ck0001511699-20220630
Institutional
Class – LKBLX
Statement
of Additional Information
October
28, 2022
This
Statement of Additional Information (“SAI”) provides general information about
the LK Balanced 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 October 28, 2022 (the “Prospectus”), as
supplemented and amended from time to time. In addition, the Fund’s financial
statements for the fiscal year ended June 30, 2022 are
incorporated herein by reference to the Fund’s annual
report
dated June 30, 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 http://www.lkfunds.com.
LK
Balanced Fund
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
855-698-1378
TABLE
OF CONTENTS
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. Prior to July 1, 2012, the Fund’s investment adviser managed a
limited partnership with an investment objective and investment policies that
were, in all material respects, equivalent to those of the Fund. The limited
partnership, which incepted on December 31, 1986, converted into, and the Fund
commenced operations in, the Trust on, July 1, 2012. 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
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.
Lawson
Kroeker Investment Management, Inc. (the “Adviser”) serves as the investment
adviser for the Fund.
Investment
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 and Non-Fundamental Investment Limitations”), the Fund’s
investment strategies and policies are not fundamental and may be changed by
sole action of the Board, without shareholder approval. While the Fund is
permitted to hold securities and engage in various strategies as described
hereafter, it is not obligated to do so. The Fund might not invest in all of
these types of securities or use all of these techniques at any one time. The
Fund's transactions in a particular type of security or use of a particular
technique is subject to limitations imposed by the Fund's investment objective,
policies and restrictions described in the Fund's Prospectus and/or this SAI, as
well as the federal securities laws.
Investment
Objective
The
investment objective of the Fund is set forth under the “Summary Section” in the
Fund’s Prospectus.
Diversification
The
Fund is diversified. A diversified fund is a fund that satisfies the definition
of a “diversified company” set forth in the 1940 Act. A “diversified company”
means that as to 75% of the Fund’s total assets, excluding cash, government
securities and securities of other investment companies, (1) no more than 5% may
be invested in the securities of a single issuer, and (2) the Fund may not hold
more than 10% of the outstanding voting securities of a single
issuer.
Because
the Fund intends to qualify as a “regulated investment company” under Subchapter
M of the Internal Revenue Code of 1986, as amended, (the “Code”), the Fund will
limit its investment, 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 the issuer’s outstanding voting securities.
Percentage
Limitations
The
Fund’s compliance with its investment policy and limitations 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 affected 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 Fund, and may increase the
risks discussed below.
Equity
Securities
An
equity security represents a proportionate share of the ownership of a company.
Its value is based on the success of the company’s business, any income paid to
stockholders, the value of its assets and general market conditions. The value
of equity securities will be affected by changes in the stock markets, which may
be the result of domestic or international political or economic news, changes
in interest rates or changing investor sentiment. At times, stock markets can be
volatile and stock prices can change substantially. Equity securities risk
affects the Fund’s net asset value per share (“NAV”), which will fluctuate as
the value of the securities it holds changes. Not all stock prices change
uniformly or at the same time, and not all stock markets move in the same
direction at the same time. Other factors affect a particular stock’s prices,
such as poor earnings reports by an issuer, loss of major customers, major
litigation against an issuer, or changes in governmental regulations affecting
an industry. Adverse news affecting one company can sometimes depress the stock
prices of all companies in the same industry. Not all factors can be predicted.
Common stocks and preferred stocks are examples of equity securities. The
fundamental risk of investing in common and preferred stock is the risk that the
value of the stock might decrease.
Common
Stock
Common
stock represents an ownership interest in a company. In addition to the general
risks set forth above, investments in common stocks are subject to the risk that
in the event a company in which 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 are not U.S. dollar denominated, purchase and sell foreign
currency on a spot basis. The Fund may also invest in American Depositary
Receipts (“ADRs”) 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. ADRs 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 are deemed to have the same classification as the underlying securities
they represent. Thus, an ADR representing ownership of common stock will be
treated as common stock.
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, voters
in the United Kingdom (“UK”) withdrew from the European Union (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 (“OTC”) markets or on exchanges located
in the countries in which the principal offices of the issuers of the various
securities are located, if that is the best available market. Foreign exchanges
and markets may be more volatile than those in the United States. While growing
in volume, they usually have substantially less volume than U.S. markets, and
the 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.
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
issuers 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.
Additional
Risks of Emerging Markets.
In addition, the Fund may invest in foreign securities of companies that are
located in developing or emerging markets. Investing in securities of issuers
located in these markets may pose greater risks not typically associated with
investing in more established markets, such as increased risk of social,
political and economic instability. Emerging market countries typically have
smaller securities markets than developed countries and therefore less liquidity
and greater price volatility than more developed markets. Securities traded in
emerging markets may also be subject to risks associated with the lack of modern
technology, poor governmental and/or judicial infrastructures relating to
private or foreign investment or to judicial redress for injury to private
property, the lack of capital base to expand business operations, foreign
taxation and the inexperience of financial intermediaries, custodians and
transfer agents. Emerging market countries are also more likely to impose
restrictions on the repatriation of an investor’s assets and even where there is
no outright restriction on repatriation, the mechanics of repatriations may
delay or impede the Fund’s ability to obtain possession of its assets. As a
result, there may be an increased risk or price volatility associated with the
Fund’s investments in emerging market countries, which may be magnified by
currency fluctuations.
Real
Estate Securities
The
real estate securities in which the Fund may invest consist of securities issued
by Real Estate Investment Trusts (“REITs”) or Real Estate Operating Companies
(“REOCs”) that are listed on a securities exchange or traded over-the-counter.
A REIT is a corporation or trust that invests in fee or leasehold
ownership of real estate, mortgages or shares issued by other REITs and that
receives favorable tax treatment provided it meets certain conditions. REITs may
be characterized as equity REITs (i.e., REITs that primarily invest in fee
ownership and leasehold ownership of land), mortgage REITs (i.e., REITs that
primarily invest in mortgages on real estate and other real estate debt) or
hybrid REITs which invest in both fee and leasehold ownership of land and
mortgages. A REIT that meets the applicable requirements of the Code may deduct
dividends paid to shareholders, effectively eliminating any corporate level
federal tax. As a result, REITs are able to distribute a larger portion of their
earnings to investors than other corporate entities subject to the federal
corporate tax. There is the risk that a REIT held by the Fund will fail to
qualify for this tax-free pass-through treatment of its income. By investing in
REITs indirectly through the Fund, in addition to bearing a proportionate share
of the expenses of the Fund, investors will also indirectly bear similar
expenses of the REITs in which the Fund invests. A REOC is typically structured
as a “C” corporation under the tax code and is not required to distribute any
portion of its income. A REOC, therefore, does not receive the same favorable
tax treatment that is accorded a REIT. In addition, the value of the Fund’s
securities issued by REOCs may be adversely affected by income streams derived
from businesses other than real estate ownership.
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 and below investment grade debt securities (commonly known as
“junk bonds” or “high yield bonds”). 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. 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.
The
Adviser selects debt securities identically to how it selects equity securities
except that the valuation study is not done using traditional equity valuation,
but rather using historical studies of interest levels for the appropriate
company given its financial strength to allow for a determination of the value
of the debt instrument. The total return potential of the debt instrument is
reviewed relative to the total return potential of other investment
opportunities in determining whether to invest in a debt security.
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.
Junk
Bonds.
Junk bonds generally offer a higher current yield than that available for
investment grade issues. However, below investment grade debt securities involve
higher risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers, and to price fluctuations in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial stress
that could adversely affect their ability to make payments of interest and
principal and increase the possibility of default. At times in recent years, the
prices of many below investment grade debt securities declined substantially,
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on below investment grade debt
securities rose dramatically, reflecting the risk that holders of such
securities could lose a substantial portion of their value as a result of the
issuers’ financial restructuring or default. There can be no assurance that such
price declines will not recur. The market for below investment grade debt issues
generally is thinner and less active than that for higher quality securities,
which may limit the Fund’s ability to sell such securities at fair value in
response to changes in the economy or financial markets. Adverse publicity and
investor perceptions, whether based on fundamental analysis, may also decrease
the values and liquidity of below investment grade debt securities, especially
in a thinly traded market. Changes by recognized rating services in their rating
of a debt security may affect the value of these investments. 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.
Variable
and Floating Rate Securities.
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be
event-based, such as based on a change in the base rate. The base rate usually
is a benchmark that “floats” or changes to reflect current interest rates, such
as (i) the prime rate offered by one or more major U.S. banks, or (ii) the
London Inter-Bank Offered Rate (“LIBOR”). The applicable benchmark is defined by
the terms of an obligation and will remain the same for the life of such
obligation. If the benchmark interest rate on a floating rate security changes,
the rate payable will, in turn, change at the next scheduled adjustment
date.
On
July 27, 2017, the head of the United Kingdom’s Financial Conduct Authority
announced a desire to phase out the use of LIBOR by the end of 2021. Although
many LIBOR rates will be phased out at the end of 2021 as originally intended, a
selection of widely used USD LIBOR rates will continue to be published until
June 2023 in order to assist with the transition. There remains uncertainty
regarding the effect of the LIBOR transition process and the nature of any
replacement rate. There is no assurance that the composition or characteristics
of any alternative reference rate will be similar to or produce the same value
or economic equivalence as LIBOR or that instruments using as alternative rate
will have the same value or liquidity. As a result, any impact of a transition
away from LIBOR on the Funds or the instruments in which the Funds invests
cannot yet be determined.
Corporate
Debt Securities.
Corporate debt securities are fixed-income securities issued by businesses to
finance their operations, although corporate debt instruments may also include
bank loans to companies. Notes, bonds, debentures and commercial paper are the
most common types of corporate debt securities, with the primary difference
being their maturities and secured or unsecured status. Commercial paper has the
shortest term and is usually unsecured.
The
broad category of corporate debt securities includes debt issued by domestic or
foreign companies of all kinds, including those with small, mid and large
capitalizations. Corporate debt may be rated investment grade or below
investment grade and may carry fixed, variable or floating rates of
interest.
Because
of the wide range of types and maturities of corporate debt securities, as well
as the range of creditworthiness of its issuers, corporate debt securities have
widely varying potentials for return and risk profiles. For example, commercial
paper issued by a large established domestic corporation that is rated
investment grade may have a modest return on principal, but carries relatively
limited risk. On the other hand, a long-term corporate note issued by a small
foreign corporation from an emerging market country that has not been rated may
have the potential for relatively large returns on principal, but carries a
relatively high degree of risk.
Exchange-Traded
Notes.
The
Fund may invest in Exchange-Traded Notes (“ETNs”). An ETN is a type of
unsecured, unsubordinated debt security that differs from other types of bonds
and notes because ETN returns are typically based upon the performance of a
market index. ETNs are publicly traded on a U.S. securities exchange. An ETN
incurs certain expenses not incurred by its applicable index, and an investment
in an ETN will bear its proportionate share of any fees and expenses borne by
the ETN. The market value of an ETN share may differ from its NAV; the share may
trade at a premium or discount to its NAV, which may be due to, among other
things, differences in the supply and demand in the market for the share.
Although an ETN is a debt security, it is unlike a typical bond, in that there
are no periodic interest payments and principal is not protected. ETNs are
subject to credit risk and the value of the ETN may drop due to a downgrade in
the issuer’s credit rating, despite the underlying market benchmark or strategy
remaining unchanged.
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 convertible
securities 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.
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.
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. 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.
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.
Inflation-Indexed
Securities.
Inflation-indexed securities are debt securities, the principal value of which
is periodically adjusted to reflect the rate of inflation as indicated by the
Consumer Price Index for all Urban Consumers before seasonal adjustment (“CPI”).
Inflation-indexed securities may be issued by the U.S. government, agencies and
instrumentalities of the U.S. government, and by corporations. The U.S. Treasury
issues Treasury inflation-protected securities (“TIPS”) and some other issuers
use a structure that accrues inflation into the principal value of the bond.
Most other issuers pay out the CPI accruals as part of a semiannual
coupon.
The
periodic adjustment of U.S. inflation-indexed securities is tied to the CPI,
which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI is a
measurement of changes in the cost of living, made up of components such as
housing, food, transportation, and energy. There can be no assurance that the
CPI will accurately measure the real rate of inflation in the prices of goods
and services.
Inflation,
which is a general rise in prices of goods and services, erodes the purchasing
power of an investor’s portfolio. For example, if an investment provides a
“nominal” total return of 5% in a given year and inflation is 2% during that
period, the inflation-adjusted, or real, return is 3%. Inflation, as measured by
the CPI, has occurred in almost each of the past 50 years, so investors should
be conscious of both the nominal and real returns of their investments. Although
inflation-indexed securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise because of reasons other than inflation (for
example, because of changes in currency exchange rates), investors in these
securities may not be protected to the extent that the increase is not reflected
in the bond’s inflation measure.
If
the periodic adjustment rate measuring inflation (i.e., the CPI) falls, the
principal value of inflation-indexed securities will be adjusted downward, and
consequently the interest payable on these securities (calculated with respect
to a smaller principal amount) will be reduced. Repayment of the original bond
principal upon maturity (as adjusted for inflation) is guaranteed in the case of
TIPS, even during a period of deflation. However, the current market value of
the inflation-indexed securities is not guaranteed, and will fluctuate. Other
inflation-indexed securities include inflation-related bonds, which may or may
not provide a similar guarantee. If a guarantee of principal is not provided,
the adjusted principal value of the bond repaid at maturity may be less than the
original principal.
The
value of inflation-indexed securities should change in response to changes in
real interest rates. Real interest rates, in turn, are tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of
inflation-indexed securities. In contrast, if nominal interest rates increased
at a faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed securities.
Coupon
payments that the Fund receives from inflation-indexed securities are included
in the Fund’s gross income for the period during which they accrue. Any increase
in principal for an inflation-indexed security resulting from inflation
adjustments is considered by Internal Revenue Service (IRS) regulations to be
taxable income in the year it occurs. For direct holders of an inflation-indexed
security, this means that taxes must be paid on principal adjustments, even
though these amounts are not received until the bond matures. By contrast, a
fund holding these securities distributes both interest income and the income
attributable to principal adjustments each quarter in the form of cash or
reinvested shares (which, like principal adjustments, are taxable to
shareholders). It may be necessary for the Fund to liquidate portfolio
positions, including when it is not advantageous to do so, in order to make
required distributions.
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 within
35 days of the trade date.
Initial
Public Offerings
The
Fund may invest in securities offered by companies in initial public offerings
(“IPOs”). IPOs involve companies that have no public operating history and
therefore entail more risk than established public companies. 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.
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. 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.
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 regulations in Section 4(2) of the Securities Act
(“4(2) Paper”). The liquidity of Rule 144A securities and 4(2) Paper will be
will be determined in accordance with Rule 22e-4 under the 1940
Act.
Cash
Investments
The
Fund may invest 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 objective. 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 their 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 calendar days from the date of acquisition. 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 because 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 deposits or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
Savings
Association Obligations.
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 or
“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 the Fund to invest in other investment
companies, including money market funds, beyond the statutory limits, subject to
certain conditions. The rescission of the applicable exemptive orders and the
withdrawal of the applicable no-action letters was effective on January 19,
2022. Following this effectiveness, an investment company is no longer able to
rely on these exemptive orders and no-action letters, and is subject instead to
Rule 12d1-4 and other applicable rules under Section 12(d)(1).
Closed-End
Funds.
Closed-end
funds are investment companies that typically issue a fixed number of shares
that trade on a securities exchange or OTC. 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 (“ETFs”)
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. Some ETFs are actively
managed and instead of replicating, they seek to outperform a particular index
or basket or price of a commodity or currency. In addition, shares of an ETF may
trade at a market price that is higher or lower than their NAV and an active
trading market in such shares may not develop or continue. Lack of liquidity in
an ETF could result in an ETF being more volatile than the underlying portfolio
of securities it holds. In addition, because of ETF expenses, compared to owning
the underlying securities directly, it may be more costly to own an
ETF.
If
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 at least 100% cash collateral
for domestic securities and 105% cash collateral 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.
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 15% 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, for investment
purposes. 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, which are paid by
the Fund, 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.
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 the Fund 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 that
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.
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 Fund 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. 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 of Trustees
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 in 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 the 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 underlying funds.
The
Board has determined that the inclusion of all Independent Trustees as members
of the Audit Committee and the Nominating & Governance Committee allows all
such Trustees to participate in the full range of the Board’s oversight duties,
including oversight of risk management processes discussed below. Given the
composition of the Board and the function and composition of its various
committees as described above, the Trust has determined that the Board’s
leadership structure is appropriate.
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 risks, business continuity risks, etc.) the
oversight of different types of risks is handled in different ways. For example,
the CCO regularly reports to the Board during Board Meetings and meets in
executive session with the Independent Trustees and their legal counsel to
discuss compliance and operational risks. In addition, 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 funds
and the portfolio managers 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 |
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 |
35 |
Retired,
Chief Financial Officer, Robert W. Baird & Co. Incorporated,
(2000-2011). |
Independent
Trustee, ETF Series Solutions (60 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 |
35 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022):
Co-Founder and Chief Investment Strategist, Next Generation Wealth
Management, Inc. (2005-present). |
Independent
Trustee, ETF Series Solutions (60 Portfolios)
(2012-Present). |
David
M. Swanson 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1957
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Trustee
and Nominating & Governance Committee Chairman |
Indefinite
Term; Since April 2011 |
35 |
Founder
and Managing Principal, SwanDog Strategic Marketing, LLC (2006-present).
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Independent
Trustee, ALPS Variable Investment Trust (7 Portfolios) (2006-Present);
Independent Trustee, RiverNorth Funds (3 Portfolios) (2018-Present);
RiverNorth Managed Duration Municipal Income Fund Inc. (1 Portfolio)
(2019-Present); RiverNorth Specialty Finance Corporation (1 Portfolio)
(2018-Present); RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (1
Portfolio) (2018-Present); RiverNorth Opportunities Fund, Inc. (1
Portfolio) (2015-Present); RiverNorth Opportunistic Municipal Income Fund,
Inc. (1 Portfolio) (2018-Present); RiverNorth Flexible Municipal Income
Fund (2020-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 |
Robert
J. Kern 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1958 |
Trustee |
Indefinite
Term; Since January 2011 |
35 |
Retired
(July 2018- present); Executive Vice President, U.S. Bancorp Fund
Services, LLC (1994-2018). |
None |
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
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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. Bank Global Fund Services (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 |
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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 |
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. 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 38 years of senior management and marketing experience with over 30 years
dedicated to the financial services industry. He is currently the Founder and
Managing Principal of a marketing strategy boutique serving asset and wealth
management businesses. He has also served as Chief Operating Officer and Chief
Marketing Officer of Van Kampen Investments, President and Chief Executive
Officer of Scudder, Stevens & Clark, Canada, Ltd., Managing Director and
Head of Global Investment Products at Morgan Stanley, Director of Marketing for
Morgan Stanley Mutual Funds, Director of Marketing for Kemper Funds, and
Executive Vice President and Head of Distribution for Calamos Investments. The
Board believes Mr. Swanson’s experience, qualifications, attributes and skills
on an individual basis and in combination with those of the other Trustees lead
to the conclusion that he possesses the requisite skills and attributes as a
Trustee to carry out oversight responsibilities with respect to the
Trust.
This
discussion of the Trustees’ experience and qualifications is pursuant to SEC
requirements, does not constitute holding out the Board or any Trustee as having
special expertise, and shall not impose any greater responsibility or liability
on any such Trustee or the Board by reason thereof.
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, 2021.
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Dollar
Range of Shares Beneficially Owned (None, $1-$10,000, $10,001-$50,000,
$50,001-$100,000, Over $100,000) |
Name |
LK
Balanced Fund |
Aggregate
Dollar Range of Shares in the Trust |
Independent
Trustees |
David
A. Massart |
None |
None |
Leonard
M. Rush |
None |
None |
David
M. Swanson |
$1
- $10,000 |
$50,001
- $100,000 |
Robert
J. Kern |
None |
None |
As
of September 30, 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
June 30, 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. 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 time any such nominee would be voted
on. Shareholder recommendations for nominations to the Board will be accepted on
an ongoing basis. The Nominating 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 June 30, 2022.
Trustee
Compensation
Effective
January 1, 2022, the Trustees receive an annual retainer of $110,000. The
Chairman of the Audit Committee receives additional compensation of $14,000, the
Chairman of the Nominating & Governance Committee receives additional
compensation of $8,000, and the Chairman of the Board of Trustees receives
$12,500 annually. The Trustees receive $6,000 for regularly scheduled meetings
and $2,500 for additional meetings.
The
following table sets forth the compensation received by the Independent Trustees
for the Fund’s fiscal year ended June 30, 2022:
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Name
of Person/Position |
Aggregate
Compensation from the Fund1 |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from the Fund and the Trust2
Paid
to Trustees |
Leonard
M. Rush, Chairman, Independent Trustee
and
Audit Committee Chairman |
$4,917 |
None |
None |
$162,000 |
David
A. Massart, Independent Trustee
|
$4,113 |
None |
None |
$135,500 |
David
M. Swanson, Independent Trustee and Nominating & Governance Committee
Chairman |
$4,356 |
None |
None |
$143,500 |
Robert
J. Kern, Independent Trustee |
$4,113 |
None |
None |
$135,500 |
1Trustees
fees and expenses are allocated among the Fund and any other series comprising
the Trust.
2The
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 table lists the shareholders
considered to be either a control person or a principal shareholder of the Fund
as of September 30, 2022:
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Name
and Address |
%
Ownership |
Type
of Ownership(1) |
Lawson
Kroeker Investment Management Inc. PSP U/A DTD 01/01/1988 1926 S
67th Street, Ste 201 Omaha, Nebraska 68106-3054 |
13.56% |
Beneficial |
U.S.
Bank NA Cust Kenneth W. Kroeker IRA Rollover 17060 W. Links
Drive Surprise, Arizona 85387-7503 |
11.06% |
Beneficial |
UBATCO
& Co FBO Lamson Dugan & Murry PSP PO Box 82535 Lincoln,
Nebraska 68501-2535 |
5.79% |
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.”
Investment
Adviser
Investment
advisory services are provided to the Fund by the Adviser, Lawson Kroeker
Investment Management, Inc., pursuant to an investment advisory agreement (the
“Advisory Agreement”). The Adviser is majority owned by Thomas J. Sudyka, Jr.
and Bruce H. Van Kooten.
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. 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.
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; 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; or (ii) by a vote of a majority of the Board, or by the
Adviser upon 60 days’ written notice to the Trust. The Advisory Agreement will
automatically terminate in the event of its “assignment,” as defined under the
1940 Act. The Advisory Agreement provides that the Adviser under such agreement
shall not be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution of
portfolio transactions for the 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 Prospectus. However, the Adviser may voluntarily agree to
waive a portion of the management fees payable to it on a month-to-month basis,
including additional fees above and beyond any contractual agreement the Adviser
may have to waive management fees and/or reimburse Fund expenses.
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 fee, and/or 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 expense payment occurred, if such recoupment
can be achieved without exceeding the expense limit in effect at the time the
fee waiver and/or expense payment occurred, and the expense limit in effect at
the time of the recoupment. The Operating Expenses Limitation Agreement is
indefinite in term and cannot be terminated through at least October 28, 2023.
Thereafter, the agreement may be terminated at any time upon 60 days’ written
notice by the Trust’s Board or the Adviser.
The
total advisory fees paid by the Fund during the fiscal years ended June 30 are
as follows:
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| |
| 2022 |
2021 |
2020 |
Advisory
Fees Accrued |
$226,623 |
$205,032 |
$201,991 |
Advisory
Fees Waived |
$(115,812) |
$(133,920) |
$(120,701) |
Total
Advisory Fees Paid to Adviser |
$110,811 |
$71,112 |
$81,290 |
Portfolio
Managers
As
disclosed in the Prospectus, Thomas J. Sudyka, Jr. and Bruce H. Van Kooten are
the portfolio managers for the Fund (the “Portfolio Managers”).
The
following table provides information regarding other accounts managed jointly by
the Portfolio Managers, other than the Fund, as of June 30, 2022:
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Account
Category |
#
of Accounts |
Total
Assets of Accounts (in millions) |
#
of Accounts Paying a Performance Fee |
Total
Assets of Accounts Paying a Performance Fee |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
accounts |
229 |
$361.1
million |
0 |
$0 |
The
Portfolio Managers’ 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 a Portfolio Manager could favor one
account over another. Another potential conflict could include a 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 Managers for their management of the Fund.
Each Portfolio Manager receives a competitive base salary, and as a shareholder
of the Adviser, a share of the profits from the operations of the firm. The
Portfolio Managers’ 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
each Portfolio Manager as of as of June 30, 2022:
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Portfolio
Manager |
Dollar
Range of Fund Shares
(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) |
Thomas
J. Sudyka, Jr. |
Over
$1,000,000 |
Bruce
H. Van Kooten |
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; 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 daily net
assets, subject to an annual minimum fee. Fund Services also acts as Fund
Accountant, Transfer Agent and dividend disbursing agent under separate
agreements with the Trust.
The
Fund paid fund administration and fund accounting fees to Fund Services during
the fiscal years ended June 30, as follows:
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Fund |
2022 |
2021 |
2020 |
LK
Balanced Fund |
$80,472 |
$82,659 |
$74,065 |
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. 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, N.A. 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,
Pennsylvania 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.
Its services include auditing the Fund’s financial statements and the
performance of related tax services.
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,
Administrator and Custodian are affiliated companies. The Distributor is a
registered broker-dealer and member of the Financial Industry Regulatory
Authority, Inc. (“FINRA”).
The
Distribution Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by vote of a majority of
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, 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 affected 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 customers). These
securities normally are purchased directly from the issuer or from an
underwriter or market maker for the securities. The price of securities
purchased from underwriters includes a disclosed fixed commission or concession
paid by the issuer to the underwriter, and prices of securities purchased from
dealers serving as market makers reflects the spread between the bid and asked
price. The price of OTC securities usually includes an undisclosed commission or
markup.
Purchases
of portfolio securities for 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 made independently from those of other client
accounts of the Adviser and its affiliates. Nevertheless, it is possible that at
times 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
table set forth below shows the total commissions paid for research services by
the Fund, along with the principal value of the transactions, for the fiscal
year ended June 30, 2022:
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|
|
|
|
| |
Fund |
Commissions |
Principal
Value |
LK
Balanced Fund |
$3,117 |
$4,891,399 |
The
following table sets forth the amount of brokerage commissions paid by the Fund
during the fiscal years ended June 30:
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|
|
|
|
|
|
|
|
| |
Fund |
2022 |
2021 |
2020 |
LK
Balanced Fund |
$3,117 |
$4,873 |
$4,252 |
Portfolio
Turnover
Although
the Fund generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser, investment considerations warrant such
action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in 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 June 30, were as
follows:
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|
|
|
|
|
|
| |
Fund |
2022 |
2021 |
LK
Balanced Fund |
14% |
21% |
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. 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
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 Policies and Procedures is as
follows:
•The
Adviser monitors for proxy proposals as it monitors for other corporate events
that could affect the companies in which the Fund invests;
•When
voting proxies, the Adviser follows the “Wall Street Rule” which means that it
votes as management recommends or it sells the stock prior to the meeting of
shareholders; and
•In
the event that the interests of the Adviser conflict or appear to conflict with
the interests of the Fund, the Adviser will vote the proxy in accordance with
its pre-determined policy to follow the Wall Street Rule only after disclosing
the conflict to the Fund and affording the Fund an opportunity to direct the
voting of such securities.
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
opening 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 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 www.sec.gov. In addition, the Fund will publicly disclose its
top ten equity holdings and equity sector breakdown on the Adviser’s website at
http://www.lkfunds.com within approximately 30 calendar days after each fiscal
quarter end (September, December, March and June).
Such
portfolio holdings information may be separately provided to any person,
including rating and ranking organizations such as Lipper and Morningstar, at
the same time that it is filed with the SEC or posted to the Adviser’s
website.
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 website 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 must be approved under the
Portfolio Holdings Policies by the Trust’s CCO.
In
no event shall the Adviser, its affiliates or employees, or the 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 Fund 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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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 Trust’s valuation procedures.
When
market prices are not readily available, a security or other asset is valued at
its fair value as determined under fair value pricing 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 the Fund is accurately priced. The Board will
regularly evaluate whether the Trust’s fair value pricing procedures continue to
be appropriate in light of the specific circumstances of the Fund and the
quality of prices obtained through the application of such
procedures.
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.
Participation Notes are valued at the mean between bid and ask prices.
Investments in other investment companies, including money market funds, are
valued at their NAV per share.
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.
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 affected
at the NAV per share determined as of the close of trading on the NYSE on that
day. Otherwise, the orders will be processed based on the next determined NAV.
Orders
received by financial intermediaries that are not Authorized Intermediaries will
be processed at the 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
wire or 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 of each owner is required in the following
situations:
•If
ownership is changed on your account;
•When
redemption proceeds are payable or sent to any person, address or bank account
not on record;
•When
a redemption is received by the Transfer Agent and the account address has
changed within the last 15 calendar days; or
•For
all redemptions in excess of $100,000 from any shareholder account.
Non-financial
transactions, including establishing or modifying certain services on an
account, may require a signature guarantee, signature verification from a
Signature Validation Program member or other acceptable form of authentication
from a financial institution source. Signature guarantees, from either a
Medallion program member or a non-Medallion program member, can be obtained from
banks and securities dealers, but not from a notary public.
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
its 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 regulated investment company (“RIC”) under Subchapter M of the
Code, provided it complies with all applicable requirements regarding the source
of its income, diversification of its assets and timing of distributions, as
discussed below.
If
for any taxable year 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 corporate income 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 the Code 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 substantially 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. 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 October 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 carry-forward of the Fund. As
of June 30, 2022, the Fund did not have any capital loss
carryovers.
Distributions
of net investment income are 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 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 that 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 “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. The TCJA does not contain a provision
permitting a RIC, such as a Fund, to pass the special character of this income
through to its shareholders. It is uncertain whether a future technical
corrections bill or regulations issued by the IRS will address this issue to
enable a Fund to pass through the special character of "qualified REIT
dividends" to its shareholders.
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 shareholder’s liability for
the alternative minimum tax. (Under the TCJA corporations are no longer subject
to the alternative minimum tax for taxable years of the corporation beginning
after December 31, 2017.)
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 Internal Revenue
Service 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 a Fund will be treated as long-term capital gains by a
Fund and, in turn, may be distributed by a 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 a 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 a Fund in a non-U.S. REIT may
subject a 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. A Fund’s pro rata share of any such
taxes will reduce a Fund’s return on its investment. A 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, a 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 a 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 a 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 a Fund will not
allocate to shareholders excess inclusion income.
These
rules are potentially applicable to a 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.
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 its
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 treaty.
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 distributions is dependent upon the amount of net
investment income received by the Fund from its portfolio holdings, is not
guaranteed, and is subject to the discretion of the Board. 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