’s investment
objective.
Corporate
Debt Securities.
Corporate debt securities are fixed-income securities issued by businesses to
finance their operations, although corporate debt instruments may also include
bank loans to companies. Notes, bonds, debentures and commercial paper are the
most common types of corporate debt securities, with the primary difference
being their maturities and secured or unsecured status. Commercial paper has the
shortest term and is usually unsecured.
The
broad category of corporate debt securities includes debt issued by domestic or
foreign companies of all kinds, including those with small-, mid- and
large-capitalizations. Corporate debt may be rated investment grade or below
investment grade and may carry variable, or floating rates of
interest.
Because
of the wide range of types and maturities of corporate debt securities, as well
as the range of creditworthiness of its issuers, corporate debt securities have
widely varying potentials for return and risk profiles. For example, commercial
paper issued by a large established domestic corporation that is rated
investment grade may have a modest return on principal, but carries relatively
limited risk. On the other hand, a long-term corporate note issued by a small
foreign corporation from an emerging market country that has not been rated may
have the potential for relatively large returns on principal, but carries a
relatively high degree of risk.
Variable
and Floating Rate Securities.
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
Convertible
Securities.
Convertible securities include fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer’s underlying
common stock or other equity security at the option of the holder during a
specified period. Convertible securities entitle the holder to receive interest
paid or accrued on debt or dividends paid or accrued on preferred stock until
the security matures or is redeemed, converted or exchanged. Convertible
securities may take the form of convertible preferred stock, convertible bonds
or debentures, units consisting of “usable” bonds and warrants or a combination
of the features of several of these securities. The investment characteristics
of each convertible security vary widely, which allows convertible securities to
be employed for a variety of investment strategies. The Fund will exchange or
convert convertible securities into shares of underlying common stock when, in
the opinion of the Adviser, the investment characteristics of the underlying
common stock or other equity security will assist the Fund in achieving its
investment objectives. The Fund may also elect to hold or trade convertible
securities. In selecting convertible securities, the Adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation.
Asset-Backed
Securities.
Asset-backed securities represent an interest in a pool of assets such as car
loans and credit card receivables. Almost any type of fixed income assets
(including other fixed income securities) may be used to create an asset-backed
security. However, most asset-backed securities involve consumer or commercial
debts with maturities of less than ten years. Asset-backed securities may have a
higher level of default and lower recoveries than mortgage-backed securities.
Asset-backed securities may take the form of commercial paper or notes, in
addition to pass-through certificates or asset-backed bonds.
Mortgage-Backed
Securities.
Mortgage-backed securities generally represent interests in pools of mortgages
on residential or commercial property. Mortgages may have fixed or adjustable
interest rates. Interests in pools of adjustable rate mortgages are known as
ARMs. Mortgage-backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage-backed securities is a
“pass-through certificate.” Holders of pass-through certificates receive a pro
rata share of the payments from the underlying mortgages. Holders also receive a
pro rata share of any prepayments, so they assume all the prepayment risk of the
underlying mortgages. Mortgage-backed securities tend to pay higher yields to
compensate for prepayment risk.
Collateralized
mortgage obligations (“CMOs”) are complicated instruments that allocate payments
and prepayments from an underlying pass-through certificate among holders of
different classes of mortgage-backed securities. This creates different
prepayment and market risks for each CMO class. In addition, CMOs may allocate
interest payments to one class (Interest Only or IOs) and principal payments to
another class (Principal Only or POs). POs increase in value when prepayment
rates increase. In contrast, IOs decrease in value when prepayments increase,
because the underlying mortgages generate less interest payments. However, IOs’
prices tend to increase when interest rates rise (and prepayments fall), making
IOs a useful hedge against market risk.
Residential
mortgage-backed securities include securities that reflect an interest in, and
are secured by, mortgage loans on residential real property. Residential
mortgages may be issued and guaranteed by the U.S. Government or its agencies,
some of which do not have an explicit U.S. Government guarantee, or by private
issuers. Residential mortgages issued or guaranteed by private issuers typically
have more credit risk than those issued or guaranteed by the U.S. Government or
its agencies. Generally, homeowners have the option to prepay their mortgages at
any time without penalty. Homeowners frequently refinance high rate mortgages
when mortgage rates fall. This results in the prepayment of the mortgages
underlying residential mortgage-backed securities, which deprives holders of the
securities of the higher yields. Conversely, when mortgage rates increase,
prepayments due to refinancings decline. This extends the life of residential
mortgage-backed securities with lower yields. As a result, increases in
prepayments of residential mortgage-backed securities purchased at a premium, or
decreases in prepayments of residential mortgage-backed securities purchased at
a discount, may reduce their yield and price. This relationship between interest
rates and mortgage prepayments makes the price of residential mortgage-backed
securities more volatile than most other types of fixed income securities with
comparable credit risks.
Commercial
mortgage-backed securities include securities that reflect an interest in, and
are secured by, mortgage loans on commercial real property. In addition to
prepayment and extension risk, commercial mortgage-backed securities also
reflect the risks of investing in the real estate securing the underlying
mortgage loans including, the effects of local and other economic conditions on
real estate markets, the ability of the property owner to make loan payments,
the ability of tenants to make lease payments, and the ability of a property to
attract and retain tenants. Commercial mortgage-backed securities may be less
liquid and exhibit greater price volatility than other types of mortgage- or
asset-backed securities.
Municipal
Securities.
Municipal securities are fixed income securities issued by states, counties,
cities and other political subdivisions and authorities. Although most municipal
securities are exempt from federal income tax, municipalities also may issue
taxable securities. Tax-exempt securities are generally classified by their
source of payment.
Contingent
Convertible Securities.
Contingent convertible securities (“CoCos”) are a form of hybrid debt security
that are intended to either convert into equity or have their principal written
down upon the occurrence of certain “triggers.” The triggers are generally
linked to regulatory capital thresholds or regulatory actions calling into
question the issuing banking institution’s continued viability as a going
concern. CoCos’ unique equity conversion or principal write-down features are
tailored to the issuing banking institution and its regulatory requirements.
Some additional risks associated with CoCos include, but are not limited
to:
•Loss
absorption risk. CoCos have fully discretionary coupons. This means coupons can
potentially be cancelled at the banking institution’s discretion or at the
request of the relevant regulatory authority in order to help the bank absorb
losses.
•Subordinated
instruments. CoCos will, in the majority of circumstances, be issued in the form
of subordinated debt instruments in order to provide the appropriate regulatory
capital treatment prior to a conversion. Accordingly, in the event of
liquidation, dissolution or winding-up of an issuer prior to a conversion having
occurred, the rights and claims of the holders of the CoCos, such as the Fund,
against the issuer in respect of or arising under the terms of the CoCos shall
generally rank junior to the claims of all holders of unsubordinated obligations
of the issuer. In addition, if the CoCos are converted into the issuer’s
underlying equity securities following a conversion event (i.e.,
a “trigger”), each holder will be subordinated due to their conversion from
being the holder of a debt instrument to being the holder of an equity
instrument.
•Market
value will fluctuate based on unpredictable factors. The value of CoCos is
unpredictable and will be influenced by many factors including, without
limitation: (i) the creditworthiness of the issuer and/or fluctuations in such
issuer’s applicable capital ratios; (ii) supply and demand for the CoCos; (iii)
general market conditions and available liquidity; and (iv) economic, financial
and political events that affect the issuer, its particular market or the
financial markets in general.
Zero-Coupon
Securities.
Zero-coupon securities make no periodic interest payments, but are sold at a
deep discount from their face value. The buyer recognizes a rate of return
determined by the gradual appreciation of the security, which is redeemed at
face value on a specified maturity date. The discount varies depending on the
time remaining until maturity, as well as market interest rates, liquidity of
the security, and the issuer’s perceived credit quality. If the issuer defaults,
the holder may not receive any return on its investment. Because zero-coupon
securities bear no interest, their price fluctuates more than other types of
bonds. Since zero-coupon bondholders do not receive interest payments, when
interest rates rise, zero-coupon securities fall more dramatically in value than
bonds paying interest on a current basis. When interest rates fall, zero-coupon
securities rise more rapidly in value because the bonds reflect a fixed rate of
return. An investment in zero-coupon may cause the Fund to recognize income and
make distributions to shareholders before it receives any cash payments on its
investment.
Unrated
Debt Securities.
The Fund may also invest in unrated debt securities. Unrated debt, while not
necessarily lower in quality than rated securities, may not have as broad a
market. Because of the size and perceived demand for the issue, among other
factors, certain issuers may decide not to pay the cost of getting a rating for
their bonds. The creditworthiness of the issuer, as well as any financial
institution or other party responsible for payments on the security, will be
analyzed to determine whether to purchase unrated bonds.
U.S.
Government Obligations
The
Fund may invest in U.S. government obligations. U.S. government obligations
include securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities. Treasury bills, the most
frequently issued marketable government securities, have a maturity of up to one
year and are issued on a discount basis. U.S. government obligations include
securities issued or guaranteed by government-sponsored
enterprises.
Payment
of principal and interest on U.S. government obligations may be backed by the
full faith and credit of the United States or may be backed solely by the
issuing or guaranteeing agency or instrumentality itself. In the latter case,
the investor must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
government would provide financial support to its agencies or instrumentalities,
including government-sponsored enterprises, where it is not obligated to do so
(see “Agency Obligations,” below). In addition, U.S. government obligations are
subject to fluctuations in market value due to fluctuations in market interest
rates. As a general matter, the value of debt instruments, including U.S.
government obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. government
obligations are subject to fluctuations in yield or value due to their structure
or contract terms.
Agency
Obligations
The
Fund may invest in agency obligations, such as the Export-Import Bank of the
United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Government National Mortgage Association (“GNMA”), commonly
known
as “Ginnie Mae,” Federal National Mortgage Association (“FNMA”), commonly known
as “Fannie Mae,” Federal Home Loan Mortgage Corporation (“FHLMC”), commonly
known as “Freddie Mac,” and the Student Loan Marketing Association (“SLMA”),
commonly known as “Sallie Mae.” Some, such as those of the Export-Import Bank of
United States, are supported only by the right of the issuer to borrow from the
Treasury; others, such as those of the FNMA and FHLMC, are supported by only the
discretionary authority of the U.S. government to purchase the agency’s
obligations; still others, such as those of the SLMA, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
government would provide financial support to U.S. government-sponsored
instrumentalities
because
they are not obligated by law to do so. As a result, there is a risk that these
entities will default on a financial obligation. For instance, in September
2008, at the direction of the U.S. Treasury, FNMA and FHLMC were placed into
conservatorship under the Federal Housing Finance Agency (“FHFA”), a newly
created independent regulator.
Warrants
and Rights
The
Fund may purchase, or receive as a distribution from other investments, warrants
and rights, which are instruments that permit the Fund to acquire, by
subscription, the capital stock of a corporation at a set price, regardless of
the market price for such stock. The principal difference between warrants and
rights is their term-rights typically expire within weeks while warrants have
longer durations. Neither rights nor warrants have voting rights or pay
dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that
warrants might drop in value at a faster rate than the underlying
stock.
When-Issued
Securities
When-issued
securities transactions involve a commitment by the Fund to purchase or sell
particular securities with payment and delivery taking place at a future date,
and permit the Fund to lock in a price or yield on a security it owns or intends
to purchase, regardless of future changes in interest rates or market action.
Typically, no income accrues to the purchaser of a security on a when-issued
basis prior to delivery. Such securities are recorded as an asset and its value
may fluctuate. Purchasing a security on a when-issued basis can involve a risk
that the market price at the time of delivery may be lower than the agreed-upon
purchase price, in which case there could be an unrealized loss at the time of
delivery. The Fund will only make commitments to purchase securities on a
when-issued basis with the intention of actually acquiring the securities. The
Fund will only make commitments to purchase securities on a when-issued basis
with the intention of actually acquiring the securities within 35 days of the
trade date.
Initial
Public Offerings
The
Fund may invest in securities offered by companies in initial public offerings
(“IPOs”). Because IPO shares frequently are volatile in price, the Fund may hold
IPO shares for a very short period of time. This may increase the turnover of
the Fund’s portfolio and may lead to increased expenses to the Fund, such as
commissions and transaction costs. By selling IPO shares, the Fund may realize
taxable capital gains that it will subsequently distribute to shareholders.
Companies that offer securities in IPOs tend to typically have small market
capitalizations and therefore their securities may be more volatile and less
liquid than those issued by larger companies. Certain companies offering
securities in an IPO may have limited operating experience and, as a result face
a greater risk of business failure.
Master
Limited Partnerships
The
Fund may invest in publicly traded master limited partnerships (“MLPs”) that are
registered under the Securities Exchange Act of 1934, as amended (the
“Securities Exchange Act”), and listed on a major United States stock exchange,
if the issuer meets the Fund’s investment criteria. MLPs are businesses
organized as limited partnerships which trade their proportionate shares of the
partnership (units) on a
public
exchange. MLPs often own or own interests in properties of business that are
related to oil and gas industries, including pipelines, although MLPs may invest
in other types of investments, including credit-related investments. MLPs are
required to pay out most or all of their cash flow in distributions. This pass
through creates passive income or losses, along with dividend and investment
income. The MLPs the Fund may purchase are comprised of a general partner (the
“GP”) and multiple limited partners (the “LP Holders”). The GP is responsible
for the operations and the maintenance of the partnership’s businesses, while
the LP Holders assume economic risk up to their level of investment. Typically,
the GP has a 1% to 2% investment in the MLP, but can extract a higher percentage
of the partnership’s profits as the MLP’s distributions increase. This serves as
an incentive to the GP to grow the partnership’s distributions. Conflicts of
interest may exist among unit holders, subordinated unit holders and the general
partner of an MLP, including those arising from incentive distribution
payments.
MLP
common units represent an equity ownership interest in a partnership, providing
limited voting rights and entitling the holder to a share of the company’s
success through distributions and/or capital appreciation. Unlike shareholders
of a corporation, common unit holders do not elect directors annually and
generally have the right to vote only on certain significant events, such as
mergers, a sale of substantially all of the assets, removal of the general
partner or material amendments to the partnership agreement. MLPs are required
by their partnership agreements to distribute a large percentage of their
current operating earnings. Common unit holders generally have first right to a
minimum quarterly distribution prior to distributions to the convertible
subordinated unit holders or the general partner (including incentive
distributions). Common unit holders typically have arrearage rights if the
minimum quarterly distribution is not met. In the event of liquidation, MLP
common unit holders have first right to the partnership’s remaining assets after
bondholders, other debt holders, and preferred unit holders have been paid in
full.
Investments
in securities of an MLP involve risks that differ from investments in common
stock, including risks related to limited control and limited rights to vote on
matters affecting the MLP, risks related to potential conflicts of interest
between the MLP and the MLP’s general partner, cash flow risks, dilution risks
and risks related to the general partner’s right to require unit-holders to sell
their common units at an undesirable time or price. Certain MLP securities may
trade in lower volumes due to their smaller capitalizations, and may be subject
to more abrupt or erratic price movements and lower market
liquidity.
Generally
speaking, MLP investment returns are enhanced during periods of declining or low
interest rates and tend to be negatively influenced when interest rates are
rising. During periods of interest rate volatility, these investments may not
provide attractive returns. As an income vehicle, the unit price can be
influenced by general interest rate trends independent of specific underlying
fundamentals. In addition, most MLPs are fairly leveraged and typically carry a
portion of a “floating” rate debt. As such, a significant upward swing in
interest rates would also drive interest expense higher. Furthermore, most MLPs
grow by acquisitions partly financed by debt, and higher interest rates could
make it more difficult to make acquisitions.
There
are also certain tax risks undertaken by the Fund when it invests in MLPs. MLPs
are generally treated as partnerships for U.S. federal income tax purposes,
subject to the application of certain partnership audit rules. Partnerships do
not pay U.S. federal income tax at the partnership level. Rather, each partner
is allocated a share of the partnership’s income, gains, losses, deductions and
expenses. A change in current tax law or a change in the underlying business mix
of a given MLP could result in an MLP being treated as a corporation for U.S.
federal income tax purposes, which would result in the MLP being required to pay
U.S. federal income tax (as well as state and local income taxes) on its taxable
income.
This would have the effect of reducing the amount of cash available for
distribution by the MLP and could result in a reduction in the value of the
Fund’s investment in the MLP and lower income to the Fund. Also, to the extent a
distribution received by the Fund from an MLP is treated as a return of capital,
the Fund’s adjusted tax basis in the interests of the MLP will be reduced, which
may increase the Fund’s tax liability upon the sale of the interests in the MLP
or upon subsequent distributions in respect of such interests.
The
manner and extent of the Fund’s investments in MLPs may be limited by its
intention to qualify as a regulated investment company under the Code, and any
such investments by the Fund may adversely affect the ability of the Fund to so
qualify.
Private
Placements and Restricted Securities
The
Fund may invest in restricted securities (securities with limited
transferability under the securities laws) acquired from the issuer in “private
placement” transactions. Private placement securities are not registered under
the Securities Act of 1933, as amended (the “Securities Act”), and are subject
to restrictions on resale. They are eligible for sale only to certain qualified
institutional buyers, like the Fund, and are not sold on a trading market or
exchange. While private placement securities offer attractive investment
opportunities otherwise not available on an open market, because such securities
are available to few buyers, they are often both difficult to sell and to value.
Certain of the Fund’s investments may be placed in smaller, less seasoned,
issuers that present a greater risk due to limited product lines and/or
financial resources. The issuer of privately placed securities may not be
subject to the disclosure and other investor protection requirements of a public
trade. Additionally, the Fund could obtain material non-public information from
the issuer of such securities that would restrict the Fund’s ability to conduct
transactions in underlying securities.
Privately
placed securities can usually only be resold to other qualified institutional
buyers, or in a private transaction, or to a limited number of purchasers, or in
limited quantities after they have been held for a specified period of time and
other conditions are met pursuant to an exemption from registration. The Fund
may incur more cost in the disposition of such securities because of the time
and legal expense required to negotiate a private placement. Because of the
limited market, the Fund may find it difficult to sell the securities when it
finds it advisable to do so and, to the extent such securities are sold in
private negotiations, they may be sold for less than the price for which they
were purchased or less than their fair market value.
Privately
placed securities cannot be resold to the public unless they have been
registered under the Securities Act or pursuant to an exemption, such as Rule
144A. The Fund may purchase Rule 144A securities subject to the limitation on
investments in illiquid investments, described in the "Illiquid Investments"
section below. The Fund may also purchase certain commercial paper issued in
reliance on the exemption from regulation in Section 4(2) of the Securities Act
("4(2) Paper"). The liquidity of Rule 144A securities and 4(2) Paper will
be determined in accordance with Rule 22e-4 under the
1940 Act.
The
Fund currently has no intention of investing in private placements and
restricted securities.
Cash
Investments
The
Fund may invest up to 100% of its assets in high-quality, short-term debt
securities and money market instruments (“Cash Investments”) for (i) temporary
defensive purposes in response to adverse market, economic, or political
conditions and (ii) retaining flexibility in meeting redemptions, paying
expenses, and identifying and assessing investment opportunities. Cash
Investments include shares of other mutual funds, certificates of deposit,
bankers’ acceptances, time deposits, savings association obligations, commercial
paper, short-term notes (including discount notes), and other
obligations.
The
Fund may hold a substantial position in Cash Investments for long periods of
time, which may result in the Fund not achieving its investment objectives. If
the market advances during periods when the Fund is holding a large Cash
Investment, the Fund may not participate to the extent it would have if the Fund
had been more fully invested. To the extent that the Fund uses a money market
fund for its Cash Investment, there will be some duplication of expenses because
the Fund would bear its pro rata portion of such money market fund’s advisory
fees and operational expenses.
Cash
Investments are subject to credit risk and interest rate risk although to a
lesser extent than longer-term debt securities, due to Cash Investments’
short-term, significant liquidity, and the high credit quality typically
associated with such securities.
The
Fund may invest in any of the following Cash Investments:
Money
Market Mutual Funds.
Generally, money market mutual funds seek to earn income consistent with the
preservation of capital and maintenance of liquidity. They primarily invest in
high quality money market obligations, including U.S. government obligations,
bank obligations and high-grade corporate instruments. These investments
generally mature within 397 days from the date of purchase. An investment in a
money market mutual fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any government agency.
To
the extent that the Fund invests in money market mutual funds, your cost of
investing in the Fund will generally be higher since you will indirectly bear
fees and expenses charged by the underlying money market mutual funds in
addition to the Fund’s direct fees and expenses. Furthermore, investing in money
market mutual funds could affect the timing, amount and character of
distributions to you and therefore may increase the amount of taxes payable by
you.
Bank
Certificates of Deposit, Bankers’ Acceptances and Time Deposits.
The Fund may acquire certificates of deposit, bankers’ acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
monies deposited in a commercial bank for a definite period of time and earning
a specified return. Bankers’ acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are “accepted” by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers’ acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and
foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully
insured by the U.S. government.
In
addition to purchasing certificates of deposit and bankers’ acceptances, to the
extent permitted under the investment objective and policies stated above and in
the Prospectus, the Fund may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
Savings
Association Obligations.
The Fund may invest in certificates of deposit (interest-bearing time deposits)
issued by savings banks or savings and loan associations that have capital,
surplus and undivided profits in excess of $100 million, based on latest
published reports, or less than $100 million if the principal amount of
such obligations is fully insured by the U.S. government.
Commercial
Paper, Short-Term Notes and Other Corporate Obligations.
The Fund may invest a portion of its assets in commercial paper, short-term
notes and other corporate obligations. Commercial paper consists of unsecured
promissory notes issued by corporations. Issues of commercial paper and
short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial
paper and short-term notes will consist of issues rated at the time of purchase
“A-2” or higher by S&P, “Prime-1” or “Prime-2” by Moody’s, or similarly
rated by another nationally recognized statistical rating organization or, if
unrated, determined by the Adviser to be of comparable quality.
Corporate
obligations include bonds and notes issued by corporations to finance
longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated “A” or higher by S&P, “A”
or higher by Moody’s, similarly rated by another nationally recognized
statistical rating organization, or, if unrated, determined by the Adviser to be
of comparable quality.
Investment
Companies
The
Fund may invest in other investment companies to the extent permitted by the
1940 Act. The Fund generally may purchase or redeem, without limitation, shares
of any affiliated or unaffiliated money market funds, including unregistered
money market funds, so long as the Fund does not pay a sales load or service fee
in connection with the purchase, sale or redemption or if such fees are paid,
and the Fund’s investment adviser waives its management fee in an amount
necessary to offset the amounts paid. With respect to other investments in
investment companies, the 1940 Act generally limits the Fund from acquiring (i)
more than 3% of the total outstanding shares of another investment company; (ii)
shares of another investment company having an aggregate value in excess of 5%
of the value of the total assets of the Fund; or (iii) shares of another
registered investment company and all other investment companies having an
aggregate value in excess of 10% of the value of the total assets of the
Fund.
Investments
by the Fund in other investment companies will be subject to the limitations of
the 1940 Act (including limitations on sales charges), and the rules and
regulations thereunder. By investing in securities of an investment company, the
Fund’s shareholders will indirectly bear the fees and expenses of that
underlying fund in addition to the Fund’s own fees and expenses.
In
October 2020, the SEC adopted regulatory changes related to the ability of an
investment company to invest in other investment companies in excess of
specified statutory limits. These changes include, among other things,
amendments to Rule 12d1-1, the rescission of Rule 12d1-2, the adoption of new
Rule 12d1-4, and the rescission of certain exemptive relief issued by the SEC
permitting certain fund of funds
arrangements.
Rule 12d1-4, which became effective on January 19, 2021, permits each Fund to
invest in other investment companies, including money market funds, beyond the
statutory limits, subject to certain conditions. The rescission of the
applicable exemptive orders and the withdrawal of the applicable no- action
letters was effective on January 19, 2022. Following this effectiveness, an
investment company is no longer able to rely on these exemptive orders and
no-action letters, and is subject instead to Rule 12d1-4 and other applicable
rules under Section 12(d)(1).
Closed-End
Funds.
Closed-end
funds are investment companies that typically issue a fixed number of shares
that trade on a securities exchange or over-the-counter. The risks of investment
in closed-end funds typically reflect the risk of the types of securities in
which the funds invest. Investments in closed-end funds are subject to the
additional risk that shares of the fund may trade at a premium or discount to
their net asset value (“NAV”) per share. Closed-end funds come in many varieties
and can have different investment objectives, strategies and investment
portfolios. They also can be subject to different risks, volatility and fees and
expenses. Although closed-end funds are generally listed and traded on an
exchange, the degree of liquidity, or ability to be bought and sold, will vary
significantly from one closed-end fund to another based on various factors
including, but not limited to, demand in the marketplace. When the Fund invests
in shares of a closed-end fund, shareholders of the Fund bear their
proportionate share of the closed-end fund’s fees and expenses, as well as their
share of the Fund’s fees and expenses.
Open-End
Mutual Funds.
Open-end
mutual funds are investment companies that issue new shares continuously and
redeem shares daily. The risks of investment of open-end mutual funds typically
reflect securities in which the funds invest. The NAV per share of an open-end
fund will fluctuate daily depending upon the performance of the securities held
by the fund. Each open-end fund may have a different investment objective and
strategy and different investment portfolio. Different funds may also be subject
to different risks, volatility and fees and expenses. When the Fund invests in
shares of an open-end fund, shareholders of the Fund bear their proportionate
share of the open-end funds’ fees and expenses, as well as their share of the
Fund’s fees and expenses.
Exchange-Traded
Funds.
Exchange-traded
Funds (“ETF”s)
are
typically open-end investment companies that are bought and sold on a national
securities exchange. When the Fund invests in an ETF, it will bear additional
expenses based on its pro rata share of the ETF’s operating expenses, including
the potential duplication of management fees. The risk of owning an ETF
generally reflects the risks of owning the underlying securities it holds. Many
ETFs seek to replicate a specific benchmark index. However, an ETF may not fully
replicate the performance of its benchmark index for many reasons, including
because of the temporary unavailability of certain index securities in the
secondary market or discrepancies between the ETF and the index with respect to
the weighting of securities or the number of stocks held. Lack of liquidity in
an ETF could result in an ETF being more volatile than the underlying portfolio
of securities it holds. In addition, because of ETF expenses, compared to owning
the underlying securities directly, it may be costlier to own an
ETF.
If
the Fund invests in shares of an ETF, shareholders will indirectly bear fees and
expenses charged by the underlying ETF in which the Fund invests in addition to
the Fund’s direct fees and expenses. The Fund also will incur brokerage costs
when it purchases ETFs. Furthermore, investments in other ETFs could affect the
timing, amount and character of distributions to shareholders and therefore may
increase the amount of taxes payable by investors in the Fund.
Securities
Lending
The
Fund may lend its securities in order to increase the return on its portfolio.
The SEC currently requires that the following conditions must be met whenever
the Fund’s portfolio securities are loaned:
(1) the
Fund must receive liquid collateral of at least 102% for domestic securities and
105% for foreign securities from the borrower in the form of cash or cash
equivalents; (2) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral;
(3) 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.
The
Board appoints agents to be responsible for monitoring the creditworthiness of
borrowers. To the extent the Fund is participating in securities lending, on a
quarterly basis, the Board reviews a report regarding the Fund’s loans. Such
report includes, among other things, the identity and value of all securities
comprising each loan, the length of time that the loan has been outstanding, the
amount earned by the Fund, the amount of fees paid in connection with the loan
and the ratio of the value of the collateral to the value of the
loan.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that 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.
The Fund currently has no intention of lending its portfolio
securities.
Illiquid
Investments
The
Fund may purchase illiquid investments, which may include securities that are
not readily marketable and securities that are not registered under the
Securities Act. The Fund may not acquire any illiquid investments if,
immediately after the acquisition, the Fund would have invested more than 15% of
its net assets in illiquid investments that are assets. The term “illiquid
investments” for this purpose means any investment that a fund reasonably
expects cannot be sold or disposed of in current market conditions in seven
calendar days or less without the sale or disposition significantly changing the
market value of the investment, as determined pursuant to the provisions of Rule
22e-4 under the 1940 Act. The Fund may not be able to sell illiquid investments
when the Adviser considers it desirable to do so or may have to sell such
investments at a price that is lower than the price that could be obtained if
the investments were more liquid. In addition, the sale of illiquid investments
also may require more time and may result in higher dealer discounts and other
selling expenses than does the sale of investments that are more liquid.
Illiquid
investments also may be more difficult to value due to the unavailability of
reliable market quotations for such investments, and investments in illiquid
investments may have an adverse impact on NAV.
Institutional
markets for restricted securities have developed as a result of the promulgation
of Rule 144A under the Securities Act, which provides a safe harbor from
Securities Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and otherwise meet selection criteria, the Fund may make such
investments. Whether or not such investments are illiquid depends on the market
that exists for the particular investment. It is not possible to predict with
assurance exactly how the market for Rule 144A restricted securities or any
other security will develop. An investment which when purchased enjoyed a fair
degree of marketability may subsequently become illiquid. In such event,
appropriate remedies are considered to minimize the effect on the Fund’s
liquidity.
Repurchase
Agreements
The
Fund may enter into repurchase agreements. Under such agreements, the Fund
agrees to purchase U.S. government obligations from a counterparty and the
counterparty agrees to repurchase the securities at a mutually agreed upon time
and price. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the security itself. Such repurchase
agreements will be made only with banks with assets of $500 million or more that
are insured by the Federal Deposit Insurance Corporation or with government
securities dealers recognized by the Federal Reserve Board and registered as
broker‑dealers with the SEC or exempt from such registration. The Fund will
generally enter into repurchase agreements of short durations, from overnight to
one week, although the underlying securities generally have longer maturities.
The Fund may not enter into a repurchase agreement with more than seven days to
maturity if, as a result, more than 5% of the value of the Fund’s net assets
would be invested in illiquid investments including such repurchase agreements.
To the extent necessary to facilitate compliance with Section 12(d)(3) of the
1940 Act and Rule 12d3-1 promulgated thereunder, the Fund will ensure that
repurchase agreements will be collateralized fully to the extent required by
Rule 5b-3.
For
purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from the
Fund to the seller of the U.S. government obligations that are subject to the
repurchase agreement. It is not clear whether a court would consider the U.S.
government obligations to be acquired by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund to the seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the U.S. government obligations before
its repurchase under a repurchase agreement, the Fund could encounter delays and
incur costs before being able to sell the underlying U.S. government
obligations. Delays may involve loss of interest or a decline in price of the
U.S. government obligations. If a court characterizes the transaction as a loan
and the Fund has not perfected a security interest in the U.S. government
obligations, the Fund may be required to return the securities to the seller’s
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, the Fund would be at the risk of losing some or all of the principal
and income involved in the transaction. As with any unsecured debt instrument
purchased for the Fund, the Adviser seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the other party, in
this case the seller of the U.S. government security.
Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the U.S. government obligations. However,
the Fund will always receive as collateral for any repurchase agreement to which
it is a party securities acceptable to the Adviser, the market value of which is
equal to at least 100% of the repurchase price, and the Fund will make payment
against such securities only upon physical delivery or evidence of book entry
transfer to the account of its Custodian. If the market value of the U.S.
government obligations subject to the repurchase agreement become less than the
repurchase price (including interest), the Fund will direct the seller of the
U.S. government obligations to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that the Fund could be unsuccessful in
seeking to enforce on the seller a contractual obligation to deliver additional
securities.
Borrowing
The
Fund may borrow money in amounts of up to one-third of its total assets
(including the amount borrowed) from banks. In addition, the Fund is authorized
to borrow money from time to time for temporary, extraordinary or emergency
purposes or for clearance of transactions. The use of borrowing by the Fund
involves special risk considerations that may not be associated with other funds
having similar objectives and policies. Since substantially all of the Fund’s
assets fluctuate in value, while the interest obligation resulting from a
borrowing will be fixed by the terms of the Fund’s agreement with its lender,
the NAV per share of the Fund will tend to increase more when its portfolio
securities increase in value and to decrease more when its portfolio assets
decrease in value than would otherwise be the case if the Fund did not borrow
funds. In addition, interest costs on borrowings may fluctuate with changing
market rates of interest and may partially offset or exceed the return earned on
borrowed funds. Under adverse market conditions, the Fund might have to sell
portfolio securities to meet interest or principal payments at a time when
fundamental investment considerations would not favor such sales.
The
Fund currently intends only to use borrowing to facilitate the management of its
portfolio by enabling the Fund to meet redemption requests when the liquidation
of portfolio instruments would be inconvenient or disadvantageous. Such
borrowing is not for investment purposes and will be repaid
promptly.
Cybersecurity
Risk
The
Fund, like all companies, may be susceptible to operational and information
security risks. Cybersecurity failures or breaches of the Fund or its service
providers or the issuers of securities in which the Fund invests have the
ability to cause disruptions and impact business operations, potentially
resulting in financial losses, the inability of Fund shareholders to transact
business, violations of applicable privacy and other laws, regulatory fines,
penalties, reputational damage, reimbursement or other compensation costs,
and/or additional compliance costs. The Fund and its shareholders could be
negatively impacted as a result.
Fundamental
and Non-Fundamental Investment Limitations
The
Trust (on behalf of the Fund) has adopted the following restrictions as
fundamental policies, which may not be changed without the favorable “vote of
the holders of a majority of the outstanding voting securities” of the Fund, as
defined under the 1940 Act. Under the 1940 Act, the “vote of the holders of a
majority of the outstanding voting securities” means the vote of the holders of
the lesser of (i) 67% of the
shares
of the Fund represented at a meeting at which the holders of more than 50% of
its outstanding shares are represented; or (ii) more than 50% of the
outstanding shares of the Fund.
The
Fund may not:
1.Issue
senior securities, borrow money or pledge its assets, except that (i) the
Fund may borrow from banks in amounts not exceeding one-third of its total
assets (including the amount borrowed) less liabilities (other than borrowings);
and (ii) this restriction shall not prohibit the Fund from engaging in
options transactions, reverse repurchase agreements, purchasing securities on a
when-issued, delayed delivery or forward delivery basis or short sales in
accordance with its objectives and strategies;
2.Underwrite
the securities of other issuers (except that the Fund may engage in transactions
involving the acquisition, disposition or resale of its portfolio securities
under circumstances where it may be considered to be an underwriter under the
Securities Act);
3.Purchase
or sell real estate or interests in real estate, unless acquired as a result of
ownership of securities (although the Fund may purchase and sell securities
which are secured by real estate and securities of companies that invest or deal
in real estate);
4.Purchase
or sell physical commodities or commodities contracts, unless acquired as a
result of ownership of securities or other instruments and provided that this
restriction does not prevent the Fund from engaging in transactions involving
currencies and futures contracts and options thereon or investing in securities
or other instruments that are secured by physical commodities;
5.Make
loans of money (except for the lending of the Fund’s portfolio securities,
repurchase agreements and purchases of debt securities consistent with the
investment policies of the Fund);
6.Invest
in the securities of any one industry or group of industries if, as a result,
25% or more of the Fund’s total assets would be invested in the securities of
such industry or group of industries, except that the foregoing does not apply
to securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities; or
7.With
respect to 75% of the Fund’s total assets, purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities, or, to the extent permitted by the 1940 Act, the
rules and regulations thereunder and any applicable exemptive relief, securities
of other investment companies) if, as a result, (1) more than 5% of the Fund’s
total assets would be invested in the securities of that issuer; or (2) the Fund
would hold more than 10% of the outstanding voting securities of that
issuer.
The
following lists the non-fundamental investment restrictions applicable to the
Fund. These restrictions can be changed by the Board of Trustees, but the change
will only be effective after prior written notice is given to shareholders of
the Fund.
The
Fund may not:
1.Invest
in futures, mortgages or oil, gas, mineral or other exploration or development
programs.
2.Borrow
money, except for temporary purposes, and then only in amounts not to exceed 5%
of the market value of its total assets at the time of such
borrowing.
3.Invest
more than 5% of its total assets at the time of purchase in securities of
companies that have been in business or have been in continuous operations less
than 3 years, including the operations of any predecessor.
4.Invest
or deal in securities that do not have quoted markets.
5.Maintain
margin accounts, purchase its investments on credit or margin, or leverage its
investments, except for normal transaction obligations during settlement
periods.
6.Invest
for the purpose of obtaining, exercising, or planning to exercise voting control
of the subject company.
7.Sell
securities short.
8.Invest
in real estate limited partnerships.
9.Invest
in warrants in excess of 5% of the Fund’s net assets; no more than 2% of the
Fund’s net assets may be invested in warrants not listed on the New York or
American Stock Exchange.
10.Lend
its assets to any person or individual, except by the purchase of bonds or other
debt obligations customarily sold to institutional investors. However, portfolio
securities may be loaned if collateral values are continuously maintained at no
less than 100% by “marking to the market” daily, and the practice is fair, just
and equitable as determined by a finding that adequate provision has been made
for margin calls, termination of the loan, reasonable servicing fees (including
finders’ fees), voting rights, dividend rights, shareholder approval, and
disclosure. Such lending of portfolio securities must also be within the
limitations approved by the SEC.
Except
with respect to borrowing and investments in illiquid investments, if a
percentage or rating restriction on investment or use of assets set forth herein
or in the Prospectus is adhered to at the time a transaction is effected, later
changes in percentage resulting from any cause other than actions by the Fund
will not be considered a violation. With respect to borrowing, if at any time
the Fund’s borrowings exceed one-third of its total assets (including the amount
borrowed) less liabilities (other than borrowings), such borrowings will be
reduced within three days, (not including Sundays and holidays) or such longer
period as may be permitted by the 1940 Act, to the extent necessary to comply
with the one-third limitation. If at any time the Fund’s illiquid investments
are greater than 15% of its net assets, the Advisor and Trust will determine how
to remediate the excess illiquid investments in accordance with the 1940 Act and
the Fund’s policies and procedures.
Management
of the Fund
Board
of Trustees
The
management and affairs of the Fund are supervised by the Board of Trustees. The
Board consists of four individuals. The Trustees are fiduciaries for the Fund’s
shareholders and are governed by the laws of the State of Delaware in this
regard. The Board establishes policies for the operation of the Fund and
appoints the officers who conduct the daily business of the Fund.
The
Role of the Board
The
Board provides oversight of the management and operations of the Trust. Like all
mutual funds, the day-to-day responsibility for the management and operation of
the Trust is the responsibility of various service providers to the Trust and
its individual series, such as the Adviser; Quasar Distributors, LLC, the Fund's
principal underwriter (the “Distributor”); U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, the Fund's administrator (the
“Administrator”) and transfer agent (the “Transfer Agent”); and U.S. Bank N.A.,
the Fund's Custodian, each of whom are discussed in greater detail in this SAI.
The Board approves all significant agreements between the Trust and its service
providers, including the agreements with the Adviser, Distributor,
Administrator, Custodian and Transfer Agent. The Board has appointed various
individuals of certain of these service providers as officers of the Trust, with
responsibility to monitor and report to the Board on the Trust’s day-to-day
operations. In conducting this oversight, the Board receives regular reports
from these officers and service providers regarding the Trust’s operations. The
Board has appointed a Chief Compliance Officer (“CCO”) who reports directly to
the Board and who administers the Trust’s compliance program and regularly
reports to the Board as to compliance matters, including an annual compliance
review. Some of these reports are provided as part of formal Board Meetings,
which are held four times per year, in person, and such other times as the Board
determines is necessary, and involve the Board’s review of recent Trust
operations. From time to time one or more members of the Board may also meet
with Trust officers in less formal settings, between formal Board Meetings to
discuss various topics. In all cases, however, the role of the Board and of any
individual Trustee is one of oversight and not of management of the day-to-day
affairs of the Trust and its oversight role does not make the Board a guarantor
of the Trust’s investments, operations or activities.
Board
Leadership Structure
The
Board has structured itself in a manner that it believes allows it to
effectively perform its oversight function. The Board is comprised of four
Trustees that are not considered to be “interested persons,” of the Fund, as
defined by the 1940 Act (“Independent Trustees”) – Messrs. David A. Massart,
Leonard M. Rush, David M. Swanson and Robert J. Kern. Accordingly, 100% of the
members of the Board are Independent Trustees, who are Trustees that are not
affiliated with the investment adviser to the Fund or its affiliates or other
service providers to the Fund. Prior to July 6, 2020, Mr. Kern was considered an
“interested person” of the Trust as defined in the 1940 Act (“Interested
Trustee”). He was considered an Interested Trustee by virtue of the fact that he
had served as a board member of Quasar Distributors, LLC, which acts as
principal underwriter to many of the Trust’s underlying funds and had been an
Executive Vice President of the Administrator. The Board has established two
standing committees, an Audit Committee and a Nominating & Governance
Committee, which are discussed in greater detail under “Board Committees” below.
Each of the Audit Committee and the Nominating & Governance Committee are
comprised entirely of Independent Trustees. The Independent Trustees have
engaged independent counsel to advise them on matters relating to their
responsibilities in connection with the Trust, as well as the Fund.
The
Independent Trustees have appointed Leonard M. Rush as Chairman. Prior to July
6, 2020, Mr. Kern served as Chairman of the Trust and Mr. Rush served as lead
Independent Trustee with responsibilities to coordinate activities of the
Independent Trustees, act as a liaison with the Trust’s service providers,
officers, legal counsel, and other Trustees between meetings, help to set Board
meeting agendas, and serve as chair during executive sessions of the Independent
Trustees.
In
accordance with the fund governance standards prescribed by the SEC under the
1940 Act, the Independent Trustees on the Nominating & Governance Committee
select and nominate all candidates for Independent Trustee positions. Each
Trustee was appointed to serve on the Board because of his
experience,
qualifications, attributes and skills as set forth in the subsection “Trustee
Qualifications” below.
The
Board reviews its structure regularly in light of the characteristics and
circumstances of the Trust, including: the affiliated or unaffiliated nature of
each investment adviser; the number of funds that comprise the Trust; the
variety of asset classes that those funds reflect; the net assets of the Trust;
the committee structure of the Trust; and the independent distribution
arrangements of each of the Trust’s series.
The
Board has determined that inclusion of all Independent Trustees as members of
the Audit Committee and the Nominating & Governance Committee allows all
such Trustees to participate in the full range of the Board’s oversight duties,
including oversight of risk management processes discussed below. Given the
composition of the Board and the function and composition of its various
committees as described above, the Trust has determined that the Board’s
leadership structure is appropriate.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel, including personnel of the Trust’s service
providers. Because risk management is a broad concept comprised of many elements
(such as, for example, investment risk, issuer and counter-party risk,
compliance risk, operational risk, business continuity risk, etc.) the oversight
of different types of risks is handled in different ways. For example, the CCO
regularly reports to the Board during Board Meetings and meets in executive
session with the Independent Trustees and their legal counsel to discuss
compliance and operational risks. In addition, Mr. Rush, the Independent Trustee
designated as the Audit Committee’s “audit committee financial expert” meets
with the President, Treasurer and the Fund's independent registered public
accounting firm to discuss, among other things, the internal control structure
of the Fund's financial reporting function. The full Board receives reports from
the investment advisers to the underlying series as to investment
risks.
Trustees
and Officers
The
Trustees and officers of the Trust are listed below with their addresses,
present positions with the Trust and principal occupations over at least the
last five years.
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
Independent
Trustees |
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| |
Leonard
M. Rush, CPA 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1946 |
Chairman, Trustee
and Audit Committee Chairman |
Indefinite Term;
Since April 2011 |
31 |
Retired;
Chief Financial Officer, Robert W. Baird & Co. Incorporated,
(2000-2011). |
Independent Trustee,
ETF Series Solutions (56
Portfolios) (2012-Present) |
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
David
A. Massart 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1967 |
Trustee
|
Indefinite Term;
Since April 2011 |
31 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022);
Co-Founder and Chief Investment Strategist, Next Generation Wealth
Management, Inc. (2005-2021). |
Independent Trustee,
ETF Series Solutions (56
Portfolios) (2012-Present) |
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
David
M. Swanson 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1957 |
Trustee
and Nominating & Governance Committee Chairman |
Indefinite Term;
Since April 2011 |
31 |
Founder
and Managing Principal, SwanDog Strategic Marketing, LLC
(2006-present). |
Independent
Trustee, ALPS Variable Investment Trust (7 Portfolios) (2006 to Present);
Independent Trustee, RiverNorth Funds (3 Portfolios) (2018 to Present);
RiverNorth Managed Duration Municipal Income Fund, Inc. (1 Portfolio)
(2019 to Present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1
Portfolio) (2018 to Present); RiverNorth Capital and Income Fund (1
Portfolio) (2018 to Present); RiverNorth Opportunities Fund (1 Portfolio)
(2015 to Present); RiverNorth/DoubleLine Strategic Opportunity Fund, Inc.
(1 Portfolio) (2019 to Present); RiverNorth Flexible Municipal Income
Fund, Inc. (1 Portfolio) (2020 to Present); RiverNorth Flexible Municipal
Income Fund II, Inc. (1 Portfolio) (2021 to Present); RiverNorth Managed
Duration Municipal Income Fund II, Inc. (1 Portfolio) (2022 to
Present). |
Robert
J. Kern 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1958 |
Trustee |
Indefinite Term;
Since January 2011 |
31 |
Retired
(2018-present); Executive Vice President, U.S. Bancorp Fund Services, LLC
(1994-2018). |
None |
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal Occupation(s)
During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
Officers |
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Brian
R. Wiedmeyer 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1973 |
President
and Principal Executive Officer |
Indefinite
Term; Since November 2018 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2005-present). |
N/A |
Deborah
Ward 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1966 |
Vice
President, Chief Compliance Officer and Anti-Money Laundering
Officer |
Indefinite
Term; Since April 2013 |
N/A |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2004-present). |
N/A |
Benjamin
Eirich 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1981 |
Treasurer,
Principal Financial Officer and Vice President |
Indefinite Term;
Since August 2019 (Treasurer); Indefinite Term;
Since November 2018 (Vice President) |
N/A |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2008-present). |
N/A |
John
Hadermayer 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1977 |
Secretary |
Indefinite
Term; Since May 2022 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2022-present); Executive
Director, AQR Capital Management, LLC (2013-2022). |
N/A |
Douglas
Schafer 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1970 |
Assistant
Treasurer and Vice President |
Indefinite
Term; Since May 2016 (Assistant Treasurer); Indefinite Term; Since
November 2018 (Vice President) |
N/A |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2002-present). |
N/A |
Sara
J. Bollech 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1977 |
Assistant
Treasurer and Vice President |
Indefinite
Term: Since November 2021 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2007-present). |
N/A |
Peter
A. Walker, CPA 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1993 |
Assistant
Treasurer and Vice President |
Indefinite
Term: Since November 2021 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2016-present). |
N/A |
Trustee
Qualifications
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills appropriate to their continued service as Trustees of the
Trust in light of the Trust’s business and structure. The Trustees have
substantial business and professional backgrounds that indicate they have the
ability to critically review, evaluate and assess information provided to them.
Certain of these business and professional experiences are set forth in detail
in the table above. In addition, the Trustees have substantial board experience
and, in their service to the Trust, have gained substantial insight as to the
operation of the Trust. The Board annually conducts a “self-assessment” wherein
the effectiveness of the Board and the individual Trustees is
reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each individual Trustee. The information
provided below, and in the table above, is not all-inclusive. Many of the
Trustees’ qualifications to serve on the Board involve intangible elements, such
as intelligence, integrity, work ethic, the ability to work together, the
ability to communicate effectively, the ability to exercise judgment, the
ability to ask incisive questions, and commitment to shareholder
interests.
Mr.
Kern’s trustee attributes include substantial industry experience, including
over 35 years of service with U.S. Bancorp Fund Services, LLC (the fund
accountant (“Fund Accountant”), Administrator and Transfer Agent to the Trust)
where he managed business development and the mutual fund transfer agent
operation including investor services, account services, legal compliance,
document processing and systems support. He also served as a board member of
U.S. Bancorp Fund Services, LLC and previously served as a board member of
Quasar Distributors, LLC (the principal underwriter of many of the Trust's
series). The Board believes Mr. Kern’s experience, qualifications, attributes
and skills on an individual basis and in combination with those of the other
Trustees lead to the conclusion that he possesses the requisite skills and
attributes as a Trustee to carry out oversight responsibilities with respect to
the Trust.
Mr.
Massart’s trustee attributes include substantial industry experience, including
over two decades working with high net worth individuals, families, trusts and
retirement accounts to make strategic and tactical asset allocation decisions,
evaluate and select investment managers and manage client relationships. He is
currently Partner and Managing Director of Beacon Pointe Advisors, LLC.
Previously, he served as Chief Investment Strategist and lead member of the
investment management committee of the SEC registered investment advisory firm
he co-founded. He also previously served as Managing Director of Strong Private
Client and as a Manager of Wells Fargo Investments, LLC. The Board believes Mr.
Massart’s experience, qualifications, attributes and skills on an individual
basis and in combination with those of the other Trustees lead to the conclusion
that he possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
Mr.
Rush’s trustee attributes include substantial industry experience, including
serving in several different senior executive roles at various global financial
services firms. He most recently served as Managing Director and Chief Financial
Officer of Robert W. Baird & Co. Incorporated and several other affiliated
entities and served as the Treasurer for Baird Funds. He also served as the
Chief Financial Officer for Fidelity Investments’ four broker-dealers and has
substantial experience with mutual fund and investment advisory organizations
and related businesses, including Vice President and Head of Compliance for
Fidelity Investments, a Vice President at Credit Suisse First Boston, a Manager
with Goldman Sachs, & Co. and a Senior Manager with Deloitte & Touche.
Mr. Rush has been determined to qualify as an Audit Committee Financial Expert
for the Trust. The Board believes Mr. Rush’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of
the other Trustees lead to the
conclusion
that he possesses the requisite skills and attributes as a Trustee and as the
Chairman to carry out oversight responsibilities with respect to the
Trust.
Mr.
Swanson’s trustee attributes include substantial industry experience, including
over 35 years of senior management and marketing experience with over 30 years
dedicated to the financial services industry. He is currently the Founder and
Managing Principal of a marketing strategy boutique serving asset and wealth
management businesses. He has also served as Chief Operating Officer and Chief
Marketing Officer of Van Kampen Investments, President and Chief Executive
Officer of Scudder, Stevens & Clark, Canada, Ltd., Managing Director and
Head of Global Investment Products at Morgan Stanley, Director of Marketing for
Morgan Stanley Mutual Funds, Director of Marketing for Kemper Funds, and
Executive Vice President and Head of Distribution for Calamos Investments. The
Board believes Mr. Swanson’s experience, qualifications, attributes and skills
on an individual basis and in combination with those of the other Trustees lead
to the conclusion that he possesses the requisite skills and attributes as a
Trustee to carry out oversight responsibilities with respect to the
Trust.
The
discussion of the Trustees’ experience and qualifications is pursuant to SEC
requirements, does not constitute holding out the Board or any Trustee as having
special expertise, and shall not impose any greater responsibility or liability
on any such Trustee or the Board by reason thereof.
Trustee
and Management Ownership of Fund Shares
The
following table shows the dollar range of Fund shares and shares in all
portfolios of the Trust beneficially owned by the Trustees as of the calendar
year ended December 31, 2022.
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Name |
Dollar
Range of Fund Shares Beneficially Owned (None, $1-$10,000,
$10,001-$50,000, $50,001-$100,000, Over $100,000) |
Aggregate
Dollar Range of Shares in the Trust |
Independent
Trustees |
Leonard
M. Rush |
None |
None |
David
A. Massart |
None |
None |
David
M. Swanson |
$1-$10,000 |
$50,001-$100,000 |
Robert
J. Kern |
None |
None |
As
of December 31, 2022, the Trustees and Officers of the Trust as a group
owned less than 1% of the outstanding shares of any fund in the
Trust.
Board
Committees
Audit
Committee.
The Trust has an Audit Committee, which is comprised of the Independent
Trustees. The Audit Committee reviews financial statements and other
audit-related matters for the Fund. The Audit Committee also holds discussions
with management and with the Fund’s independent registered public accounting
firm concerning the scope of the audit and the auditor’s
independence.
The
Audit Committee met twice with respect to the Fund during its fiscal year ended
December 31, 2022.
Nominating
& Governance Committee.
The Trust has a Nominating & Governance Committee, which is comprised of the
Independent Trustees. The Nominating & Governance Committee is responsible
for seeking and reviewing candidates for consideration as nominees for the
position of trustee and meets only as necessary.
The
Nominating & Governance Committee will consider nominees recommended by
shareholders for vacancies on the Board of Trustees. Recommendations for
consideration by the Nominating & Governance Committee should be sent to the
President of the Trust in writing together with the appropriate biographical
information concerning each such proposed nominee, and such recommendation must
comply with the notice provisions set forth in the Trust’s Bylaws. In general,
to comply with such procedures, such nominations, together with all required
information, must be delivered to and received by the President of the Trust at
the principal executive office of the Trust no fewer than 120 days, and no more
than 150 days, prior to the shareholder meeting at which any such nominee would
be voted on. Shareholder recommendations for nominations to the Board will be
accepted on an ongoing basis. The Nominating & Governance Committee’s
procedures with respect to reviewing shareholder nominations will be disclosed
as required by applicable securities laws. The Nominating & Governance
Committee did not meet during the Fund’s fiscal year ended December 31,
2022.
Trustee
Compensation
The
Trustees receive an annual retainer of $110,000. The Chairman of the Audit
Committee received additional compensation of $14,000, the Chairman of the
Nominating & Governance Committee receives additional compensation of $8,000
and the Chairman of the Board of Trustees receives $12,500 annually. Prior to
January 1, 2023, the Trustees received $6,000 for regularly scheduled meetings
and $2,500 for additional meetings. Effective January 1, 2023, the Trustees
receive $8,000 for reguarly schedule meetings and $2,500 for additional
meetings.
The
following table sets forth the compensation received by the Trustees for the
Fund’s fiscal year ended December 31, 2022:
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Name
of Person/Position |
Aggregate
Compensation
from
the Fund(1) |
Pension
or Retirement Benefits Accrued as Part of
Fund Expenses |
Estimated Annual
Benefits Upon Retirement |
Total
Compensation
from
the Fund and
the
Trust(2)
Paid
to
Trustees |
Leonard
M. Rush, Chairman, Independent Trustee and Audit Committee
Chairman |
$4,749 |
None |
None |
$166,500 |
David
A. Massart, Independent Trustee |
$3,996 |
None |
None |
$140,000 |
David
M. Swanson, Independent Trustee and Nominating & Governance Committee
Chairman |
$4,223 |
None |
None |
$148,000 |
Robert
J. Kern, Independent Trustee |
$3,996 |
None |
None |
$140,000 |
(1)Trustees
fees and expenses are allocated among the Fund and any other series comprising
the Trust.
(2)The
Trust includes other portfolios in addition to the Fund.
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 the Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of the Fund or acknowledges the existence of control. A controlling
person possesses the ability to control the outcome of matters submitted for
shareholder vote by the Fund.
The
following tables list the shareholders considered to be either a control person
or a principal shareholder of the Fund as of March 31, 2023:
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|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of
Ownership(1) |
Charles
Schwab & Co Inc Special Custody A/C FBO Customers Attn Mutual
Funds 211 Main St San Francisco, California 94105-1905 |
10.38% |
Record |
National
Financial Services LLC For the Exclusive Benefit of Our
Customers Attn Mutual Funds Dept 4th Fl 499 Washington
Blvd Jersey City, New Jersey 07310-1995 |
9.84% |
Record |
(1)“Record”
ownership means the shareholder of record, or the exact name of the shareholder
on the account, e.g.,
“ABC Brokerage, Inc.” “Beneficial” ownership refers to the actual pecuniary, or
financial, interest in the security, e.g.,
“Jane Doe Shareholder.” “Both” refers to accounts held by the company of record,
for the actual or pecuniary interest of others (e.g.,
“ABC Brokerage, Inc. FBO Its Customers”).
Investment
Adviser
Investment
advisory services are provided to the Fund by the Adviser, Muhlenkamp &
Company, Inc., pursuant to an investment advisory agreement (the “Advisory
Agreement”). The Adviser is majority owned and controlled by Ronald H.
Muhlenkamp, Founder of the Adviser. Ronald H. Muhlenkamp served as a portfolio
manager of the Fund until his resignation on February 15, 2019.
Pursuant
to the Advisory Agreement, the Adviser provides the Fund with investment
research and advice and furnishes the Fund with an investment program consistent
with the Fund’s investment objective and policies, subject to the supervision of
the Board of Trustees. The Adviser determines which portfolio securities will be
purchased or sold, arranges for the placing of orders for the purchase or sale
of portfolio securities, selects brokers or dealers to place those orders,
maintains books and records with respect to the securities transactions and
reports to the Board on the Fund’s investments and performance. The Adviser is
solely responsible for making investment decisions on behalf of the Fund. The
Board will have sole responsibility for selecting, evaluating the performance
of, and replacing as necessary any of the service providers to the Fund,
including the Adviser.
After
an initial two-year period, the Advisory Agreement will continue in effect from
year to year, only if such continuance is specifically approved at least
annually by: (i) the Board or the vote of a majority of the outstanding voting
securities of the Fund (with respect to such Fund); and (ii) the vote of a
majority of the Independent Trustees, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement is terminable without
penalty by the Trust, on behalf of the Fund, upon 60 days’ written notice to the
Adviser, when authorized by either: (i) a majority vote of the Fund’s
shareholders (with respect to such Fund); or (ii) by a vote of a majority of the
Board of Trustees, or by the Adviser upon 60 days’ written notice to the Trust.
The Advisory Agreement will automatically terminate in the event of its
“assignment,” as defined under the 1940 Act. The Advisory Agreement provides
that the Adviser under such agreement shall not be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or for
any act or omission in the execution of portfolio transactions for the Fund,
except for willful misfeasance, bad faith or negligence in the performance of
its duties, or by reason of reckless disregard of its obligations and duties
thereunder.
In
consideration of the services provided by the Adviser pursuant to the Advisory
Agreement, the Adviser is entitled to receive from the Fund a management fee
computed daily and paid monthly, based on a percentage of the Fund’s net assets
as specified in the Fund’s prospectus. However, the Adviser may decide to waive
a portion of the management fees the Fund pays to it on a monthly basis. The
Adviser’s decision to forego its full management fee may be in addition to any
contractual agreement to waive management fees and/or reimburse Fund expenses.
Fund
Expenses.
The Fund is responsible for its own operating expenses. Pursuant to an Operating
Expenses Limitation Agreement between the Adviser and the Trust, on behalf of
the Fund, the Adviser has agreed to waive its management fees and pay Fund
expenses, as specified in the Prospectus. Fees waived and expenses paid by the
Adviser may be recouped by the Adviser for a period of 36 months following the
month during which such waiver and/or expense payment was made, and the expense
limit in effect at the time of the recoupment. The Operating Expenses Limitation
Agreement is indefinite in term, but cannot be terminated through at least
April 30, 2024. Thereafter, the agreement may be terminated at any time
upon 60 days’ written notice by the Trust’s Board or the Adviser.
The
Fund paid the following advisory fees during the prior three fiscal years ended
December 31:
|
|
|
|
|
|
|
|
|
|
| |
| 2022 |
2021 |
2020 |
Advisory
Fees Paid to Adviser |
$2,631,854 |
$1,978,207 |
$1,624,540 |
Advisory
Fees Waived |
$(316,952) |
$(318,386) |
$(304,035) |
Total
Advisory Fees Paid to the Adviser |
$2,314,902 |
$1,659,821 |
$1,320,505 |
Portfolio
Manager
As
disclosed in the Prospectus, the Fund is managed by Jeffrey P. Muhlenkamp (the
“Portfolio Manager”).
The
following table provides information regarding other accounts, excluding the
Fund, managed by the Portfolio Manager as of December 31,
2022:
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|
|
|
|
|
|
|
| |
| Registered
Investment Companies (excluding the Fund) |
Other
Pooled Investment Vehicles |
Other
Accounts |
Portfolio
Manager |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total Assets
in the Accounts |
Jeffrey
Muhlenkamp |
None |
$0 |
None |
$0 |
70 |
$117,020,000 |
As
of December 31, 2022, the Portfolio Manager did not manage any accounts
pursuant to a performance-based advisory fee.
The
Portfolio Manager’s management of “other accounts” may give rise to potential
conflicts of interest in connection with the management of the Fund’s
investments, on the one hand, and the investments of the other accounts, on the
other. The other accounts may have the same investment objective as the Fund.
Therefore, a potential conflict of interest may arise as a result of the
identical investment objectives, whereby the Portfolio Manager could favor one
account over another. Another potential conflict could
include
the Portfolio Manager’s knowledge about the size, timing and possible market
impact of Fund trades, whereby the Portfolio Manager could use this information
to the advantage of other accounts and to the disadvantage of the Fund. However,
the Adviser has established policies and procedures to ensure that the purchase
and sale of securities among all accounts it manages are fairly and equitably
allocated.
The
Adviser compensates the Portfolio Manager for his management of the Fund. The
Portfolio Manager’s compensation is based on a combination of fixed annual
salary, a possible bonus and a commensurate share of available company profits
as equity owners of the firm. Whereas the performance of an account may
contribute to the overall profitability of the firm, compensation of the
Portfolio Manager is not based on the numerical performance of any client
account. The Portfolio Manager’s entire compensation package is paid by the
Adviser and not by any client account.
The
following table indicates the dollar range of Fund shares beneficially owned by
the Portfolio Manager as of December 31, 2022:
|
|
|
|
| |
Portfolio
Manager |
Dollar
Range of Fund Beneficially Owned
(None,
$1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001 - $500,000,
$500,001-$1,000,000, Over $1,000,000) |
Jeffrey
Muhlenkamp |
Over
$1,000,000 |
Service
Providers
Pursuant
to an administration agreement (the “Administration Agreement”) between the
Trust and U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global
Fund Services (“Fund Services”), 615 East Michigan Street, Milwaukee, Wisconsin,
53202, acts as the Administrator to the Fund. Fund Services provides certain
administrative services to the Fund, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Fund’s 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 Fund with applicable laws and
regulations; 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 Fund, 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 Fund, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares. Pursuant to the
Administration Agreement, for its services, Fund Services receives from the Fund
a fee computed daily and payable monthly based on the Fund’s average net assets,
subject to a minimum annual fee.
Fund
Services also acts as Fund Accountant, Transfer Agent and dividend disbursing
agent under separate agreements with the Trust.
The
Fund paid the following in fund administration and fund accounting fees to Fund
Services during the fiscal periods ended December 31:
|
|
|
|
|
|
|
| |
2022 |
2021 |
2020 |
$232,445 |
$184,159 |
$157,310 |
Pursuant
to a custody agreement between the Trust and the Fund, U.S. Bank N.A., an
affiliate of Fund Services, serves as the Custodian of the Fund’s assets (the
“Custodian”). For its services, the Custodian receives a monthly fee based on a
percentage of the Fund’s assets, in addition to certain transaction based fees,
and is reimbursed for out of pocket expenses. The Custodian’s address is 1555
North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin, 53212. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Fund. U.S. Bank and its affiliates may participate in revenue
sharing arrangements with service providers of mutual funds in which the Fund
may invest.
Legal
Counsel
Stradley
Ronon Stevens & Young, LLP, 2005 Market Street, Suite 2600, Philadelphia, PA
19103, serves as counsel to the Trust and as independent legal counsel to the
Board.
Independent
Registered Public Accounting Firm
Cohen
& Company, Ltd., 342 North Water Street, Suite 830, Milwaukee, Wisconsin
53202 serves as the independent registered public accounting firm for the
Fund.
Distribution
of Fund Shares
The
Trust has entered into a distribution agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC (the “Distributor”), 111 East Kilbourn Avenue,
Suite 2200, Milwaukee, Wisconsin 53202, pursuant to which the Distributor acts
as the Fund’s principal underwriter, provides certain administrative services
and promotes and arranges for the sale of the Fund’s shares on a best efforts
basis. The offering of the Fund’s shares is continuous. The Distributor is not
affiliated with the Adviser, Administrator, Fund Accountant or the Custodian.
The Distributor is a registered broker-dealer and member of the Financial
Industry Regulatory Authority, Inc. (“FINRA”).
The
Distribution Agreement has an initial term of up to two years and 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
60 days’ written notice when authorized either by a majority vote of the
Fund’s shareholders or by vote of a majority of the Board of Trustees, including
a majority of the Trustees who are not “interested persons” (as defined under
the 1940 Act) of the Trust, or by the Distributor on 60 days’ written
notice, and will automatically terminate in the event of its “assignment,” as
defined in the 1940 Act.
Portfolio
Transactions and Brokerage
Pursuant
to the Advisory Agreement, the Adviser determines which securities are to be
purchased and sold by the Fund and which broker-dealers are eligible to execute
the Fund’s portfolio transactions. Purchases and sales of securities on an
exchange are effected through brokers that charge a commission while purchases
and sales of securities in the OTC market will generally be executed directly
with the primary “market-maker” unless, in the opinion of the Adviser, a better
price and execution can otherwise be obtained by using a broker for the
transaction. Purchases and sales of portfolio securities that are fixed income
securities (for instance, money market instruments and bonds, notes and bills)
usually are principal transactions. In a principal transaction, the party from
whom the Fund purchases or to whom the Fund sells is acting on its own behalf
(and not as the agent of some other party such as its customer). These
securities normally are purchased directly from the issuer or from an
underwriter or market maker for the securities. The price of securities
purchased from underwriters includes a disclosed fixed commission or concession
paid by the issuer to the underwriter, and prices of securities purchased from
dealers
serving as market makers reflects the spread between the bid and asked price.
The price of OTC securities usually includes an undisclosed commission or
markup.
Purchases
of portfolio securities for the Fund will be effected through broker-dealers
(including banks) that specialize in the types of securities that the Fund will
be holding, unless better executions are available elsewhere. Dealers usually
act as principal for their own accounts. Purchases from dealers will include a
spread between the bid and the asked price. If the execution and price offered
by more than one dealer are comparable, the order may be allocated to a dealer
that has provided research or other services as discussed below.
In
placing portfolio transactions, the Adviser will use reasonable efforts to
choose broker-dealers capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and quality of
services, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm’s risk in positioning a
block of securities and other factors available, will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker-dealer can offer the services needed to obtain the most
favorable price and execution available, consideration may be given to those
broker-dealers that furnish or supply research and statistical information to
the Adviser that it may lawfully and appropriately use in its investment
advisory capacities, as well as provide other brokerage services incidental to
execution services. Research and statistical information may include reports
that are common in the industry such as industry research reports and
periodicals, quotation systems, software for portfolio management and formal
databases. Typically, the research will be used to service all of the Adviser’s
accounts, although a particular client may not benefit from all the research
received on each occasion. The Adviser considers research information, which is
in addition to and not in lieu of the services required to be performed by it
under its Advisory Agreement with the Fund, to be useful in varying degrees, but
of indeterminable value.
While
it is the Fund’s general policy to first seek to obtain the most favorable price
and execution available in selecting a broker-dealer to execute portfolio
transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Adviser, even if the specific services are not directly useful to the Fund and
may be useful to the Adviser in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Adviser to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Adviser’s overall responsibilities to the
Fund.
Investment
decisions for the Fund are generally made independently from those of the
Adviser’s other client accounts and its affiliates. However, because certain
client accounts are managed using a substantially similar investment strategy as
the Fund, identical securities will be acceptable for both the Fund and one or
more of such client accounts. In such event, the position of the Fund and such
client account(s) in the same issuer may vary and the length of time that each
may choose to hold its investment in the same issuer may likewise vary. However,
to the extent any of these client accounts seek to acquire the same security as
the Fund at the same time, the Fund may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price or
obtain a lower yield for such security. Similarly, the Fund may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that the Fund is purchasing
or selling, each day’s transactions in such security will be allocated between
the Fund and all such client accounts in a manner deemed equitable by
the
Adviser, taking into account the respective sizes of the accounts and the amount
being purchased or sold. It is recognized that in some cases this system could
have a detrimental effect on the price or value of the security insofar as the
Fund is concerned. In other cases, however, it is believed that the ability of
the Fund to participate in volume transactions may produce better executions for
the Fund. Notwithstanding the above, the Adviser may execute buy and sell orders
for accounts and take action in performance of its duties with respect to any of
its accounts that may differ from actions taken with respect to another account,
so long as the Adviser shall, to the extent practical, allocate investment
opportunities to accounts, including the Fund, over a period of time on a fair
and equitable basis and in accordance with applicable law.
Portfolio
transactions may be placed with broker-dealers who sell shares of the Fund
subject to rules adopted by FINRA and the SEC. Portfolio transactions may also
be placed with broker-dealers in which the Adviser has invested on behalf of the
Fund and/or client accounts.
The
Fund paid the following brokerage commissions for the fiscal years ended
December 31:
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|
|
|
|
|
|
| |
2022 |
2021 |
2020 |
$30,716(2) |
$10,524(1) |
$27,132 |
(1)The
decrease in brokerage commissions during the fiscal years ended December 31,
2021 is largely due to a decrease in the Fund’s portfolio turnover rate.
(2)The
increase in brokerage commissions during the fiscal year ended December 31, 2022
is due to the increase in the Fund’s portfolio turnover rate.
Portfolio
Turnover
Portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser, investment considerations warrant such
action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in the Fund’s
portfolio, with the exception of securities whose maturities at the time of
acquisition were one year or less, were sold and either repurchased or replaced
within one year. A high rate of portfolio turnover (100% or more) generally
leads to above-average transaction costs and could generate capital gains that
must be distributed to shareholders as short-term capital gains taxed at
ordinary income rates (currently as high as 37%). To the extent that the Fund
experiences an increase in brokerage commissions due to a higher portfolio
turnover rate, the performance of the Fund could be negatively impacted by the
increased expenses incurred by the Fund and may result in a greater number of
taxable transactions. The Fund’s portfolio turnover rate for the fiscal years
ended December 31, were as follows:
Code
of Ethics
The
Trust, the Adviser and the Distributor have each adopted Codes of Ethics under
Rule 17j-1 of the 1940 Act. These codes permit, subject to certain conditions,
personnel of the Trust, Adviser and Distributor to invest in securities that may
be purchased or held by the Fund.
Proxy
Voting Procedures
The
Board has adopted proxy voting policies and procedures (“Proxy Policies”)
wherein the Trust has delegated to the Adviser the responsibility for voting
proxies relating to portfolio securities held by the Fund as part of the
Adviser’s investment advisory services, subject to the supervision and oversight
of the Board of Trustees. Notwithstanding this delegation of responsibilities,
however, the Fund retains the right to vote proxies relating to its portfolio
securities. The fundamental purpose of the Proxy Policies is to ensure that each
vote will be in a manner that reflects the best interest of the Fund and its
shareholders, taking into account the value of the Fund’s
investments.
The
actual voting records relating to portfolio securities during the most recent
12-month period ended June 30 are available without charge, upon request, by
calling toll-free, (800) SEC-0330 or by accessing the SEC’s website at
https://www.sec.gov/.
The
Adviser’s Proxy Voting Policies and Procedures
The
Adviser will vote proxies on behalf of the Fund in a manner that it believes is
consistent with the best interests of the Fund and its shareholders. Absent
special circumstances, all proxies will be voted consistent with guidelines
established and described in the Adviser’s Proxy Voting Policies and Procedures.
A summary of the Adviser’s Proxy Voting Procedures is as follows:
•Because
the Adviser believes that it would not own a stock where it did not agree with
the actions of management, the Adviser votes proxies in line with management
recommendations; and
•In
the event of a conflict between the interest of the Fund and its shareholders
and those of the Adviser, the Adviser will disclose the conflict to the Fund and
vote as directed by the Board of Trustees.
Anti-Money
Laundering Compliance Program
The
Trust has established an Anti-Money Laundering Compliance Program (the
“Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”). To ensure compliance with this law, the Trust’s Program provides
for the development of internal practices, procedures and controls, designation
of anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the Program. Ms.
Deborah Ward has been designated as the Trust’s Anti-Money Laundering Compliance
Officer.
Procedures
to implement the Program include, but are not limited to: determining that the
Distributor and the Transfer Agent have established proper anti-money laundering
procedures; reporting suspicious and/or fraudulent activity; checking
shareholder names against designated government lists, including Office of
Foreign Asset Control (“OFAC”), and a complete and thorough review of all new
account applications. The Fund will not transact business with any person or
legal entity whose identity and beneficial owners, if applicable, cannot be
adequately verified under the provisions of the USA PATRIOT Act.
As
a result of the Program, the Fund may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity or
if certain account information matches
information
on government lists of known terrorists or other suspicious persons, or the Fund
may be required to transfer the account or proceeds of the account to a
governmental agency.
Portfolio
Holdings Information
The
Trust, on behalf of the Fund, has adopted portfolio holdings disclosure policies
(“Portfolio Holdings Policies”) that govern the timing and circumstances of
disclosure of portfolio holdings of the Fund. Information about the Fund’s
portfolio holdings will not be distributed to any third party except in
accordance with these Portfolio Holdings Policies. The Board has considered the
circumstances under which the Fund’s portfolio holdings may be disclosed under
the Portfolio Holdings Policies. The Board has also considered actual and
potential material conflicts that could arise in such circumstances between the
interests of the Fund’s shareholders and the interests of the Adviser,
Distributor or any other affiliated person of the Fund. After due consideration,
the Board has determined that the Fund has a legitimate business purpose for
disclosing portfolio holdings to persons described in the Portfolio Holdings
Policies. The Board also has authorized its CCO to consider and authorize
dissemination of portfolio holdings information to additional parties, after
considering the best interests of the Fund’s shareholders and potential
conflicts of interest in making such disclosures.
The
Board exercises continuing oversight of the disclosure of the Fund’s portfolio
holdings by (1) overseeing the implementation and enforcement of the
Portfolio Holdings Policies, codes of ethics and other relevant policies of the
Fund and its service providers by the CCO, (2) by considering reports and
recommendations by the CCO concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act), and (3) by considering whether to
approve any amendment to these Portfolio Holdings Policies. The Board reserves
the right to amend the Portfolio Holdings Policies at any time without prior
notice in its sole discretion.
Disclosure
of the Fund’s complete holdings is required to be made quarterly within 60 days
of the end of each fiscal quarter, in the annual and semi-annual reports to Fund
shareholders, and in the quarterly holdings report on Form N-PORT. These
reports will be made available, free of charge, on the EDGAR database on the
SEC’s website at https://www.sec.gov/. The Fund’s top ten holdings are disclosed
on its website at https://muhlenkamp.com/muhlx/ within 5 to 10 days of the end
of each quarter. The top ten holdings will remain posted on the Fund’s website
until updated with the next quarter’s holdings. The Fund may provide separately
to any person, including rating and ranking organizations such as Lipper and
Morningstar, the Fund’s holdings commencing the day after the information is
first published on the Fund’s website. In addition, the 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 the Fund and its shareholders
and the interests of the Adviser or an affiliated person of the Adviser, the CCO
of the Adviser, in consultation with the Trust’s CCO, shall make a determination
in the best interests of the Fund and its shareholders, and shall report such
determination to the Board at the end of the quarter in which such determination
was made. Any employee of the Adviser who suspects a breach of this obligation
must report the matter immediately to the Adviser’s CCO or to his or her
supervisor.
In
addition, material non-public holdings information may be provided without lag
as part of the normal investment activities of the 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: the Administrator; the Fund’s Accountant; the Custodian; the Transfer
Agent; the Fund’s independent registered public accounting firm; counsel to the
Fund or the Board (current parties are identified in this SAI); broker-dealers
(in connection with the purchase or sale of securities or requests for
price
quotations or bids on one or more securities); and regulatory authorities.
Portfolio holdings information not publicly available with the SEC or on the
Fund’s web site may only be provided to additional third parties, in accordance
with the Portfolio Holdings Policies, when the Fund has a legitimate business
purpose, and the third party recipient is subject to a confidentiality
agreement. Such portfolio holdings disclosure may be approved under the
Portfolio Holdings Policies by the Trust’s CCO.
In
no event shall the Adviser, its affiliates or employees, or the Fund 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 Portfolio Holdings Policies and these procedures
will protect the Fund from potential misuse of that information by individuals
or entities to which it is disclosed.
Determination
of Net Asset Value
The
NAV of the Fund’s shares will fluctuate and is determined by the Fund Accountant
as of the close of trading on the New York Stock Exchange (the “NYSE”)
(generally 4:00 p.m., Eastern Time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial
Day, Juneteenth National Independence Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, the NYSE may close on days not
included in that announcement.
The
NAV per share is computed by determining the Fund’s “Net Assets” and dividing by
the total number of shares outstanding at such time. Net Assets are calculated
by (1) taking the value of all assets, less liabilities, held by the Fund; and
(2) subtracting “Accrued Expenses.”
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Net
Assets |
= |
Net
Asset Value Per Share |
Shares
Outstanding |
| |
The
Fund’s assets are generally valued at their market price on the valuation date
and are based on valuations provided by independent pricing services consistent
with the Adviser’s valuation procedures. If market quotations are not readily
available, securities will be valued at their fair market value as determined
using the “fair value” procedures approved by the Board. The Board reviews, no
less frequently than annually, the adequacy of the policies and procedures of
the Fund and the effectiveness of their implementation. These fair value pricing
procedures will also be used to price a security when corporate events, events
in the securities market and/or world events cause the Adviser to believe that a
security’s last sale price may not reflect its actual market value. The intended
effect of using fair value pricing procedures is to ensure that each Fund is
accurately priced. The Board will regularly evaluate whether the Trust’s fair
value pricing procedures continue to be appropriate in light of the specific
circumstances of the Funds and the quality of prices obtained through the
application of such procedures.
Each
security owned by the Fund that is listed on a securities exchange is valued at
its last sale price on that exchange on the date as of which assets are valued.
Where the security is listed on more than one exchange, the Fund will use the
price of the exchange that the Fund generally considers to be the principal
exchange on which the security is traded. If no sale is reported, the security
is valued at the mean between the last available bid and asked
price.
Portfolio
securities primarily traded on the NASDAQ Stock Market (“NASDAQ”) shall be
valued using the NASDAQ Official Closing Price (“NOCP”), which may not
necessarily represent the last sale price. If the NOCP is not available, such
securities shall be valued at the last sale price on the day of valuation, or if
there has been no sale on such day, at the mean between the bid and asked
prices. OTC securities that are not traded on NASDAQ shall be valued at the most
recent trade price.
Fixed
income securities are valued at the mean of the bid and asked prices as
determined by an independent pricing service, taking into consideration recent
transactions, yield, liquidity, risk, credit quality, coupon, maturity, type of
issue and any other factors or market data the pricing service deems relevant.
Foreign
securities are generally valued in the same manner as the securities described
above. Foreign securities are priced in the local currencies as of the close of
their primary exchange or market or as of the close of trading on the NYSE,
whichever is earlier. Foreign currencies are translated into U.S. dollars at the
exchange rate as provided by a pricing service as of the close of trading on the
NYSE.
Exchange
traded options are generally valued at the composite price, using the National
Best Bid and Offer quotes (“NBBO”). NBBO consists of the highest bid price and
lowest ask price across any of the exchanges on which an option is quoted, thus
providing a view across the entire U.S. options marketplace. Specifically,
composite pricing looks at the last trades on the exchanges where the options
are traded. If there are no trades for the option on a given business day
composite option pricing calculates the mean of the highest bid price and lowest
ask price across the exchanges where the option is traded.
Purchase
and Redemption of Fund Shares
Shares
of the Fund are sold in a continuous offering and shares may be purchased or
redeemed on any business day that the Fund calculates its NAV. The Fund may also
authorize one or more financial intermediaries to accept purchase and redemption
orders on its behalf (“Authorized Intermediaries”). Authorized Intermediaries
are authorized to designate other Authorized Intermediaries to accept orders on
the Fund’s behalf. An order is deemed to be received when the Fund or an
Authorized Intermediary accepts the order.
Orders
received by the Fund or an Authorized Intermediary by the close of trading on
the NYSE (generally 4:00 p.m., Eastern Time) on a business day will be effected
at the NAV per share determined as of the close of trading on the NYSE on that
day. Otherwise, the orders will be processed at the next determined
NAV.
Orders
received by financial intermediaries that are not Authorized Intermediaries will
be processed at the NAV next calculated after the Transfer Agent receives the
order from the financial intermediary.
Purchase
Requests Must be Received in Good Order
“Good
order” means that your purchase request includes:
•The
name of the Fund;
•The
dollar amount of shares to be purchased;
•Your
account application or investment stub; and
•A
check payable to the name of the Fund.
Shares
of the Fund have not been registered for sale outside of the United States. The
Fund generally does not sell shares to investors residing outside the United
States, even if they are United States citizens or lawful permanent residents,
except to investors with United States military APO or FPO addresses or in
certain other circumstances where the CCO and Anti-Money Laundering Officer for
the Trust conclude that such sale is appropriate and is not in contravention of
United States law.
Redemption
Requests Must be Received in Good Order
Your
share price will be based on the next NAV per share calculated after the
Transfer Agent or an Authorized Intermediary receives your redemption request in
good order. A redemption request will be deemed in “good order” if it
includes:
•The
shareholder’s name;
•The
name of the Fund;
•The
account number;
•The
share or dollar amount to be redeemed; and
•Signatures
by all shareholders on the account (with signature(s) guaranteed if
applicable).
Unless
you instruct the Transfer Agent otherwise, redemption proceeds will be sent to
the address of record. The Fund will not be responsible for interest lost on
redemption amounts due to lost or misdirected mail.
A
signature guarantee, from either a Medallion program member or a non-Medallion
program member, of each owner is required in the following
situations:
•If
ownership is changed on your account;
•When
redemption proceeds are payable or sent to any person, address or bank account
not on record;
•When
a redemption is received by the Transfer Agent and the account address has
changed within the last 15 days;
•For
all redemptions in excess of $100,000 from any shareholder account.
Non-financial
transactions, including establishing or modifying certain services on an
account, may require a signature guarantee, signature verification from a
Signature Validation Program member, or other acceptable form of authentication
from a financial institution source. Signature guarantees, from either a
Medallion program member or a non-Medallion program member, can be obtained from
banks and securities dealers, but not from a notary public.
The
Fund may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Fund and the
Transfer Agent reserve the right to amend these standards at any time without
notice.
Redemption-in-Kind
Under
normal circumstances, the Fund does not intend to redeem shares in any form
except cash. The Trust, however, has filed a notice of election under Rule 18f-1
of the 1940 Act that allows the Fund to redeem in-kind redemption requests
during any 90-day period in excess of the lesser of $250,000 or 1% of the net
assets of the Fund, valued at the beginning of such period. If the Fund pays
your redemption proceeds by a distribution of securities, you could incur
brokerage or other charges in converting the securities to cash, and will bear
any market risks associated with such securities until they are converted into
cash.
Cancellations
and Modifications
The
Fund will not accept a request to cancel or modify a written transaction once
processing has begun.
Tax
Matters
The
following discussion is a summary of certain U.S. federal income tax
considerations affecting the Fund and its shareholders. The discussion reflects
applicable U.S. federal income tax laws of the U.S. as of the date of this SAI,
which tax laws may be changed or subject to new interpretations by the courts or
the Internal Revenue Service (the “IRS”), possibly with retroactive effect. No
attempt is made to present a detailed explanation of all U.S. federal income,
estate or gift, or state, local or foreign tax concerns affecting the Fund and
their shareholders (including shareholders owning large positions in the Fund).
The discussion set forth herein does not constitute tax advice. Investors are
urged to consult their own tax advisers to determine the tax consequences to
them of investing in the Fund.
Each
series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund, a series of the Trust, intends to qualify and elect to be
treated as a RIC under Subchapter M of the Code, provided it complies with
all applicable requirements regarding the source of its income, diversification
of its assets and timing of distributions, as discussed below.
If
for any taxable year the Fund fails to qualify for the special federal income
tax treatment afforded to RICs, all of its taxable income will be subject to
federal income tax at the applicable regular corporate rates tax rate (without
any deduction for distributions to the Fund’s shareholders) and its income
available for distribution will be reduced.
As
long as the Fund meets certain requirements that govern the Fund’s source of
income, diversification of assets and distribution of earnings to its
shareholders, the Fund will not be subject to U.S. federal income tax on income
distributed (or treated as distributed, as described below) to its shareholders.
With respect to the source of income requirement, the Fund must derive in each
taxable year, at least 90% of its gross income (including tax-exempt interest)
from (i) dividends, interest, payments with respect to certain securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of investing
in such shares, securities or currencies and (ii) net income derived from
interests in qualified publicly traded partnerships (“QPTP”). A QPTP is
generally defined as a publicly traded partnership under Section 7704 of the
Code, but does not include a publicly traded partnership if 90% or more of its
income is described in (i) above.
With
respect to the diversification of assets requirement, the Fund must diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Fund’s total assets is represented by cash and
cash items, U.S. government securities, the securities of other RICs and other
securities, with such other securities limited for purposes of such calculation,
in respect of any one issuer, to an amount not greater than 5% of the value of
the Fund’s total assets and not more than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of the Fund’s
total assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other RICs), the securities (other
than the securities of other RICs) of any two or more issuers that the Fund
controls and that are determined to be engaged in the same, similar or related
trades or businesses, or the securities of one or more QPTPs.
In
addition, pursuant to tax regulations the Fund may invest no more than 25% of
its total assets in the securities of MLPs and other entities treated as QPTPs.
The Fund will not be required to reduce a position
due
solely to market value fluctuations in order to comply with the 25% limitation
in publicly traded partnerships, inclusive of MLP investments, but will not be
able to purchase additional MLP securities unless the Fund is in compliance with
the restriction.
The
Fund’s policy is to distribute to its shareholders all of its net investment
company taxable income and any net realized long-term capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that the Fund will not be subject to any federal income or excise taxes
based on net income. However, the Fund can give no assurances that its
anticipated distributions will be sufficient to eliminate all taxes.
Additionally,
if the Fund does not qualify as a RIC, it would be taxed as a corporation and,
in such case, it would be more beneficial for a shareholder to directly own the
Fund’s underlying investments rather than indirectly owning the underlying
investments through the Fund. If the Fund fails to distribute (or be deemed to
have distributed) by December 31 of each calendar year (i) at least
98% of its ordinary income for such year, (ii) at least 98.2% of the excess
of its realized capital gains over its realized capital losses for the 12-month
period ending on December 31 during such year and (iii) any amounts
from the prior calendar year that were not distributed and on which the Fund
paid no federal income tax, the Fund will be subject to a 4% excise
tax.
Net
investment income generally consists of interest, dividends and short-term
capital gains, less expenses. Net realized capital gains for a fiscal period are
computed by taking into account any capital loss carryforward of the
Fund.
Distributions
of net investment income may be taxable to shareholders as ordinary income. For
individual shareholders, a portion of the distributions paid by the Fund may
consist of qualified dividends eligible for taxation at the rate applicable to
long-term capital gains to the extent that the Fund designates the amount
distributed as a qualified dividend and the shareholder meets certain holding
period requirements with respect to his or her Fund shares. In the case of
corporate shareholders, a portion of the distributions may qualify for the
intercorporate dividends-received deduction to the extent the Fund designates
the amount distributed as eligible for deduction and the shareholder meets
certain holding period requirements with respect to its Fund shares. The
aggregate amount so designated to either individuals or corporate shareholders
cannot, however, exceed the aggregate amount of such dividends received by the
Fund for its taxable year. In view of the Fund’s investment policies, it is
expected that part of the distributions by the Fund may be eligible for the
qualified dividend income treatment for individual shareholders and the
dividends-received deduction for corporate shareholders. Any distributions to
you in excess of the Fund’s investment company taxable income and net capital
gains will be treated by you, first, as a tax-deferred return of capital, which
is applied against and will reduce the adjusted tax basis of your shares and,
after such adjusted tax basis is reduced to zero, will generally constitute
capital gains.
Any
long-term capital gain distributions are taxable to shareholders as long-term
capital gains regardless of the length of time shares have been held. Net
capital gains distributions are not eligible for the qualified dividend income
treatment or the dividends-received deduction referred to in the previous
paragraph.
Any
distributions to you in excess of the Fund’s investment company taxable income
and net capital gains will be treated by you, first, as a tax-deferred return of
capital, which is applied against and will reduce the adjusted tax basis of your
shares and, after such adjusted tax basis is reduced to zero, will generally
constitute capital gains to you.
Under
the Tax Cuts and Jobs Act (“TCJA”), "qualified REIT dividends" (i.e., ordinary
REIT dividends other than capital gain dividends and portions of REIT dividends
designated as qualified dividend income) are treated as eligible for a 20%
deduction by noncorporate taxpayers. This deduction, if allowed in full, equates
to a maximum effective tax rate of 29.6% (37% top rate applied to income after
20% deduction). A Fund may choose to report the special character of “qualified
REIT dividends” to the shareholder, provided both a Fund and a shareholder meet
certain holding period requirements with respect to their shares. A noncorporate
shareholder receiving such dividends would treat them as eligible for the 20%
deduction, provided the RIC shares were held by the shareholder for more than 45
days during the 91-day period beginning on the date that is 45 days before the
date on which the shares become ex-dividend with respect to such dividend. The
amount of a RIC’s dividends eligible for the 20% deduction for a taxable year is
limited to the excess of the RIC’s qualified REIT dividends for the taxable year
over allocable expenses.
Distributions
of any net investment income and net realized capital gains will be taxable as
described above, whether received in shares or in cash. Shareholders who choose
to receive distributions in the form of additional shares will have a cost basis
for federal income tax purposes in each share so received equal to the NAV of a
share on the reinvestment date. Distributions are generally taxable when
received. However, distributions declared in October, November or December to
shareholders of record on a date in such a month and paid the following January
are taxable as if received on December 31. Distributions are includable in
alternative minimum taxable income in computing a noncorporate shareholder’s
liability for the alternative minimum tax.
Investment
income received by the Fund from sources within foreign countries may be subject
to foreign income tax withheld at the source and the amount of tax withheld
generally will be treated as an expense of the Fund. The U.S. has entered into
tax treaties with many foreign countries that entitle the Fund to a reduced rate
of, or exemption from, tax on such income. Some countries require the filing of
a tax reclaim or other forms to receive the benefit of the reduced tax rate;
whether or when the Fund will receive the tax reclaim is within the control of
the individual country. Information required on these forms may not be available
to the Fund, such as shareholder information; therefore, the Fund may not
receive the reduced treaty rates or potential reclaims. Other countries have
conflicting and changing instructions and restrictive timing requirements which
may cause the Fund not to receive the reduced treaty rates or potential
reclaims. Other countries may subject capital gains realized by the Fund on sale
or disposition of securities of that country to taxation. It is impossible to
determine the effective rate of foreign tax in advance since the amount of the
Fund’s assets to be invested in various countries is not known.
A
redemption of Fund shares may result in recognition of a taxable gain or loss
and, if held as a capital asset, capital gain or loss. Any loss realized upon a
redemption of shares within six months from the date of their purchase will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gains received on those shares. Any loss
realized upon a redemption may be disallowed under certain wash sale rules to
the extent Fund shares are purchased (through reinvestment of distributions or
otherwise) within 30 days before or after the redemption.
The
Fund is required to report to you and the IRS annually on Form 1099-B the cost
basis of shares purchased or acquired. However, cost basis reporting is not
required for certain shareholders, including shareholders investing in the Fund
through a tax-advantaged retirement account, such as a 401(k) plan or an
individual retirement account. The Fund will calculate cost basis using the
Fund’s default method, unless you instruct the Fund to use a different
calculation method. For additional information regarding the Fund’s available
cost basis reporting methods, including its default method, please contact the
Fund.
If
you hold your Fund shares through a broker (or other nominee), please contact
that broker (nominee) with respect to reporting of cost basis and available
elections for your account.
Except
in the case of certain exempt shareholders, if a shareholder does not furnish
the Fund with its correct Taxpayer Identification Number and certain
certifications or the Fund receives notification from the IRS requiring back-up
withholding, the Fund is required by federal law to withhold federal income tax
from the shareholder’s distributions and redemption proceeds currently at a rate
of 24% for U.S. residents.
Gain
or loss recognized by the Fund on the sale or other disposition of portfolio
investments will be a capital gain or loss. Such capital gain and loss may be
long-term or short-term depending, in general, upon the length of time a
particular investment position is maintained and, in some cases, upon the nature
of the transaction. Property held for more than one year generally will be
eligible for long-term capital gain or loss treatment. The application of
certain rules described below may serve to alter the manner in which the holding
period for a security is determined or may otherwise affect the characterization
as long-term or short-term, and also the timing of the realization and/or
character, of certain gains or losses.
A
U.S. REIT is not subject to federal income tax on the income and gains it
distributes to shareholders. Dividends paid by a U.S. REIT, other than capital
gain distributions, will be taxable as ordinary income up to the amount of the
U.S. REIT’s current and accumulated earnings and profits. Capital gain dividends
paid by a U.S. REIT to the Fund will be treated as long-term capital gains by
the Fund and, in turn, may be distributed by the Fund to its shareholders as a
capital gain distribution. Because of certain noncash expenses, such as property
depreciation, an equity U.S. REIT’s cash flow may exceed its taxable income. The
equity U.S. REIT, and in turn the Fund, may distribute this excess cash to
shareholders in the form of a return of capital distribution. However, if a U.S.
REIT is operated in a manner that fails to qualify as a REIT, an investment in
the U.S. REIT would become subject to double taxation, meaning the taxable
income of the U.S. REIT would be subject to federal income tax at the applicable
corporate income tax rate without any deduction for dividends paid to
shareholders and the dividends would be taxable to shareholders as ordinary
income (or possibly as qualified dividend income) to the extent of the REIT’s
current and accumulated earnings and profits.
While
non-U.S. REITs often use complex acquisition structures that seek to minimize
taxation in the source country, an investment by the Fund in a non-U.S. REIT may
subject the Fund, directly or indirectly, to corporate taxes, withholding taxes,
transfer taxes and other indirect taxes in the country in which the real estate
acquired by the non-U.S. REIT is located. The Fund’s pro rata share of any such
taxes will reduce the Fund’s return on its investment. The Fund’s investment in
a non-U.S. REIT may be considered an investment in a PFIC, as discussed below.
Additionally, foreign withholding taxes on distributions from the non-U.S. REIT
may be reduced or eliminated under certain tax treaties. Also, the Fund in
certain limited circumstances may be required to file an income tax return in
the source country and pay tax on any gain realized from its investment in the
non-U.S. REIT under rules similar to those in the United States which tax
foreign persons on gain realized from dispositions of interests in U.S. real
estate.
Investment
in taxable mortgage pools (excess inclusion income). Under a Notice issued by
the IRS, the Code and Treasury regulations to be issued, a portion of the Fund’s
income from a U.S. REIT that is attributable to the REIT’s residual interest in
a real estate mortgage investment conduit (“REMIC”) or equity interests in a
“taxable mortgage pool” (referred to in the Code as an excess inclusion) will be
subject to federal income tax in all events. The excess inclusion income of a
regulated investment company, such as the Fund, will be allocated to
shareholders of the regulated investment company in proportion to the dividends
received by such shareholders, with the same consequences as if the
shareholders
held the related REMIC residual interest or, if applicable, taxable mortgage
pool directly. In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income (“UBTI”) to entities (including qualified pension plans, individual
retirement accounts, 401(k) plans, Keogh plans or other tax-exempt entities)
subject to tax on UBTI, thereby potentially requiring such an entity that is
allocated excess inclusion income, and otherwise might not be required to file a
tax return, to file a tax return and pay tax on such income, and (iii) in the
case of a foreign stockholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
“disqualified organization” (which generally includes certain cooperatives,
governmental entities, and tax-exempt organizations not subject to UBTI) is a
record holder of a share in a regulated investment company, then the regulated
investment company will be subject to a tax equal to that portion of its excess
inclusion income for the taxable year that is allocable to the disqualified
organization, multiplied by the applicable corporate income tax rate. The Notice
imposes certain reporting requirements upon regulated investment companies that
have excess inclusion income. There can be no assurance that the Fund will not
allocate to shareholders excess inclusion income.
These
rules are potentially applicable to the Fund with respect to any income it
receives from the equity interests of certain mortgage pooling vehicles, either
directly or, as is more likely, through an investment in a U.S.
REIT.
The
Fund’s transactions in foreign currencies, foreign currency-denominated debt
obligations and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to
the extent such income or loss results from fluctuations in the value of the
foreign currency concerned. This treatment could increase or decrease the Fund’s
ordinary income distributions to you, and may cause some or all of the Fund's
previously distributed income to be classified as a return of capital. In
certain cases, the Fund may make an election to treat such gain or loss as
capital.
While
securities are loaned out by a fund, the fund generally will receive from the
borrower amounts equal to any dividends or interest paid on the borrowed
securities. For federal income tax purposes, payments made "in lieu of"
dividends are not considered dividend income. These distributions will neither
qualify for the reduced rate of taxation for individuals on qualified dividends
nor the 50% dividends-received deduction for corporations.
The
Fund may invest in securities of foreign companies that may be classified under
the Code as a passive foreign investment company (“PFIC”). In general, a foreign
company is classified as a PFIC if at least one-half of its assets constitute
investment-type assets or 75% or more of its gross income is investment-type
income. When investing in PFIC securities, the Fund intends to mark-to-market
these securities under certain provisions of the Code and recognize any
unrealized gains as ordinary income at the end of the Fund’s fiscal and excise
tax years. Deductions for losses are allowable only to the extent of any current
or previously recognized gains. These gains (reduced by allowable losses) are
treated as ordinary income that the Fund is required to distribute, even though
it has not sold or received dividends from these securities. You should also be
aware that the designation of a foreign security as a PFIC security will cause
its income dividends to fall outside of the definition of qualified foreign
corporation dividends. These dividends generally will not qualify for the
reduced rate of taxation on qualified dividends when distributed to you by the
Fund. Foreign companies are not required to identify themselves as PFICs. Due to
various complexities in identifying PFICs, the Fund can give no assurances that
it will be able to identify portfolio securities in foreign corporations that
are PFICs in time for the Fund to make a mark-to-market election. If the Fund is
unable to identify an investment as a PFIC and thus does not make a
mark-
to-market
election, the Fund may be subject to U.S. federal income tax on a portion of any
“excess distribution” or gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the Fund to their shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains.
Foreign
taxpayers (including nonresident aliens) are generally subject to a flat
withholding rate, currently 30% on U.S. source income. This withholding rate may
be lower under the terms of a tax convention.
This
discussion and the related discussion in the Prospectus have been prepared by
Fund management, and counsel to the Fund has expressed no opinion in respect
thereof.
This
section is not intended to be a full discussion of federal tax laws and the
effect of such laws on you. There may be other federal, state, foreign or local
tax considerations to a particular investor. You are urged to consult your own
tax advisor.
Distributions
The
Fund will receive income in the form of dividends and interest earned on its
investments in securities. This income, less the expenses incurred in its
operations, is the Fund’s net investment income, substantially all of which will
be distributed to the Fund’s shareholders.
The
amount of the Fund’s distribution is dependent upon the amount of net investment
income received by the Fund from its portfolio holdings, is not guaranteed and
is subject to the discretion of the Board of Trustees. The Fund does not pay
“interest” or guarantee any fixed rate of return on an investment in its
shares.
The
Fund may also derive capital gains or losses in connection with sales or other
dispositions of its portfolio securities. Any net gain the Fund may realize from
transactions involving investments held less than the period required for
long-term capital gain or loss recognition or otherwise producing short-term
capital gains and losses (to the extent not offset by any capital loss
carryovers), although a distribution from capital gains, will be distributed to
shareholders with and as a part of the distributions of net investment income
giving rise to ordinary income. If during any year the Fund realizes a net gain
on transactions involving investments held for the period required for long-term
capital gain or loss recognition or otherwise producing long-term capital gains
and losses, the Fund will have a net long-term capital gain. After deduction of
the amount of any net short-term capital loss, the balance (to the extent not
offset by any capital losses carried over from the eight previous taxable years)
will be distributed and treated as long-term capital gains in the hands of the
shareholders regardless of the length of time the Fund’s shares may have been
held by the shareholders. For more information concerning applicable capital
gains tax rates, see your tax advisor.
Any
distribution paid by the Fund reduces the Fund’s NAV per share on the date paid
by the amount of the distribution per share. Accordingly, a distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes.
Distributions
will be made in the form of additional shares of the Fund unless the shareholder
has otherwise indicated. Investors have the right to change their elections with
respect to the reinvestment of distributions by notifying the Transfer Agent in
writing or by telephone. However, any such change will be effective only as to
distributions for which the record date is five or more calendar days after the
Transfer Agent has received the request.
Financial
Statements
The
Fund’s annual
report
to shareholders for the fiscal year ended December 31, 2022 is a separate
document, and the financial statements, accompanying notes, and report of the
independent registered public accounting firm appearing therein are incorporated
by reference into this SAI.