ck0001083387-20221231
Advisor
Class A, Advisor Class C, Institutional Class, No Load Class
KINETICS
MUTUAL FUNDS, INC.
STATEMENT
OF ADDITIONAL INFORMATION
April 30,
2023
The
Kinetics Spin-off and Corporate Restructuring Fund
Advisor
Class A (LSHAX)
Advisor
Class C (LSHCX)
Institutional
Class (LSHUX)
No
Load Class (LSHEX)
a
series of Kinetics Mutual Funds, Inc.
This
Statement of Additional Information (“SAI”) is not a prospectus and it should be
read in conjunction with the Prospectus dated April 30, 2023, as may be
amended from time to time, of the Kinetics Spin-off and Corporate Restructuring
Fund (the “Fund”), a series of Kinetics Mutual Funds, Inc. (the “Company”).
Horizon Kinetics Asset Management LLC (the “Adviser” or “Kinetics”) is the
investment adviser to the Fund. A copy of the Fund’s Prospectus may be obtained
by contacting the Fund at the address or telephone number specified below.
Kinetics
Mutual Funds, Inc.
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
WI 53201-0701
Phone:
1-800-930-3828
The
financial statements, accompanying notes and report of independent registered
public accounting firm appearing in the Company’s most recent annual
report
to shareholders are incorporated by reference into this SAI. The Fund’s annual
report may be obtained free of charge upon request by writing or calling the
Fund at the address or telephone number shown above.
General
Information about Kinetics Mutual Funds, Inc
The
Company is a Maryland corporation, established on March 26, 1999. The Company is
comprised of several series of mutual funds, all of which are open-end
investment companies. This SAI pertains to the No Load, Institutional, Advisor
Class A and Advisor Class C shares of the Fund, a series of the Company. Each
series of the Company, other than the Fund, is in a master/feeder fund structure
and are not described in this SAI. Each series, other than the Fund, is a feeder
fund to a corresponding series of Kinetics Portfolios Trust (the “Trust”). The
Trust is a Delaware statutory trust, established on March 14, 2000. The Trust is
comprised of several series of mutual funds, all of which are open-end
investment companies. The principal business office for the Company and the
Trust is located at 470 Park Avenue South, New York, New York
10016.
General
Information about the Investment Adviser
Horizon
Kinetics Asset Management LLC (“Kinetics” or “Adviser” or “Investment Adviser”)
is a Delaware limited liability corporation that serves as the investment
adviser to each series of the Company and the Trust, both of which are offered
separately. The Adviser provides investment advisory services to the Company and
the Trust, a family of seven mutual funds, with discretionary management
authority over approximately $6.95 billion in assets at March 31,
2023. The Investment Adviser is a wholly-owned subsidiary of Horizon Kinetics
LLC.
On
April 24, 2019, Kinetics Asset Management LLC (“KAM”), the Fund’s former
investment adviser, reorganized into Horizon Asset Management LLC (“HAM”),
following which HAM was renamed Horizon Kinetics Asset Management LLC. Both KAM
and HAM were wholly-owned subsidiaries of Horizon Kinetics LLC.
As
part of the reorganization, the Fund’s investment advisory agreement was
transferred from KAM to the Investment Adviser, and the Investment Adviser
replaced KAM as the Fund’s investment adviser. The reorganization resulted in no
other change to the terms of the investment advisory agreement, including the
advisory fee rates. Further, the portfolio managers, all of whom are now
employees of the Investment Adviser, have not changed as a result of the
reorganization. KAM was advised by legal counsel that the reorganization did not
result in an “assignment” of the investment advisory agreement (as such term is
defined in the 1940 Act).
Capitalization
The
authorized capitalization of the Company consists of 1 billion shares of common
stock of $0.001 par value per share. Each share has equal dividend, distribution
and liquidation rights. There are no conversion or preemptive rights applicable
to any shares of the Fund. All shares issued are fully paid and non-assessable.
Each holder of common stock has one vote for each share held. Voting rights are
non-cumulative.
Title
and Description of Share Classes
Under
the Company’s Articles of Incorporation and a Multiple Class Plan adopted
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended
(“1940 Act”), the Fund is permitted to offer several classes of shares as
follows: No Load Class, Institutional Class, Advisor Class A and Advisor
Class C. Advisor Class A shares are subject to a front-end sales load and a
Rule 12b-1 fee as described in the Prospectus. Advisor Class C shares are
subject to a Rule 12b-1 fee and contingent deferred sales charge as described in
the Prospectus.
All
Classes are sold primarily to individuals who purchase shares through Kinetics
Funds Distributor LLC (“KFD” or the “Distributor”), the Company’s distributor.
The expenses incurred pursuant to the Rule 12b‑1
Plans
will be borne solely by Advisor Class A and Advisor Class C shares of the Fund
and constitute the only expenses allocated on a Class by Class
basis.
Rights
of Each Share Class
Each
share of common stock of the Fund is entitled to one vote in electing Directors
and other matters that may be submitted to shareholders for a vote. All shares
of all Classes of the Fund generally have equal voting rights. However, matters
affecting only one particular Class of shares can be voted on only by
shareholders in that Class. Only shareholders of Advisor Class A or Advisor
Class C shares will be entitled to vote on matters submitted to a shareholder
vote with respect to the Rule 12b-1 Plan applicable to such Class. All
shareholders are entitled to receive dividends when and as declared by the Board
of Directors from time to time and as further discussed in the
Prospectus.
Non-Diversification
of Investments
The
Fund is a non-diversified fund, which means it is not subject to the
diversification requirements under the 1940 Act which means that there is no
restriction as to how much the Fund may invest in the securities of any one
issuer. However, to qualify for tax treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the “Code”), the Fund
intends to comply, as of the end of each taxable quarter, with certain
diversification requirements imposed by the Code. Pursuant to these
requirements, at the end of each taxable quarter, the Fund, among other things,
will not have investments in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment companies)
of more than 25% of the value of the Fund’s total assets. In addition, the Fund,
with respect to 50% of its total assets, will not have investments in the
securities of any issuer greater than 5% of the Fund’s total assets, and will
not purchase more than 10% of the outstanding voting securities of any one
issuer. As a non-diversified investment company, the Fund may be subject to
greater risks than diversified companies because of the larger impact of
fluctuation in the values of securities of fewer issues.
Description
of the Fund
The
Fund commenced operations on May 24, 2007 as the Liberty Street Horizon Fund, a
series of the Forum Funds Trust (the “Liberty Street Fund”).
Effective
as of the close of business on October 9, 2009, the Horizon Spin-Off and
Corporate Restructuring Fund, a series of Investment Manager Series Trust (the
“Predecessor Fund”), acquired the assets and liabilities of the Liberty Street
Fund. As of the date of the acquisition, all of the holders of issued and
outstanding Class A, Class C and Institutional Class shares of the Liberty
Street Fund received Class A, Class C and Institutional Class shares, as
applicable, of the Predecessor Fund. The Liberty Street Fund and the Predecessor
Fund were each advised by Liberty Street Advisors, Inc. (the “Predecessor
Adviser”) and sub-advised by Horizon Asset Management, Inc. (“Horizon”), an
affiliate of the Adviser.
On
December 8, 2017, the Fund acquired the assets and assumed the liabilities of
the Predecessor Fund. As of the date of the acquisition, all of the holders of
issued and outstanding Class A, Class C and Institutional Class shares of the
Predecessor Fund received Class A, Class C and Institutional Class shares, as
applicable, of the Fund.
The
Fund currently offers
No
Load, Institutional, Advisor Class A and Advisor Class C shares. Other classes
may be established from time to time in accordance with the provisions of the
Company’s Articles of Incorporation. Each class of shares of the Fund generally
is identical in all respects except that each class of
shares
is subject to its own distribution expenses and minimum investments. Each class
of shares also has exclusive voting rights with respect to its distribution
fees.
The
Fund is a non-diversified fund with an investment objective of seeking to
achieve long-term growth of capital. The Fund’s investment objective is not
fundamental and may be changed by the Board of Directors of the Fund without
shareholder approval, upon at least 60 days’ prior written notice to
shareholders. The Fund is designed for long term investors who understand and
are willing to accept the risk of loss involved in investing in a mutual fund
seeking long term capital growth. Under normal market conditions, the Fund will
seek to achieve its investment objective by investing at least 80% of its net
assets (plus borrowings for investment purposes) in equity securities of
spin-off companies, companies subject to other forms of corporate restructuring,
parents of any such companies, and publicly traded shareholder activist holding
companies which, by way of their shareholder ownership in other companies, have
caused such other companies to undergo spin-offs and other forms of corporate
restructurings.
Investment
Restrictions
The
Fund operates under the following fundamental policies that, except as otherwise
noted, cannot be changed with respect to the Fund without the affirmative vote
of the holders of a majority of the outstanding voting securities of the Fund
voting together as a single class, which is defined by the 1940 Act as the
lesser of (i) 67% or more of the Fund’s voting securities present at a meeting,
if the holders of more than 50% of the Fund’s outstanding voting securities are
present or represented by proxy; or (ii) more than 50% of the Fund’s outstanding
voting securities. Except as otherwise noted, all percentage limitations set
forth below apply immediately after a purchase or initial investment and any
subsequent change in any applicable percentage resulting from market
fluctuations does not require any action. These restrictions provide that the
Fund may not:
1.Issue
senior securities nor borrow money, except that the Fund may issue senior
securities or borrow money to the extent permitted by applicable
law.
2.Act
as an underwriter of securities issued by others, except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to be
an underwriter under applicable securities laws.
3.Invest
in any security if, as a result, 25% or more of the value of the Fund’s total
assets, taken at market value at the time of each investment, are in the
securities of issuers in any particular industry except (a) excluding securities
issued or guaranteed by the U.S. government and its agencies and
instrumentalities or tax-exempt securities of state and municipal governments or
their political subdivisions or (b) as otherwise permitted by applicable
law.
4.Purchase
or sell real estate except that the Fund may: (a) acquire or lease office space
for its own use; (b) invest in securities of issuers that invest in real estate
or interests therein or that are engaged in or operate in the real estate
industry; (c) invest in securities that are secured by real estate or interests
therein; (d) purchase and sell mortgage-related securities; (e) hold and sell
real estate acquired by the Fund as a result of the ownership of securities; and
(f) invest as otherwise permitted by applicable law.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments; provided that this restriction shall not
prohibit the Fund from purchasing or selling options, futures contracts and
related options thereon, forward contracts, swaps, caps, floors, collars and any
other financial instruments or from investing in securities or other instruments
backed by physical commodities or as otherwise permitted by applicable
law.
6.Make
loans of money or property to any person, except: (a) to the extent that
securities or interests in which the Fund may invest are considered to be loans;
(b) through the loan of portfolio securities in
an
amount up to 33 1/3% of such Fund’s total assets; (c) by engaging in repurchase
agreements or (d) as may otherwise be permitted by applicable law.
Industry
Classification
In
applying the Fund’s fundamental policy concerning industry concentration
described above, it is a matter of non-fundamental policy that investments in
certain broader categories of companies will not be considered to be investments
in the same industry, for example: technology companies will be divided
according to their products and services so that hardware, software, information
services and outsourcing, and telecommunications will each be considered
separate industries; financial service companies will be classified according to
the end users of their services so that automobile finance, bank finance and
diversified finance will each be considered separate industries; asset-backed
securities will be classified according to the underlying assets securing such
securities; and utility companies will be divided according to their services so
that gas, gas transmission, electric and telephone will each be considered
separate industries.
Investment
Policies and Associated Risks
The
following paragraphs provide a more detailed description of the Fund’s
investment policies and risks identified in the Prospectus. Unless otherwise
noted, the policies described in this SAI are not fundamental and may be changed
by the Board of Directors of the Company without shareholder
approval.
Common
Stock
Common
stock represents an equity (ownership) interest in a company, and usually
possesses voting rights and earns dividends. Dividends on common stock are not
fixed but are declared at the discretion of the issuer. Common stock generally
represents the riskiest investment in a company. In addition, common stock
generally has the greatest appreciation and depreciation potential because
increases and decreases in earnings are usually reflected in a company’s stock
price.
The
fundamental risk of investing in common stock is that the value of the stock
might decrease. Stock values fluctuate in response to the activities of an
individual company or in response to general market and/or economic conditions.
While common stocks have historically provided greater long-term returns than
preferred stocks, fixed-income and money market investments, common stocks have
also experienced significantly more volatility than the returns from those other
investments.
Preferred
Stock
Preferred
stock is a class of stock having a preference over common stock as to the
payment of dividends and a share of the proceeds resulting from the issuer’s
liquidation, although preferred stock is usually subordinate to the debt
securities of the issuer. Some preferred stocks also entitle their holders to
receive additional liquidation proceeds on the same basis as the holders of the
issuer’s common stock. Preferred stock typically does not possess voting rights
and its market value may change based on changes in interest rates. If interest
rates rise, the fixed dividend on preferred stocks may be less attractive,
causing the price of preferred stocks to decline. Preferred stock may have
mandatory sinking fund provisions, as well as call/redemption provisions prior
to maturity, a negative feature when interest rates decline. In addition, a fund
may receive stocks or warrants as result of an exchange or tender of fixed
income securities. Preference stock, which is more common in emerging markets
than in developed markets, is a special type of common stock that shares in the
earnings of an issuer, has limited voting rights, may have a dividend
preference, and may also have a liquidation preference. Depending on the
features of the particular security, holders of preferred and preference stock
may bear the risks regarding common stock or fixed income
securities.
Small-
and Mid-Cap Stocks
The
Fund may invest in stock of companies with market capitalizations that are small
compared to other publicly traded companies. Investments in larger companies
present certain advantages in that such companies generally have greater
financial resources, more extensive research and development, manufacturing,
marketing and service capabilities, and more stability and greater depth of
management and personnel. Investments in smaller, less seasoned companies may
present greater opportunities for growth but also may involve greater risks than
customarily are associated with more established companies. The securities of
smaller companies may be subject to more abrupt or erratic market movements than
larger, more established companies. These companies may have limited product
lines, markets or financial resources, or they may be dependent upon a limited
management group. Their securities may be traded in the over-the- counter market
or on a regional exchange, or may otherwise have limited liquidity. As a result
of owning large positions in this type of security, the Fund is subject to the
additional risk of possibly having to sell portfolio securities at
disadvantageous times and prices if redemptions require the Fund to liquidate
its securities positions. In addition, it may be prudent for the Fund, as its
asset size grows, to limit the number of relatively small positions it holds in
securities having limited liquidity in order to minimize its exposure to such
risks, to minimize transaction costs, and to maximize the benefits of research.
As a consequence, as the Fund’s asset size increases, the Fund may reduce its
exposure to illiquid small capitalization securities, which could adversely
affect performance.
The
Fund may also invest in stocks of companies with medium market capitalizations
(i.e., mid-cap companies). Such investments share some of the risk
characteristics of investments in stocks of companies with small market
capitalizations described above, although mid cap companies tend to have longer
operating histories, broader product lines and greater financial resources and
their stocks tend to be more liquid and less volatile than those of smaller
capitalization issuers.
Convertible
Securities
A
convertible security is a preferred stock, warrant or other security that may be
converted or exchanged for a prescribed amount of common stock or other security
of the same or a different issuer or into cash within a particular period of
time at a specified price or formula. A convertible security generally entitles
the holder to receive the dividend or interest until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities generally have characteristics similar to both fixed income and
equity securities. Although to a lesser extent than with fixed income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A significant feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so they
may not experience market value declines to the same extent as the underlying
common stock. When the market price of the underlying common stock increases,
the prices of the convertible securities tend to rise as a reflection of the
value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
Warrants
and Rights
The
Fund may invest in warrants or rights (including those acquired in units or
attached to other securities) that entitle (but do not obligate) the holder to
buy equity securities at a specific price for a specific period of time but will
do so only if such equity securities are deemed appropriate by the Adviser.
Rights are similar to
warrants
but typically have a shorter duration and are issued by a company to existing
stockholders to provide those holders the right to purchase additional shares of
stock at a later date. Warrants and rights do not have voting rights, do not
earn dividends, and do not entitle the holder to any rights with respect to the
assets of the company that has issued them. They do not represent ownership of
the underlying companies but only the right to purchase shares of those
companies at a specified price on or before a specified exercise date. Warrants
and rights tend to be more volatile than the underlying stock, and if at a
warrant’s expiration date the stock is trading at a price below the price set in
the warrant, the warrant will expire worthless. Conversely, if at the expiration
date the stock is trading at a price higher than the price set in the warrant or
right, the Fund can acquire the stock at a price below its market value. The
prices of warrants and rights do not necessarily parallel the prices of the
underlying securities. An investment in warrants or rights may be considered
speculative.
Foreign
Investments
Foreign
Securities
Investments
in the securities of foreign issuers and other non-U.S. investments may involve
risks in addition to those normally associated with investments in the
securities of U.S. issuers or other U.S. investments. All foreign investments
are subject to risks of foreign political and economic instability, adverse
movements in foreign exchange rates, and the imposition or tightening of
exchange controls and limitations on the repatriation of foreign capital. Other
risks stem from potential changes in governmental attitude or policy toward
private investment, which in turn raises the risk of nationalization, increased
taxation or confiscation of foreign investors’ assets.
The
financial problems in global economies over the past several years, including
the European sovereign debt crisis, may continue to cause high volatility in
global financial markets. In addition, global economies are increasingly
interconnected, which increases the possibilities that conditions in one country
or region might adversely impact a different country or region. The severity or
duration of these conditions may also be affected if one or more countries leave
the Euro currency or by other policy changes made by governments or
quasi-governmental organizations.
Additional
non-U.S. taxes and expenses may also adversely affect the Fund’s performance,
including foreign withholding taxes on foreign securities’ dividends. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Foreign companies may be subject to
different accounting, auditing and financial reporting standards. To the extent
foreign securities held by the Fund are not registered with the SEC or with any
other U.S. regulator, the issuers thereof will not be subject to the reporting
requirements of the SEC or any other U.S. regulator. Accordingly, less
information may be available about foreign companies and other investments than
is generally available on issuers of comparable securities and other investments
in the United States. Foreign securities and other investments may also trade
less frequently and with lower volume and may exhibit greater price volatility
than U.S. securities and other investments.
Changes
in foreign exchange rates will affect the value in U.S. dollars of all foreign
currency- denominated securities and other investments held by the Fund.
Exchange rates are influenced generally by the forces of supply and demand in
the foreign currency markets and by numerous other political and economic events
occurring outside the United States, many of which may be difficult, if not
impossible, to predict. See “Europe-Recent Events” above.
Income
from foreign securities and other investments will be received and realized in
foreign currencies, and the Fund is required to compute and distribute income in
U.S. dollars. Accordingly, a decline in the value of a particular foreign
currency against the U.S. dollar occurring after the Fund’s income has been
earned and
computed
in U.S. dollars may require the Fund to liquidate portfolio securities or other
investments to acquire sufficient U.S. dollars to make a distribution.
Similarly, if the exchange rate declines between the time the Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the Fund may be
required to liquidate additional portfolio securities or other investments to
purchase the U.S. dollars required to meet such expenses.
The
Fund may purchase foreign bank obligations. In addition to the risks described
above that are generally applicable to foreign investments, the investments that
the Fund makes in obligations of foreign banks, branches or subsidiaries may
involve further risks, including differences between foreign banks and U.S.
banks in applicable accounting, auditing and financial reporting standards, and
the possible establishment of exchange controls or other foreign government laws
or restrictions applicable to the payment of certificates of deposit or time
deposits that may affect adversely the payment of principal and interest on the
securities and other investments held by the Fund.
Emerging
Markets
The
Fund may invest in companies organized or doing substantial business in emerging
market countries or developing countries as defined by the World Bank,
International Financial Corporation or the Morgan Stanley Capital International
(MSCI) emerging market indices or other comparable indices. Developing countries
may impose restrictions on the Fund’s ability to repatriate investment income or
capital. Even where there is no outright restriction on repatriation of
investment income or capital, the mechanics of repatriation may affect certain
aspects of the operations of the Fund.
Some
of the currencies in emerging markets have experienced devaluations relative to
the U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain developing countries face serious exchange
constraints.
Governments
of some developing countries exercise substantial influence over many aspects of
the private sector. In some countries, the government owns or controls many
companies. Therefore, government actions in the future could have a significant
effect on economic conditions in developing countries, which could affect the
private sector companies in which the Fund invests.
Foreign
Currency Transactions
The
Fund may conduct foreign currency exchange transactions either on a spot, i.e.,
cash, basis at the prevailing rate in the foreign exchange market or by entering
into a forward foreign currency contract. A forward foreign currency contract
(“forward contract”) involves an obligation to purchase or sell a specific
amount of a specific currency at a future date, which may be any fixed number of
days (usually less than one year) from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. Forward contracts are
considered to be derivatives. The Fund enters into forward contracts in order to
“lock in” the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. In addition, the Fund
may enter into forward contracts to hedge against risks arising from securities
the Fund owns or anticipates purchasing or the U.S. dollar value of interest and
dividends paid on those securities. If the Fund delivers the foreign currency at
or before the settlement of a forward contract, it may be required to obtain the
currency by selling some of the Fund’s assets that are denominated in that
specific currency. The Fund may close out a forward contract obligating it to
purchase a foreign currency by selling an offsetting contract, in which case it
will realize a gain or a loss.
Foreign
currency transactions involve certain costs and risks. The Fund incurs foreign
exchange expenses in converting assets from one currency to another. Forward
contracts involve a risk of loss if the Adviser is inaccurate in predicting
currency movements. The projection of short- term currency market movements is
extremely
difficult, and the successful execution of a short- term hedging strategy is
highly uncertain. The precise matching of forward contract amounts and the value
of the securities involved is generally not possible. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency if the market
value of the security is less than the amount of the foreign currency the Fund
is obligated to deliver under the forward contract and the decision is made to
sell the security and deliver the foreign currency. The use of forward contracts
as a hedging technique does not eliminate the fluctuation in the prices of the
underlying securities the Fund owns or intends to acquire, but it fixes a rate
of exchange in advance. Although forward contracts can reduce the risk of loss
if the values of the hedged currencies decline, these instruments also limit the
potential gain that might result from an increase in the value of the hedged
currencies.
There
is no systematic reporting of last sale information for foreign currencies, and
there is no regulatory requirement that quotations available through dealers or
other market sources be firm or revised on a timely basis. Quotation information
available is generally representative of very large transactions in the
interbank market. The interbank market in foreign currencies is a global
around-the-clock market. Since foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may be
involved in the use of foreign currency options, the Fund may be disadvantaged
by having to deal in an odd lot market (generally consisting of transactions of
less than $1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots. The Fund may take positions in options on
foreign currencies in order to hedge against the risk of foreign exchange
fluctuation on foreign securities the Fund holds in its portfolio or which it
intends to purchase.
Depositary
Receipts
American
Depositary Receipts (“ADRs”) are negotiable receipts issued by a U.S. bank or
trust company that evidence ownership of securities in a foreign company which
have been deposited with such bank or trust company’s office or agent in a
foreign country. European Depositary Receipts (“EDRs”) are negotiable
certificates held in the bank of one country representing a specific number of
shares of a stock traded on an exchange of another country. Global Depositary
Receipts (“GDRs”) are negotiable certificates held in the bank of one country
representing a specific number of shares of a stock traded on an exchange of
another country. Canadian Depositary Receipts (“CDRs”) are negotiable receipts
issued by a Canadian bank or trust company that evidence ownership of securities
in a foreign company which have been deposited with such bank or trust company’s
office or agent in a foreign country.
Investing
in ADRs, EDRs, GDRs, and CDRs presents risks that may not be equal to the risk
inherent in holding the equivalent shares of the same companies that are traded
in the local markets even though the Fund will purchase, sell and be paid
dividends on ADRs in U.S. dollars. These risks include fluctuations in currency
exchange rates, which are affected by international balances of payments and
other economic and financial conditions; government intervention; speculation;
and other factors. With respect to certain foreign countries, there is the
possibility of expropriation or nationalization of assets, confiscatory
taxation, political and social upheaval, and economic instability. The Fund may
incur foreign withholding or other taxes on certain ADRs, EDRs, GDRs, or CDRs
that it owns, thus reducing the net amount of income to be received by the Fund
and that may ultimately be available for distribution to the Fund’s
shareholders. ADRs, EDRs, GDRs, and CDRs may be sponsored by the foreign issuer
or may be unsponsored. Unsponsored ADRs, EDRs, GDRs, and CDRs are organized
independently and without the cooperation of the foreign issuer of the
underlying securities. Unsponsored ADRs, EDRs, GDRs, and CDRs are offered by
companies which are not prepared to meet either the reporting or accounting
standards of the United States. While readily exchangeable with stock in local
markets, unsponsored ADRs, EDRs, GDRs, and CDRs may be less liquid than
sponsored ADRs, EDRs, GDRs, and CDRs. Additionally, there generally is less
publicly available information with respect to unsponsored ADRs, EDRs, GDRs, and
CDRs.
Europe—Recent
Events
A
number of countries in Europe have experienced severe economic and financial
difficulties. Many non-governmental issuers, and even certain governments, have
defaulted on, or been forced to restructure, their debts; many other issuers
have faced difficulties obtaining credit or refinancing existing obligations;
financial institutions have in many cases required government or central bank
support, have needed to raise capital, and/or have been impaired in their
ability to extend credit; and financial markets in Europe and elsewhere have
experienced extreme volatility and declines in asset values and liquidity. These
difficulties may continue, worsen or spread within and without Europe. Responses
to the financial problems by European governments, central banks and others,
including austerity measures and reforms, may not work, may result in social
unrest and may limit future growth and economic recovery or have other
unintended consequences. Further defaults or restructurings by governments and
others of their debt could have additional adverse effects on economies,
financial markets and asset valuations around the world.
The
European Union (“EU”) currently faces major issues involving its membership,
structure, procedures and policies, including the successful political, economic
and social integration of new member states, the EU’s resettlement and
distribution of refugees, and resolution of the EU’s problematic fiscal and
democratic accountability.
European
countries can be significantly affected by the tight fiscal and monetary
controls that the European Economic and Monetary Union (“EMU”) imposes for
membership. Europe’s economies are diverse, its governments are decentralized,
and its cultures vary widely. Several EMU countries have faced budget issues,
some of which may have negative long-term effects for the economies of those
countries and other EMU countries. There is continued concern about
national-level support for the euro and the accompanying coordination of fiscal
and wage policy among EMU member countries. Member countries are required to
maintain tight control over inflation, public debt, and budget deficit to
qualify for membership in the EMU. These requirements can severely limit the
ability of EMU member countries to implement monetary policy to address regional
economic conditions.
In
June 2016, the United Kingdom ("UK") approved a referendum to leave the EU. The
withdrawal, known colloquially as “Brexit”, was agreed to and ratified by the UK
Parliament, and the UK left the EU on January 31, 2020. It began an 11-month
transition period in which to negotiate a new trading relationship for goods and
services that ended on December 31, 2020. The UK and EU signed the Trade and
Cooperation Agreement (“TCA”) on December 30, 2020, which was applied
provisionally as of January 1, 2021 and entered into force on May 1, 2021. The
TCA is an agreement on the terms governing certain aspects of the relationship
between the EU and the UK following the end of the transition period. Further
discussions are to be held between the UK and the EU in relation to matters not
covered by the trade agreement, such as financial services. Brexit may have
significant political and financial consequences for the Eurozone markets,
including greater volatility in the global stock markets and illiquidity,
fluctuations in currency and exchange rates, and an increased likelihood of a
recession in the UK. At this time, the impact of Brexit cannot be predicted,
however, market disruption in the EU and globally may have a negative effect on
the value of the Fund's investments. Additionally, the risks related to Brexit
could be more pronounced if one or more additional EU member states seek to
leave the EU.
In
February 2022, Russia commenced a military attack on Ukraine. The outbreak of
hostilities between the two countries could result in more widespread conflict
and the threat of wider-spread hostilities could have a severe adverse effect on
the region and global economies, including significant negative impacts on the
markets for certain securities and commodities, such as oil and natural gas. In
addition, sanctions imposed on Russia by the United States and other countries,
and any sanctions imposed in the future could have a significant adverse impact
on the Russian economy and related markets. The price and liquidity of
investments may fluctuate widely as a result of the conflict and related events.
How long the armed conflict and related events will last cannot be predicted.
These tensions and any related events could have a significant
impact
on Fund performance and the value of Fund investments, even beyond any direct
exposure the Fund may have to issuers located in these countries.
Whether
or not the Fund invests in securities of issuers located in Europe or with
significant exposure to European issuers or countries, these events could
negatively affect the value and liquidity of the Fund’s investments due to the
interconnected nature of the global economy and capital markets. The Fund may
also be susceptible to these events to the extent that the Fund invests in
municipal obligations with credit support by non-U.S. financial
institutions.
Distressed
Investments
The
Fund may invest in securities of companies that are in financial distress (i.e.,
involved in bankruptcy or reorganization proceedings). These securities may
include, among other things, senior or subordinated fixed income securities,
common stock, preferred stock, warrants and other kinds of indebtedness. There
can be no assurance that the Fund will correctly evaluate all the factors that
could affect the outcome of an investment in these types of securities.
Financially distressed securities involve considerable risk that can result in
substantial or even total loss of the Fund’s investment. It is often difficult
to obtain information as to the true condition of financially distressed
securities. These securities are often subject to litigation among the
participants in the bankruptcy or reorganization proceedings. Such investments
may also be adversely affected by federal and state laws relating to, among
other things, fraudulent transfers and other voidable transfers or payments,
lender liability and a bankruptcy court’s power to disallow, reduce, subordinate
or disenfranchise particular claims. These and other factors contribute to
above-average price volatility and abrupt and erratic movements of the market
prices of these securities. In addition, the spread between the bid and asked
prices of such securities may be greater than normally expected and it may take
a number of years for the market price of such securities to reflect their
intrinsic value.
Securities
of financially troubled companies require active monitoring and may, at times,
require participation in bankruptcy or reorganization proceedings by Kinetics.
To the extent that Kinetics becomes involved in such proceedings, Kinetics may
have a more active participation in the affairs of the issuer than that assumed
generally by a shareholder, and such participation may generate higher legal
fees and other transaction costs relating to the investment than would normally
be the case.
In
bankruptcy and other forms of corporate reorganization, there exists the risk
that the reorganization will: (1) be unsuccessful (due to, for example, failure
to obtain the necessary approvals); (2) be delayed (for example, until various
liabilities, actual or contingent, have been satisfied); or (3) result in a
distribution of cash or a new security the value of which will be less than the
purchase price of the security in respect to which such distribution was
made.
Debt
Securities
Debt
securities are used by issuers to borrow money. Generally, issuers pay investors
periodic interest and repay the amount borrowed either periodically during the
life of the security and/or at maturity. Some debt securities, such as zero
coupon bonds, do not pay current interest, but are purchased at a discount from
their face values and accrue interest at the applicable coupon rate over a
specified time period. Some debt securities pay a periodic coupon that is not
fixed; instead payments “float” relative to a reference rate, such as the London
Interbank Offered Rate (“LIBOR”). (Please see "LIBOR Risk" below for information
regarding the transition to replacement reference rates for LIBOR.) This
“floating rate” debt may pay interest at levels above or below the previous
interest payment. The market prices of debt securities fluctuate depending on
such factors as interest rates, credit quality and maturity. In general, market
prices of debt securities decline when interest rates rise and increase when
interest rates fall.
Lower
rated debt securities, those rated Ba or below by Moody’s Investors Service,
Inc. (“Moody’s”) and/or BB or below by S&P Global (“S&P”) or unrated but
determined by the Adviser to be of comparable quality, are described by the
rating agencies as speculative and involve greater risk of default or price
changes than higher rated debt securities due to changes in the issuer’s
creditworthiness or the fact that the issuer may already be in default. The
market prices of these securities may fluctuate more than higher quality
securities and may decline significantly in periods of general economic
difficulty. It may be more difficult to sell or to determine the value of lower
rated debt securities.
Certain
additional risk factors related to debt securities are discussed
below:
Sensitivity
to interest rate and economic changes. Debt
securities may be sensitive to economic changes, political and corporate
developments, and interest rate changes. In addition, during an economic
downturn or periods of rising interest rates, issuers that are highly leveraged
may experience increased financial stress that could adversely affect their
ability to meet projected business goals, obtain additional financing, and
service their principal and interest payment obligations. Furthermore, periods
of economic change and uncertainty can be expected to result in increased
volatility of market prices and yields of certain debt securities. For example,
prices of these securities can be affected by financial contracts held by the
issuer or third parties (such as derivatives) related to the security or other
assets or indices.
Payment
expectations. Debt
securities may contain redemption or call provisions. If an issuer exercises
these provisions in a lower interest rate environment, the Fund would have to
replace the security with a lower yielding security, resulting in decreased
income to investors. If the issuer of a debt security defaults on its
obligations to pay interest or principal or is the subject of bankruptcy
proceedings, the Fund may incur losses or expenses in seeking recovery of
amounts owed to it.
Liquidity.
Liquidity
risk may result from the lack of an active market, reduced number and capacity
of traditional market participants to make a market in fixed income securities,
and may be magnified in a rising interest rate environment or other
circumstances where investor redemptions from fixed income mutual funds may be
higher than normal, causing increased supply in the market due to selling
activity. In such cases, the Fund, due to limitations on investments in illiquid
investments and the difficulty in purchasing and selling such securities or
instruments, may be unable to achieve its desired level of exposure to a certain
sector. To the extent that the Fund’s principal investment strategies involve
investments in securities of companies with smaller market capitalizations,
foreign non-U.S. securities, Rule 144A securities, illiquid sectors of fixed
income securities, derivatives or securities with substantial market and/or
credit risk, the Fund will tend to have the greatest exposure to liquidity risk.
Further, fixed income securities with longer durations until maturity face
heightened levels of liquidity risk as compared to fixed income securities with
shorter durations until maturity. Finally, liquidity risk also refers to the
risk of unusually high redemption requests or other unusual market conditions
that may make it difficult for the Fund to fully honor redemption requests
within the allowable time period. Meeting such redemption requests could require
the Fund to sell securities at reduced prices or under unfavorable conditions,
which would reduce the value of the Fund. It may also be the case that other
market participants may be attempting to liquidate fixed income holdings at the
same time as the Fund, causing increased supply in the market and contributing
to liquidity risk and downward pricing pressure.
The
Adviser attempts to reduce the risks described above through diversification of
the Fund’s portfolio, credit analysis of each issuer, and by monitoring broad
economic trends as well as corporate and legislative developments, but there can
be no assurance that it will be successful in doing so. Credit ratings of debt
securities provided by rating agencies indicate a measure of the safety of
principal and interest payments, not market value risk. The rating of an issuer
is a rating agency’s view of past and future potential developments related to
the issuer and may not necessarily reflect actual outcomes. There can be a lag
between corporate developments and the time a rating is assigned and
updated.
Changing
Fixed Income Market Conditions.
Following
the financial crisis that began in 2007, the U.S. government and the Board of
Governors of the Federal Reserve System (the “Federal Reserve”), as well as
certain foreign governments and central banks, took steps to support financial
markets, including seeking to maintain interest rates at or near historically
low levels and by purchasing large quantities of fixed income securities on the
open market, such as securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, (“Quantitative Easing”). Similar steps have taken
place more recently in an effort to support the economy during the COVID-19
pandemic. It is unclear how long these policies will last. In addition, this and
other government interventions may not work as intended, particularly if the
efforts are perceived by investors as being unlikely to achieve the desired
results. When the Federal Reserve determines to “taper” or reduce Quantitative
Easing and/or raise the federal funds rate, there is a risk that interest rates
across the U.S. financial system will rise. Recently, the Federal Reserve has
raised interest rates and has indicated that it expects to continue to raise
interest rates further this year in an effort to control inflation.Such policy
changes may expose fixed-income and related markets to heightened volatility and
may reduce liquidity for certain fixed income investments, including fixed
income investments held by the Fund, which could cause the value of the Fund’s
investments and share price to decline. To the extent that the Fund invests in
derivatives tied to fixed income markets, the Fund will be more substantially
exposed to these risks than a fund that does not invest in such derivatives.
Bond
Ratings. Bond
rating agencies may assign modifiers (such as +/–) to ratings categories to
signify the relative position of a credit within the rating category. Investment
policies that are based on ratings categories should be read to include any
security within that category, without considering the modifier. Please refer to
Appendix A for more information about credit ratings.
Lower-Rated
Debt Securities
The
Fund may invest in lower-rated fixed-income securities (commonly known as “junk
bonds”). The lower ratings reflect a greater possibility that adverse changes in
the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payment of interest and principal would
likely make the values of securities held by the Fund more volatile and could
limit the Fund’s ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of a liquid
trading market for securities held by it, the Fund at times may be unable to
establish the fair value of such securities. Securities ratings are based
largely on the issuer’s historical financial condition and the rating agencies’
analysis at the time of rating. Consequently, the rating assigned to any
particular security is not necessarily a reflection of the issuer’s current
financial condition, which may be better or worse than the rating would
indicate. In addition, the rating assigned to a security by Moody’s or S&P
(or by any other nationally recognized securities rating agency) does not
reflect an assessment of the volatility of the security’s market value or the
liquidity of an investment in the security.
Like
those of other fixed-income securities, the values of lower-rated securities
fluctuate in response to changes in interest rates. A decrease in interest rates
will generally result in an increase in the value of the Fund’s fixed-income
assets. Conversely, during periods of rising interest rates, the value of the
Fund’s fixed-income assets will generally decline. The values of lower-rated
securities may often be affected to a greater extent by changes in general
economic conditions and business conditions affecting the issuers of such
securities and their industries. Negative publicity or investor perceptions may
also adversely affect the values of lower-rated securities. Changes by
nationally recognized securities rating agencies in their ratings of any
fixed-income security and changes in the ability of an issuer to make payments
of interest and principal may also affect the value of these investments.
Changes in the value of portfolio securities generally will not affect income
derived from these securities, but will affect the Fund’s net asset value. 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 its retention will assist in meeting the Fund’s
investment objective. Issuers of lower-rated securities are often highly
leveraged, so that their ability to service their debt
obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. Such issuers may not have more traditional methods of financing
available to them and may be unable to repay outstanding obligations at maturity
by refinancing.
The
risk of loss due to default in payment of interest or repayment of principal by
such issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness. It is
possible that, under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, the Fund could find it
more difficult to sell these securities when the Adviser believes it advisable
to do so or may be able to sell the securities only at prices lower than if they
were more widely held. Under these circumstances, it may also be more difficult
to determine the fair value of such securities for purposes of computing the
Fund’s net asset value. In order to enforce its rights in the event of a
default, the Fund may be required to participate in various legal proceedings or
take possession of and manage assets securing the issuer’s obligations on such
securities. This could increase the Fund’s operating expenses and adversely
affect the Fund’s net asset value. The ability of a holder of a tax-exempt
security to enforce the terms of that security in a bankruptcy proceeding may be
more limited than would be the case with respect to securities of private
issuers. In addition, the Fund’s intention to qualify as a “regulated investment
company” under the Code may limit the extent to which the Fund may exercise its
rights by taking possession of such assets. To the extent the Fund invests in
securities in the lower rating categories, the achievement of the Fund’s
investment objective is more dependent on the Adviser’s investment analysis than
would be the case if the Fund were investing in securities in the higher rating
categories.
Sovereign
Debt Obligations
The
Fund may invest in sovereign debt obligations, which are securities issued or
guaranteed by foreign governments, governmental agencies or instrumentalities
and political subdivisions, including debt of developing countries. Sovereign
debt may be in the form of conventional securities or other types of debt
instruments such as loans or loan participations. Sovereign debt of developing
countries may involve a high degree of risk, and may be in default or present
the risk of default. Governmental entities responsible for repayment of the debt
may be unable or unwilling to repay principal and pay interest when due, and may
require renegotiation or rescheduling of debt payments. In addition, prospects
for repayment of principal and payment of interest may depend on political as
well as economic factors. Although some sovereign debt, such as Brady Bonds, is
collateralized by U.S. government securities, repayment of principal and payment
of interest is not guaranteed by the U.S. government. There is no bankruptcy
proceeding by which sovereign debt on which governmental entities have defaulted
may be collected in whole or in part.
Municipal
Bonds
Municipal
bonds are debt obligations issued by the states, possessions, or territories of
the United States (including the District of Columbia) or a political
subdivision, public instrumentality, agency, public authority or other
governmental unit of such states, possessions, or territories (e.g.,
counties, cities, towns, villages, districts and authorities). For example,
states, possessions, territories and municipalities may issue municipal bonds to
raise funds for various public purposes such as airports, housing, hospitals,
mass transportation, schools, water and sewer works, gas, and electric
utilities. They may also issue municipal bonds to refund outstanding obligations
and to meet general operating expenses. Municipal bonds may be general
obligation bonds or revenue bonds. General obligation bonds are secured by the
issuer’s pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from revenues derived from
particular facilities, from the proceeds of a special excise tax or from other
specific revenue sources. They are not usually payable from the general taxing
power of a municipality. In addition, certain types of “private activity” bonds
may be issued by public authorities to obtain funding for privately operated
facilities, such as housing and pollution control facilities, for industrial
facilities and for water supply, gas, electricity and waste disposal facilities.
Other types of private activity bonds are used to finance the construction,
repair or improvement of, or to obtain equipment for, privately operated
industrial or commercial facilities. Current
federal
tax laws place substantial limitations on the size of certain of such issues. In
certain cases, the interest on a private activity bond may not be exempt from
federal income tax or the alternative minimum tax.
Zero
Coupon, Step Coupon, and Pay-In-Kind Securities
Within
the parameters of its specific investment policies, the Fund may invest in zero
coupon, pay-in-kind, and step coupon securities. Zero coupon bonds are
securities that make no fixed interest payments but instead are issued and
traded at a discount from their face value. They do not entitle the holder to
any periodic payment of interest prior to maturity. Step coupon bonds trade at a
discount from their face value and pay coupon interest. The coupon rate is low
for an initial period and then increases to a higher coupon rate thereafter. The
discount from the face amount or par value depends on the time remaining until
cash payments begin, prevailing interest rates, liquidity of the security, and
the perceived credit quality of the issuer. Pay-in-kind bonds normally give the
issuer an option to pay cash at a coupon payment date or give the holder of the
security a similar bond with the same coupon rate and a face value equal to the
amount of the coupon payment that would have been made.
Generally,
the market prices of zero coupon, step coupon, and pay-in-kind securities are
more volatile than the prices of securities that pay interest periodically and
in cash and are likely to respond to changes in interest rates to a greater
degree than other types of debt securities having similar maturities and credit
quality.
Floating
Rate, Inverse Floating Rate and Index Obligations
The
Fund may invest in debt securities with interest payments or maturity values
that are not fixed, but float in conjunction with (or inversely to) an
underlying index or price. These securities may be backed by sovereign or
corporate issuers, or by collateral such as mortgages. The indices and prices
upon which such securities can be based include interest rates, currency rates
and commodities prices. Floating rate securities pay interest according to a
coupon which is reset periodically. The reset mechanism may be formula based, or
reflect the passing through of floating interest payments on an underlying
collateral pool. Inverse floating rate securities are similar to floating rate
securities except that their coupon payments vary inversely with an underlying
index by use of a formula. Inverse floating rate securities tend to exhibit
greater price volatility than other floating rate securities. Interest rate risk
and price volatility on inverse floating rate obligations can be high,
especially if leverage is used in the formula. Index securities pay a fixed rate
of interest, but have a maturity value that varies by formula, so that when the
obligation matures a gain or loss may be realized. The risk of index obligations
depends on the volatility of the underlying index, the coupon payment and the
maturity of the obligation.
Derivatives
The
Fund may utilize a variety of derivatives contracts, such as options, futures,
swaps and forward contracts, both for investment purposes and for hedging
purposes. Hedging involves special risks including the possible default by the
other party to the transaction, illiquidity and, to the extent the Adviser’s
assessment of certain market movements is incorrect, the risk that the use of
hedging could result in losses greater than if hedging had not been used.
Nonetheless, with respect to certain investment positions, the Fund may not be
sufficiently hedged against market fluctuations, in which case an investment
position could result in a loss greater than if the Advisor had been
sufficiently hedged with respect to such position.
The
Adviser will not, in general, attempt to hedge all market or other risks
inherent in the Fund’s positions, and may hedge certain risks, if at all, only
partially. Specifically, the Adviser may choose not, or may determine that it is
economically unattractive, to hedge certain risks, either in respect of
particular positions or in respect of the Fund’s overall portfolio. Moreover, it
should be noted that the Fund’s portfolio always will
be
exposed to unidentified systematic risk factors and to certain risks that cannot
be completely hedged, such as credit risk (relating both to particular
securities and to counterparties). The Fund’s portfolio composition may result
in various directional market risks remaining unhedged, although the Adviser may
rely on diversification to control such risks to the extent that the Adviser
believes it is desirable to do so.
In
October 2020, the SEC adopted Rule 18f-4 under the 1940 Act related to the use
of derivatives, short sales, reverse repurchase agreements and certain other
transactions by registered investment companies. Rule 18f-4 requires that the
Fund trade derivatives and other transactions that create future payment or
delivery obligations (except reverse repurchase agreements and similar financing
transactions) subject to a value-at-risk (“VaR”) leverage limit and certain
derivatives risk management program and reporting requirements. Generally, these
requirements apply unless a fund qualifies as a “limited derivatives user,” as
defined in Rule 18f-4. Under Rule 18f-4, when the Fund trades reverse repurchase
agreements or similar financing transactions it needs to aggregate the amount of
indebtedness associated with the reverse repurchase agreements or similar
financing transactions with the aggregate amount of any other senior securities
representing indebtedness when calculating the Fund's asset coverage ratio or
treat all such transactions as derivatives transactions. Reverse repurchase
agreements or similar financing transactions aggregated with other indebtedness
do not need to be included in the calculation of whether a fund is a limited
derivatives user, but for funds subject to the VaR testing, reverse repurchase
agreements and similar financing transactions must be included for purposes of
such testing whether treated as derivatives transactions or not. These
requirements may limit the ability of the Fund to use derivatives and reverse
repurchase agreements and similar financing transactions as part of its
investment strategies. These requirements may increase the cost of the Fund's
investments and cost of doing business, which could adversely affect investors
in the Fund.
Certain
additional risk factors related to derivatives are discussed below:
Derivatives
Risk.
Under
CFTC rules, transactions in some types of interest rate swaps and index credit
default swaps on North American and European indices are required to be cleared.
In a cleared derivatives transaction, the Fund’s counterparty is a clearing
house (such as CME Clearing, ICE Clearing or LCH.Clearnet), rather than a bank
or broker. Since the Fund is not a member of clearing houses and only members of
a clearing house can participate directly in the clearing house, the Fund will
hold cleared derivatives through accounts at clearing members, who are futures
commission merchants that are members of the clearing houses and who have the
appropriate regulatory approvals to engage in swap transactions. The Fund will
make and receive payments owed under cleared derivatives transactions (including
margin payments) through its accounts at clearing members. Clearing members
guarantee performance of their clients’ obligations to the clearing house. In
contrast to bilateral derivatives transactions, following a period of advance
notice to the Fund, clearing members generally can require termination of
existing cleared derivatives transactions at any time and increases in margin
above the margin that it required at the beginning of a transaction. Clearing
houses also have broad rights to increase margin requirements for existing
transactions and to terminate transactions. Any such increase or termination
could interfere with the ability of the Fund to pursue its investment strategy.
Also, the Fund is subject to execution risk if it enters into a derivatives
transaction that is required to be cleared (or that the Adviser expects to be
cleared), and no clearing member is willing or able to clear the transaction on
the Fund’s behalf. While the documentation in place between the Fund and its
clearing members generally provides that the clearing members will accept for
clearing all transactions submitted for clearing that are within credit limits
specified by the clearing members in advance, the Fund could be subject to this
execution risk if the Fund submits for clearing transactions that exceed such
credit limits, if the clearing house does not accept the transactions for
clearing, or if the clearing members do not comply with their agreement to clear
such transactions. In that case, the transaction might have to be terminated,
and the Fund could lose some or all of the benefit of any increase in the value
of the transaction after the time of the transaction. In addition, new
regulations could, among other things, restrict the Fund’s ability to engage in,
or increase the cost to the Fund of, derivatives transactions, for example, by
making some types of derivatives no longer available to the Fund or increasing
margin or capital
requirements.
If the Fund is not able to enter into a particular derivatives transaction, the
Fund’s investment performance and risk profile could be adversely affected as a
result.
Counterparty
Risk.
Counterparty risk with respect to over-the-counter (“OTC”) derivatives may be
affected by new regulations promulgated by the CFTC and SEC affecting the
derivatives market. As described under “Derivatives Risk” above, some
derivatives transactions will be required to be cleared, and a party to a
cleared derivatives transaction is subject to the credit risk of the clearing
house and the clearing member through which it holds its cleared position,
rather than the credit risk of its original counterparty to the derivative
transaction. Clearing members are required to segregate all funds received from
customers with respect to cleared derivatives transactions from the clearing
member’s proprietary assets. However, all funds and other property received by a
clearing broker from its customers are generally held by the clearing broker on
a commingled basis in an omnibus account, which may also invest those funds in
certain instruments permitted under the applicable regulations. The assets of
the Fund might not be fully protected in the event of the bankruptcy of the
Fund’s clearing member because the Fund would be limited to recovering only a
pro rata share of all available funds segregated on behalf of the clearing
broker’s customers for a relevant account class. Also, the clearing member
transfers to the clearing house the amount of margin required by the clearing
house for cleared derivatives transactions, which amounts are generally held in
an omnibus account at the clearing house for all customers of the clearing
member. For commodities futures positions, the clearing house may use all of the
collateral held in the clearing member’s omnibus account to meet a loss in that
account, without regard to which customer in fact supplied that collateral.
Accordingly, in addition to bearing the credit risk of its clearing member, each
customer to a futures transaction also bears “fellow customer” risk from other
customers of the clearing member. However, with respect to cleared swaps
positions, regulations promulgated by the CFTC require that the clearing member
notify the clearing house of the amount of initial margin provided by the
clearing member to the clearing house that is attributable to each customer.
Because margin in respect of cleared swaps must be earmarked for specific
clearing member customers, the clearing house may not use the collateral of one
customer to cover the obligations of another customer. However, if the clearing
member does not provide accurate reporting, the Fund is subject to the risk that
a clearing house will use the Fund’s assets held in an omnibus account at the
clearing house to satisfy payment obligations of a defaulting customer of the
clearing member to the clearing house. In addition, a clearing member may
generally choose to provide to the clearing house the net amount of variation
margin required for cleared swaps for all of the clearing member’s customers in
the aggregate, rather than the gross amount of each customer. The Fund is
therefore subject to the risk that a clearing house will not make variation
margin payments owed to the Fund if another customer of the clearing member has
suffered a loss and is in default.
Under
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”), regulations are now in effect that require swap dealers to post and
collect variation margin (comprised of specified liquid instruments and subject
to a required haircut) in connection with trading of OTC swaps with the Fund.
Shares of investment companies (other than certain money market funds) may not
be posted as collateral under these regulations. These instruments may be
subject to additional regulation as qualified financial contracts (see
"Qualified Financial Contracts" below for additional information).
Options
on Securities and Securities Indices
A
call option would entitle the Fund, in return for the premium paid, to purchase
specified securities at a specified price during the option period. A put option
would entitle the Fund, in return for the premium paid, to sell specified
securities during the option period. The Fund may invest in both European-style
or American-style options. A European-style option is only exercisable
immediately prior to its expiration. American-style options are exercisable at
any time prior to the expiration date of the option.
Writing
Call Options.
The Fund may write covered call options. A call option is “covered” if the Fund
owns the security underlying the call or has an absolute right to acquire the
security without additional cash
consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amounts as held in a segregated account by the Fund’s custodian). The
writer of a call option receives a premium and gives the purchaser the right to
buy the security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
“closing purchase transaction.” This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an
option.
Effecting
a closing transaction in a written call option will permit the Fund to write
another call option on the underlying security with either a different exercise
price, expiration date or both. Also, effecting a closing transaction will
permit the cash or proceeds from the concurrent sale of any securities subject
to the option to be used for other investments of the Fund. If the Fund desires
to sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction prior to or concurrent with the
sale of the security.
The
Fund will realize a gain from a closing transaction if the cost of the closing
transaction is less than the premium received from writing the option or if the
proceeds from the closing transaction are more than the premium paid to purchase
the option. The Fund will realize a loss from a closing transaction if the cost
of the closing transaction is more than the premium received from writing the
option or if the proceeds from the closing transaction are less than the premium
paid to purchase the option. However, because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss to the Fund resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
If
the Fund were assigned an exercise notice on a call it has written, it would be
required to liquidate portfolio securities in order to satisfy the exercise,
unless it has other liquid assets that are sufficient to satisfy the exercise of
the call. If the Fund has written a call, there is also a risk that the market
may decline between the time the Fund has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time it is able to sell securities in its
portfolio.
In
addition to covered call options, the Fund may write uncovered (or “naked”) call
options on securities, including exchange-traded funds (“ETFs”), and
indices.
Writing
Covered Index Call Options.
The
Fund may sell index call options. The Fund may also execute a closing purchase
transaction with respect to the option it has sold and then sell another option
with either a different exercise price and/or expiration date. The Fund’s
objective in entering into such closing transactions is to increase option
premium income, to limit losses or to protect anticipated gains in the
underlying stocks. The cost of a closing transaction, while reducing the premium
income realized from the sale of the option, should be offset, at least in part,
by the appreciation in the value of the underlying index, and by the opportunity
to realize additional premium income from selling a new option. When the Fund
sells an index call option, it does not deliver the underlying stocks or cash to
the broker through whom the transaction is effected. In the case of an
exchange-traded option, the Fund establishes an escrow account. The Fund’s
custodian (or a securities depository acting for the custodian) acts as the
Fund’s escrow agent. The escrow agent enters into documents known as escrow
receipts with respect to the stocks included in the Fund (or escrow receipts
with respect to other acceptable securities). The escrow agent releases the
stocks from the escrow account when the call option expires or the Fund enters
into a closing purchase transaction. Until such release, the underlying stocks
cannot be sold by the Fund. The Fund may enter into similar collateral
arrangements with the counterparty when it sells OTC index call
options.
The
purchaser of an index call option sold by the Fund may exercise the option at a
price fixed as of the closing level of the index on the exercise date. Unless
the Fund has liquid assets sufficient to satisfy the exercise of the index call
option, the Fund would be required to liquidate portfolio securities to satisfy
the exercise. The market value of such securities may decline between the time
the option is exercised and the time the Fund is able to sell the securities.
For example, even if an index call which the Fund has written is “covered” by an
index call held by the Fund with the same strike price, it will bear the risk
that the level of the index may decline between the close of trading on the date
the exercise notice is filed with the Options Clearing Corporation and the close
of trading on the date the Fund exercises the call it holds or the time it sells
the call, which in either case would occur no earlier than the day following the
day the exercise notice was filed. If the Fund fails to anticipate an exercise,
it may have to borrow from a bank (in amounts not exceeding 5% of the Fund’s
total assets) pending settlement of the sale of the portfolio securities and
thereby incur interest charges. If trading is interrupted on the index, the Fund
would not be able to close out its option positions.
Risks
of Transactions in Options.
There
are several risks associated with transactions in options on securities and
indices. Options may be more volatile than the underlying securities and,
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation in value than an investment in the underlying securities
themselves. There are also significant differences between the securities and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objective. In addition,
a liquid secondary market for particular options may be absent for reasons which
include the following: there may be insufficient trading interest in certain
options; restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options of
underlying securities; unusual or unforeseen circumstances may interrupt normal
operations on an exchange; the facilities of an exchange or clearing corporation
may not be adequate to handle current trading volume at all times; or one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by a clearing corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their
terms.
A
decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or unexpected events. The extent to which
the Fund may enter into options transactions may be limited by the requirements
of the Code, for qualification of the Fund as a regulated investment
company.
OTC
Options.
The
Fund may engage in transactions involving OTC options as well as exchange-traded
options. Certain additional risks are specific to OTC options. The Fund may
engage a clearing corporation to exercise exchange-traded options, but if the
Fund purchased an OTC option, it must then rely on the dealer from which it
purchased the option if the option is exercised. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded
options generally have a continuous liquid market while OTC options may not.
Consequently, the Fund may generally be able to realize the value of an over-
the-counter option it has purchased only by exercising or reselling the option
to the dealer who issued it. Similarly, when the Fund writes an OTC option, the
Fund may generally be able to close out the option prior to its expiration only
by entering into a closing purchase transaction with the dealer to whom the Fund
originally wrote the option. While the Fund will seek to enter into OTC options
only with dealers who will agree to and are expected to be capable of entering
into closing transactions with the Fund, there can be no assurance that the Fund
will at any time be able to liquidate an OTC option at a favorable price at any
time prior to expiration. Unless the Fund, as a covered OTC call option writer,
is able to effect a closing purchase transaction, it will not be able to
liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the other party, the Fund may be unable
to liquidate an OTC option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund.
The
SEC has taken the position that purchased OTC options are illiquid investments.
The Fund may treat the cover used for written OTC options as liquid if the
dealer agrees that the Fund may repurchase the OTC option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
OTC option would be considered illiquid only to the extent the maximum purchase
price under the formula exceeds the intrinsic value of the option. Accordingly,
the Fund will treat OTC options as subject to the Fund’s limitation on illiquid
investments. If the SEC changes its position on the liquidity of OTC options,
the Fund will change the treatment of such instruments accordingly.
Stock
Index Options.
The Fund may invest in options on indices, including broad-based security
indices. Puts and calls on indices are similar to puts and calls on other
investments except that all settlements are in cash and gain or loss depends on
changes in the index in question rather than on price movements in individual
securities. When the Fund writes a call on an index, it receives a premium and
agrees that, prior to the expiration date, the purchaser of the call, upon
exercise of the call, will receive from the Fund an amount of cash if the
closing level of the index upon which the call is based is greater than the
exercise price of the call. The amount of cash is equal to the difference
between the closing price of the index and the exercise price of the call times
a specified multiple (“multiplier”), which determines the total dollar value for
each point of such difference. When the Fund buys a call on an index, it pays a
premium and has the same rights as to such call as are indicated above. When the
Fund buys a put on an index, it pays a premium and has the right, prior to the
expiration date, to require the seller of the put, upon the Fund’s exercise of
the put, to deliver to the Fund an amount of cash if the closing level of the
index upon which the put is based is less than the exercise price of the put,
which amount of cash is determined by the multiplier, as described above for
calls. When the Fund writes a put on an index, it receives a premium and the
purchaser of the put has the right, prior to the expiration date, to require the
Fund to deliver to it an amount of cash equal to the difference between the
closing level of the index and exercise price times the multiplier if the
closing level is less than the exercise price.
The
risks of investment in options on indices may be greater than options on
securities. Because index options are settled in cash, if the Fund writes a call
on an index it cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying index. The Fund can offset
some of the risk of writing a call index option by holding a diversified
portfolio of securities or instruments similar to those on which the underlying
index is based. However, the Fund cannot, as a practical matter, acquire and
hold a portfolio containing exactly the same securities or instruments as
underlie the index and, as a result, bears a risk that the value of the
securities or instruments held will vary from the value of the
index.
Even
if the Fund could assemble a portfolio that exactly reproduced the composition
of the underlying index, it still would not be fully covered from a risk
standpoint because of the “timing risk” inherent in writing index options. When
an index option is exercised, the amount of cash that the holder is entitled to
receive is determined by the difference between the exercise price and the
closing index level on the date when the option is exercised. As with other
kinds of options, the Fund as the call writer will not learn of the assignment
until the next business day at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security or instrument, such as common stock, because there
the writer’s obligation is to deliver the underlying security or instrument, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security or instrument, it can satisfy its settlement
obligations by simply delivering it, and the risk that its value may have
declined since the exercise date is borne by the exercising holder. In contrast
even if the writer of an index call holds investments that exactly match the
composition of the underlying index, it will not be able to satisfy its
assignment obligations by delivering those investments against payment of the
exercise price. Instead, it will
be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
“timing risk” is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding security or instrument
positions.
If
the Fund has purchased an index option and exercises it before the closing index
value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
Futures
and Options on Futures
The
Fund may use interest rate, foreign currency, index and other futures contracts.
The Fund may use options on futures contracts. A futures contract provides for
the future sale by one party and purchase by another party of a specified
quantity of the security or other financial instrument at a specified price and
time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract originally was
written. Although the value of an index might be a function of the value of
certain specified securities, physical delivery of these securities is not
always made. A public market exists in futures contracts covering a number of
indexes, as well as financial instruments, including, without limitation: U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit;
Eurodollar certificates of deposit; the Australian Dollar; the Canadian Dollar;
the British Pound; the Japanese Yen; the Swiss Franc; the Mexican Peso; and
certain multinational currencies, such as the Euro. It is expected that other
futures contracts will be developed and traded in the future.
The
Fund may purchase and write (sell) call and put futures options. Futures options
possess many of the same characteristics as options on securities and indexes
(discussed above). A futures option gives the holder the right, in return for
the premium paid, to assume a long position (call) or short position (put) in a
futures contract at a specified exercise price upon expiration of, or at any
time during the period of, the option. Upon exercise of a call option, the
holder acquires a long position in the futures contract and the writer is
assigned the opposite short position. In the case of a put option, the opposite
is true. When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its futures commission merchant a specified
amount of liquid assets (“initial margin”). The margin required for a futures
contract is set by the exchange on which the contract is traded and may be
modified during the term of the contract. The initial margin is in the nature of
a performance bond or good faith deposit on the futures contract that is
returned to the Fund upon termination of the contract, assuming all contractual
obligations have been satisfied. The Fund expects to earn taxable interest
income on its initial margin deposits. The Fund, as a writer of an option, may
have no control over whether the underlying futures contracts may be sold (call)
or purchased (put) and as a result, bears the market risk of an unfavorable
change in the valuation of the futures contracts underlying the written option.
The Fund, as a purchaser of an option, bears the risk that the counterparties to
the option may not have the ability to meet the terms of the option
contract.
Futures
and options on futures are regulated by the Commodity Futures Trading Commission
(“CFTC”). The Fund invests in futures, options on futures and other instruments
subject to regulation by the CFTC in reliance upon and in accordance with CFTC
Regulation 4.5. Under Regulation 4.5, if the Fund uses futures, options on
futures, or swaps other than for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on these positions (after
taking into account unrealized profits and unrealized losses on any such
positions and excluding the amount by which options that are “in-the-money” at
the time of purchase of a new position are “in-the-money”) may not exceed 5% of
the Fund’s net asset value, or
alternatively,
the aggregate net notional value of those positions at the time may not exceed
100% of the Fund’s net asset value (after taking into account unrealized profits
and unrealized losses on any such positions). The Company, on behalf of the
Fund, has filed a notice of eligibility for exclusion from the definition of the
term “commodity pool operator” in accordance with CFTC Regulation 4.5.
Therefore, as of the date of this SAI, neither the Company nor the Fund is
deemed to be a “commodity pool” or “commodity pool operator” under the Commodity
Exchange Act (“CEA”), and they are not subject to registration or regulation as
such under the CEA. In addition, as of the date of this SAI, the Adviser is not
deemed to be a “commodity pool operator” or “commodity trading adviser” with
respect to the advisory services it provides to the Fund. In the future, if the
Fund’s use of futures, options on futures, or swaps requires the Adviser to
register as a commodity pool operator with the CFTC with respect to the Fund,
the Adviser will do so at that time.
A
futures contract held by the Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or receives
cash, called “variation margin”, equal to the daily change in value of the
futures contract. This process is known as “marking to market.” Variation margin
does not represent a borrowing or loan by the Fund but is instead a settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, the Fund will mark
to market its open futures positions. The Fund also is required to deposit and
to maintain margin with respect to put and call options on futures contracts
written by it. Such margin deposits will vary depending on the nature of the
underlying futures contract (and the related initial margin requirements), the
current market value of the option and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same exchange, underlying security or index and delivery month).
If an offsetting purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, the Fund realizes a
capital loss. The transaction costs also must be included in these
calculations.
The
Fund may write covered straddles consisting of a call and a put written on the
same underlying futures contract. A straddle will be covered when sufficient
assets are deposited to meet the Fund’s immediate obligations. The Fund may use
the same liquid assets to cover both the call and put options if the exercise
price of the call and put are the same, or if the exercise price of the call is
higher than that of the put. In such cases, the Fund also will segregate liquid
assets equivalent to the amount, if any, by which the put is “in the
money.”
With
respect to options and futures contracts that are cash settled, the Fund is
permitted to set aside liquid assets in an amount equal to the Fund’s daily
marked-to-market net obligations under the contracts (less any amounts the Fund
has posted as margin), if any, rather than the full notional value. In the case
of options and futures contracts that are not cash settled, the Fund will set
aside liquid assets equal to the full notional value of the contracts (less any
amounts the Fund has posted as margin), while the positions are
open.
Stock
Index Futures
The
Fund may invest in stock index futures only as a substitute for a comparable
market position in the underlying securities. A stock index future obligates the
seller to deliver (and the purchaser to accept), effectively, an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the underlying
stocks in the index is made. With respect to stock indices that are permitted
investments, the Fund intends to purchase and sell futures contracts on the
stock index for which it can obtain the best price with consideration also given
to liquidity.
Swap
Transactions
The
Fund may enter into interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against currency fluctuations or to protect
against any increase in the price of securities it anticipates purchasing at a
later date. Swaps may be used in conjunction with other instruments to offset
interest rate, currency or other underlying risks. For example, interest rate
swaps may be offset with “caps,” “floors” or “collars”. A “cap” is essentially a
call option which places a limit on the amount of floating rate interest that
must be paid on a certain principal amount. A “floor” is essentially a put
option which places a limit on the minimum amount that would be paid on a
certain principal amount. A “collar” is essentially a combination of a long cap
and a short floor where the limits are set at different levels.
The
Fund will usually enter into swaps on a net basis; that is, the two payment
streams will be netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments.
Total
Return Swaps.
The Fund may enter into total return swap contracts for investment purposes.
Total return swaps are contracts in which one party agrees to make periodic
payments based on the change in market value of the underlying assets, which may
include a specified security, basket of securities or security indexes during
the specified period, in return for periodic payments based on a fixed or
variable interest rate of the total return from other underlying assets. Total
return swaps may be used to obtain exposure to a security or market without
owning or taking physical custody of such security or market, including in cases
in which there may be disadvantages associated with direct ownership of a
particular security. In a typical total return equity swap, payments made by the
Fund or the counterparty are based on the total return of a particular reference
asset or assets (such as an equity security, a combination of such securities,
or an index). That is, one party agrees to pay another party the return on a
stock, basket of stocks, or stock index in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can gain
exposure to stocks making up the index of securities without actually purchasing
those stocks. Total return swaps involve not only the risk associated with the
investment in the underlying securities, but also the risk of the counterparty
not fulfilling its obligations under the agreement.
Credit
Default Swaps.
The
Fund may enter into credit default swap transactions for investment purposes. A
credit default swap may have as reference obligations one or more securities
that are not currently held by the Fund. The Fund may be either the buyer or
seller in the transaction. Credit default swaps may also be structured based on
the debt of a basket of issuers, rather than a single issuer, and may be
customized with respect to the default event that triggers purchase or other
factors. As a seller, the Fund would generally receive an upfront payment or a
fixed rate of income throughout the term of the swap, which typically is between
six months and three years, provided that there is no credit event. If a credit
event occurs, generally the seller must pay the buyer the full-face amount of
deliverable obligations of the reference obligations that may have little or no
value. If the Fund were a buyer and no credit event occurs, the Fund would
recover nothing if the swap is held through its termination date. However, if a
credit event occurs, the buyer may elect to receive the full notional value of
the swap in exchange for an equal face amount of deliverable obligations of the
reference obligation that may have little or no value. The use of swap
transactions by the Fund entails certain risks, which may be different from, or
possibly greater than, the risks associated with investing directly in the
securities and other investments that are the referenced asset for the swap
transaction. Swaps are highly specialized instruments that require investment
techniques, risk analyses, and tax planning different from those associated with
stocks, bonds, and other traditional investments. The use of a swap requires an
understanding not only of the referenced asset, reference rate, or index, but
also of the swap itself, without the benefit of observing the performance of the
swap under all the possible market conditions. Because some swap transactions
have a leverage component, adverse changes in the value or level of the
underlying asset,
reference
rate, or index can result in a loss substantially greater than the amount
invested in the swap itself. Certain swaps have the potential for unlimited
loss, regardless of the size of the initial investment.
The
Fund may also purchase credit default swap contracts in order to hedge against
the risk of default of the debt of a particular issuer or basket of issuers, in
which case the Fund would function as the counterparty referenced in the
preceding paragraph. This would involve the risk that the investment may expire
worthless and would only generate income in the event of an actual default by
the issuer(s) of the underlying obligation(s) (or, as applicable, a credit
downgrade or other indication of financial instability). It would also involve
the risk that the seller may fail to satisfy its payment obligations to the Fund
in the event of a default. The purchase of credit default swaps involves costs,
which will reduce the Fund’s return.
Currency
Swaps.
The Fund may enter into currency swap transactions for investment purposes.
Currency swaps are similar to interest rate swaps, except that they involve
multiple currencies. The Fund may enter into a currency swap when it has
exposure to one currency and desires exposure to a different currency.
Typically, the interest rates that determine the currency swap payments are
fixed, although occasionally one or both parties may pay a floating rate of
interest. Unlike an interest rate swap, however, the principal amounts are
exchanged at the beginning of the contract and returned at the end of the
contract. In addition to paying and receiving amounts at the beginning and
termination of the agreements, both sides will also have to pay in full
periodically based upon the currency they have borrowed. Change in foreign
exchange rates and changes in interest rates, as described above, may negatively
affect currency swaps.
Interest
Rate Swaps.
The Fund may enter into an interest rate swap in an effort to protect against
declines in the value of fixed income securities held by the Fund. In such an
instance, the Fund may agree to pay a fixed rate (multiplied by a notional
amount) while a counterparty agrees to pay a floating rate (multiplied by the
same notional amount). If interest rates rise, resulting in a diminution in the
value of the Fund’s portfolio, the Fund would receive payments under the swap
that would offset, in whole or in part, such diminution in value.
Options
on Swaps.
An option on a swap agreement, or a “swaption,” is a contract that gives a
counterparty the right (but not the obligation) to enter into a new swap
agreement or to shorten, extend, cancel or otherwise modify an existing swap
agreement, at some designated future time on specified terms. In return, the
purchaser pays a “premium” to the seller of the contract. The seller of the
contract receives the premium and bears the risk of unfavorable changes on the
underlying swap. The Fund may write (sell) and purchase put and call swaptions.
The Fund may also enter into swaptions on either an asset-based or
liability-based basis, depending on whether the Fund is hedging its assets or
its liabilities. The Fund may write (sell) and purchase put and call swaptions
to the same extent it may make use of standard options on securities or other
instruments. The Fund may enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its holdings, as a
duration management technique, to protect against an increase in the price of
securities the Fund anticipates purchasing at a later date, or for any other
purposes, such as for speculation to increase returns. Swaptions are generally
subject to the same risks involved in the Fund’s use of options.
Depending
on the terms of the particular option agreement, the Fund will generally incur a
greater degree of risk when it writes a swaption than it will incur when it
purchases a swaption. When the Fund purchases a swaption, it risks losing only
the amount of the premium it has paid should it decide to let the option expire
unexercised. However, when the Fund writes a swaption, upon exercise of the
option the Fund will become obligated according to the terms of the underlying
agreement.
Over
the Counter Derivatives Transactions
The
Dodd-Frank Act, which was signed into law on July 21, 2010, established a new
statutory framework that comprehensively regulated the OTC derivatives markets
for the first time. Key Dodd-Frank
Act provisions
relating
to OTC derivatives require rulemaking by the SEC and the CFTC, not all of which
has been proposed or finalized as at the date of this SAI. Prior to the
Dodd-Frank Act, the OTC derivatives markets were traditionally traded on a
bilateral basis (so-called “bilateral OTC transactions”). Now certain OTC
derivatives contracts are required to be centrally cleared and traded on
exchanges or electronic trading platforms called swap execution facilities
(“SEFs”). Congress may determine to repeal or revise the Dodd-Frank Act or
portions thereof and other laws and regulations. The effect of such actions, if
taken, cannot be known.
Bilateral
OTC transactions differ from exchange-traded or cleared derivatives transactions
in several respects. Bilateral OTC transactions are transacted directly with
dealers and not with a clearing corporation. Without the availability of a
clearing corporation, bilateral OTC transaction pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the Adviser and verified in appropriate cases. As bilateral OTC
transactions are entered into directly with a dealer, there is a risk of
nonperformance by the dealer as a result of its insolvency or otherwise. Under
CFTC regulations, counterparties of registered swap dealers and major swap
participants have the right to elect segregation of initial margin in respect of
uncleared swaps. If a counterparty makes such an election, any initial margin
that is posted to the swap dealer or major swap participant must be segregated
in individual customer accounts held at an independent third party custodian. In
addition, the collateral may only be invested in certain categories of
instruments identified in the CFTC’s regulations. Agreements covering these
segregation arrangements must generally provide for consent by both the
counterparty and the swap dealer or major swap participant to withdraw margin
from the segregated account. Given these limitations on the use of uncleared
swaps collateral, there is some likelihood that the electing counterparty will
experience an increase in the costs associated with trading swaps with the
relevant swap dealer or major swap participant. Certain other protections apply
to a counterparty to uncleared swaps under the CFTC’s regulations even if the
counterparty does not elect segregation of its initial margin. It remains
unclear whether these regulations will be effective in protecting initial margin
in the manner intended in the event of significant market stress or the
insolvency of a swap dealer or major swap participant.
Furthermore,
a bilateral OTC transaction may only be terminated voluntarily by entering into
a closing transaction with the dealer with which the Fund originally dealt. Any
such cancellation may require the Fund to pay a premium to that dealer. In those
cases in which the Fund has entered into a covered transaction and cannot
voluntarily terminate the transaction, the Fund will not be able to sell the
underlying security until the transaction expires or is exercised or different
cover is substituted. The Fund will seek to enter into OTC transactions only
with dealers which agree to, and which are expected to be capable of, entering
into closing transactions with the Fund. There is also no assurance that the
Fund will be able to liquidate an OTC transaction at any time prior to
expiration.
The
requirement to execute certain OTC derivatives contracts on SEFs may offer
certain advantages over traditional bilateral OTC trading, such as ease of
execution, price transparency, increased liquidity and/or favorable pricing.
However, SEF trading may make it more difficult and costly for the Fund to enter
into highly tailored or customized transactions and may result in additional
costs and risks. Market participants such as the Fund that execute derivatives
contracts through a SEF, whether directly or through a broker intermediary, are
required to submit to the jurisdiction of the SEF and comply with SEF and CFTC
rules and regulations which impose, among other things disclosure and
recordkeeping obligations. In addition, the Fund will generally incur SEF or
broker intermediary fees when it trades on a SEF. The Fund may also be required
to indemnify the SEF or broker intermediary for any losses or costs that may
result from the Fund’s transactions on the SEF.
Non-Publicly
Traded Securities And Private Placements
The
Fund may invest in securities that are neither listed on a stock exchange nor
traded over-the- counter, including privately placed securities and limited
partnerships. Investing in unregistered or unlisted securities,
including
investments in new and early stage companies, may involve a high degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund, or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that would be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration.
Investments by the Fund in non-publicly traded securities and private placements
may be limited to the Fund’s prohibition on investing more than 15% of its net
assets in illiquid investments.
Illiquid
and Restricted Investments
Pursuant
to Rule 22e-4 under the 1940 Act, the Fund may invest up to 15% of its net
assets in illiquid investments. An illiquid investment is an investment that the
Fund reasonably expects cannot be sold or disposed of in current market
conditions within seven calendar days or less without the sale or disposition
significantly changing the market value of the investment.
Restricted
securities may be sold only in privately negotiated transactions or in a public
offering with respect to which a registration statement is in effect under the
Securities Act of 1933, as amended (the “Securities Act”). Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
that which prevailed when it decided to sell. Restricted securities issued
pursuant to Rule 144A under the Securities Act that have a readily available
market usually are not deemed illiquid for purposes of this limitation by the
Fund. However, investing in Rule 144A securities could result in increasing the
level of the Fund’s illiquidity if qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
The
Fund may purchase commercial paper issued pursuant to Section 4(2) of the
Securities Act. 4(2) commercial paper has substantially the same price and
liquidity characteristics as commercial paper generally, except that the resale
of 4(2) commercial paper is limited to the institutional investor marketplace.
Such a restriction on resale makes 4(2) commercial paper technically a
restricted security under the Securities Act. In practice, however, 4(2)
commercial paper can be resold as easily as any other unrestricted security held
by the Fund. Accordingly, 4(2) commercial paper has been determined to be liquid
under procedures adopted by the Board.
The
Company has implemented a liquidity risk management program and related
procedures to identify illiquid investments pursuant to Rule 22e-4. If the
limitation on illiquid investments is exceeded, other than by a change in market
values, the condition will be reported to the Board of Directors of the Company,
and when required, to the SEC.
Investment
Company Securities
The
Fund may invest in shares of other investment companies (each, an “Underlying
Fund”), including open-end funds, closed-end funds, unit investment trusts
(“UITs”) and ETFs, to the extent permitted by applicable law and subject to
certain restrictions set forth in this SAI.
Under
the 1940 Act, the Fund’s investments in such securities currently are limited
to, subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund’s total assets with respect to any one
investment company and (iii) 10% of the Fund’s total assets with respect to
investment
companies in the aggregate. Rule 12d1-1 under the 1940 Act permits a Fund to
invest an unlimited amount of its uninvested cash in a money market fund so long
as, among other things, said investment is consistent with the Fund’s investment
objectives and policies.
The
SEC has adopted revisions to the rules permitting funds to invest in other
investment companies in excess of the limits described above. While new Rule
12d1-4 permits more types of fund of fund arrangements without reliance on an
exemptive order or no-action letters, it imposes new conditions, including
limits on control and voting of acquired funds' shares, evaluations and findings
by investment advisers, fund investment agreements, and limits on most
three-tier fund structures.
Acquired
funds typically incur fees that are separate from those fees incurred directly
by the Fund. The Fund’s purchase of such investment company securities results
in the layering of expenses as Fund shareholders would indirectly bear a
proportionate share of the operating expenses of such investment companies,
including advisory fees, in addition to paying Fund expenses. In addition, the
securities of other investment companies may also be leveraged and will
therefore be subject to certain leverage risks. The net asset value and market
value of leveraged securities will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
securities. Investment companies may have investment policies that differ from
those of the Fund.
Under
certain circumstances an open-end investment company in which the Fund invests
may determine to make payment of a redemption by the Fund wholly or in part by a
distribution in kind of securities from its portfolio, instead of in cash. As a
result, the Fund may hold such securities until the Adviser determines it is
appropriate to dispose of them. Such disposition will impose additional costs on
the Fund.
Investment
decisions by the investment advisors to the registered investment companies in
which the Fund invests are made independently of the Fund. At any particular
time, one Underlying Fund may be purchasing shares of an issuer whose shares are
being sold by another Underlying Fund. As a result, under these circumstances
the Fund indirectly would incur certain transactional costs without
accomplishing any investment purpose.
Exchange-Traded
Funds
ETFs
are pooled investment vehicles that generally seek to track the performance of
specific indices. ETFs may be organized as open-end funds or as UITs. Their
shares are listed on stock exchanges and can be traded throughout the day at
market-determined prices.
An
ETF generally issues index-based investments in aggregations of 50,000 shares
known as “Creation Units” in exchange for a “Portfolio Deposit” consisting of
(a) a portfolio of securities substantially similar to the component securities
(“Index Securities”) of the applicable index (the “Index”), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the ETF’s portfolio
securities since the last dividend payment by the ETF, net of expenses and
liabilities, and (c) a cash payment or credit (“Balancing Amount”) designed to
equalize the net asset value of the Index and the net asset value of a Portfolio
Deposit.
Shares
of ETFs are not individually redeemable, except upon termination of the ETF. To
redeem shares of an ETF, an investor must accumulate enough shares of the ETF to
reconstitute a Creation Unit. The liquidity of small holdings of ETF shares,
therefore, will depend upon the existence of a secondary market for such shares.
Upon redemption of a Creation Unit, the portfolio will receive Index Securities
and cash identical to the Portfolio Deposit required of an investor wishing to
purchase a Creation Unit that day.
The
price of ETF shares is based upon (but not necessarily identical to) the value
of the securities held by the ETF. Accordingly, the level of risk involved in
the purchase or sale of ETF shares is similar to the risk involved in the
purchase or sale of traditional common stock, with the exception that the
pricing mechanism for ETF shares is based on a basket of stocks. Disruptions in
the markets for the securities underlying ETF shares purchased or sold by the
Fund could result in losses on such shares. The existence of extreme market
volatility or potential lack of an active trading market for an ETF's shares
could result in such shares trading at a significant premium or discount to NAV.
There is no assurance that the requirements of the national securities exchanges
necessary to maintain the listing of shares of any ETF will continue to be met.
See "Investment Company Securities" above for additional information.
Closed-End
Funds
The
Fund may invest in shares of closed-end funds. Investments in closed-end funds
are subject to various risks, including reliance on management’s ability to meet
the closed-end fund’s investment objective and to manage the closed-end fund
portfolio; fluctuation in the net asset value of closed-end fund shares compared
to the changes in the value of the underlying securities that the closed-end
fund owns; and bearing a pro rata share of the management fees and expenses of
each underlying closed-end fund resulting in the Fund’s shareholders being
subject to higher expenses than if he or she invested directly in the closed-end
fund(s). See "Investment Company Securities" above for additional
information.
Real
Estate Investment Trusts (“REITs”)
The
Fund may invest in REITs. REITs are pooled investment vehicles that invest
primarily in income producing real estate or real estate related loans or
interests. REITs are generally classified as equity REITs, mortgage REITs, or a
combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
principal and interest payments. Similar to investment companies such as the
Fund, REITs are not taxed on income distributed to shareholders provided they
comply with several requirements of the Code. The Fund will indirectly bear its
proportionate share of expenses incurred by REITs in which the Fund invests in
addition to the expenses incurred directly by the Fund.
Investing
in REITs involves certain unique risks in addition to those risks associated
with investing in the real estate industry in general. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified, and are subject
to heavy cash flow dependency, default by borrowers and self-
liquidation.
Investing
in REITs involves risks similar to those associated with investing in small
capitalization companies. REITs may have limited financial resources, may trade
less frequently and in a limited volume and may be subject to more abrupt or
erratic price movements than larger company securities. Historically, small
capitalization stocks, such as REITs, have had more price volatility than larger
capitalization stocks.
REITs
are subject to the possibilities of failing to qualify for the favorable U.S.
federal income tax treatment generally available to them under the Code and
failing to maintain their exemptions from registration under the 1940 Act. REITs
(especially mortgage REITs) also are subject to interest rate risks. When
interest rates decline, the value of a REIT’s investment in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT’s investment in fixed-rate obligations can be expected to
decline. In contrast, as interest rates on adjustable-rate mortgage loans are
reset periodically, yields on a REIT’s investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing
the
value of such investments to fluctuate less dramatically in response to interest
rate fluctuations than would investments in fixed-rate obligations.
Short-Term
Investments
The
Fund may invest in any of the following securities and instruments:
Bank
Certificates of Deposit, Bankers’ Acceptances and Time Deposits.
The Fund may acquire certificates of deposit, bankers’ acceptances and time
deposits in U.S. dollar or foreign currencies. 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. These short-term instruments which the Fund may
acquire must, 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. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred if the Fund invests only in debt
obligations of U.S. domestic issuers. See “Foreign Investments” above. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located, the possible confiscation or nationalization of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
governmental restrictions which may adversely affect the payment of principal
and interest on these securities.
Domestic
banks and foreign banks are subject to different governmental regulations with
respect to the amount and types of loans that may be made and interest rates
that may be charged. In addition, the profitability of the banking industry
depends largely upon the availability and cost of funds and the interest income
generated from lending operations. General economic conditions and the quality
of loan portfolios affect the banking industry.
As
a result of federal and state laws and regulations, domestic banks are required
to maintain specified levels of reserves, limited in the amount that they can
loan to a single borrower, and are subject to regulations designed to promote
financial soundness. However, such laws and regulations may not necessarily
apply to foreign banks, thereby affecting the risk involved in bank obligations
that the Fund may acquire.
In
addition to purchasing certificates of deposit and bankers’ acceptances, to the
extent permitted under its investment strategies and policies stated above and
in the Prospectus, the Fund may invest in 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 and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
The
Fund’s investment in commercial paper and short-term notes will consist of
issues rated at the time of purchase “A-2” or higher by S&P, “Prime-1” or
“Prime-2” by Moody’s, or similarly rated by another nationally recognized
statistical rating organization or, if unrated, will be determined by the
Adviser to be of comparable quality. These rating symbols are described in
Appendix A.
Corporate
debt obligations are subject to the risk of an issuer’s inability to meet
principal and interest payments on the obligations, i.e.,
credit risk. The Adviser may actively expose the Fund to credit risk. However,
there can be no guarantee that the Adviser will be successful in making the
right selections and thus fully mitigate the impact of credit risk changes on
the Fund.
Government
Obligations
The
Fund may invest in U.S. government obligations. Such obligations include
Treasury bills, certificates of indebtedness, notes and bonds. 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.
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.
Cyber
Security Risk
Investment
companies, such as the Fund, and its service providers may be subject to
operational and information security risks resulting from cyber attacks. Cyber
attacks include, among other behaviors, stealing or corrupting data maintained
online or digitally, denial of service attacks on websites, the unauthorized
release of confidential information or various other forms of cyber security
breaches. Cyber attacks affecting the Fund, the Adviser, the Fund’s custodian or
transfer agent, or intermediaries or other third-party service providers may
adversely impact the Fund. For instance, cyber attacks may interfere with the
processing of shareholder transactions, impact the Fund’s ability to calculate
its net asset value, cause the release of private shareholder information or
confidential company information, impede trading, subject the Fund to regulatory
fines or financial losses, and cause reputational damage. In addition to
administrative, technological and procedural safeguards, the Adviser has
established business continuity plans in the event of, and risk management
systems to prevent or reduce the impact of, such cyber security incidents.
However, there are inherent limitations in such plans and systems, including the
possibility that certain risks have not been identified, as well as the rapid
development of new threats. Furthermore, the Fund has limited ability to prevent
or mitigate cyber security incidents involving third-party service providers,
and such third-party service providers may have limited indemnification
obligations to the Fund and the Adviser, and the Fund cannot control the cyber
security plans and systems put in place by their service providers or any other
third-parties whose operations may affect the Fund or its shareholders. The Fund
may also incur additional costs for cyber security risk management purposes.
While the Fund and its service providers have established business continuity
plans and risk management systems designed to prevent or reduce the impact of
cyber security
attacks,
such plans and systems have inherent limitations due in part to the
ever-changing nature of technology and cyber security attack tactics, and there
is a possibility that certain risks have not been adequately identified or
prepared for. Furthermore, the Fund cannot control any cyber security plans or
systems implemented by its service providers.
Similar
types of cyber security risks are also present for issuers of securities in
which the Fund invests, which could result in material adverse consequences for
such issuers, and may cause the Fund’s investment in such portfolio companies to
lose value.
Operational
Risk
The
Adviser and other service providers may experience disruptions or operating
errors that could negatively impact the Fund. While service providers are
required to have appropriate operational risk management policies and
procedures, their methods of operational risk management may differ from the
Fund’s in the setting of priorities, the personnel and resources available or
the effectiveness of relevant controls. The Adviser, through its monitoring and
oversight of service providers, seeks to ensure that service providers take
appropriate precautions to avoid and mitigate risks that could lead to
disruptions and operating errors. However, it is not possible for the Adviser or
the other service providers to identify all of the operational risks that may
affect the Fund or to develop processes and controls to completely eliminate or
mitigate their occurrence or effects.
Qualified
Financial Contracts.
Regulations
adopted by federal banking regulators under the Dodd-Frank Act, require that
certain qualified financial contracts (“QFCs”) with counterparties that are part
of U.S. or foreign global systemically important banking organizations be
amended to include contractual restrictions on close-out and cross-default
rights. QFCs include, but are not limited to, securities contracts, commodities
contracts, forward contracts, repurchase agreements, securities lending
agreements and swaps agreements, as well as related master agreements, security
agreements, credit enhancements, and reimbursement obligations. If a covered
counterparty of the Fund or certain of the covered counterparty's affiliates
were to become subject to certain insolvency proceedings, the Fund may be
temporarily unable to exercise certain default rights, and the QFC may be
transferred to another entity. These requirements may impact the Fund's credit
and counterparty risks.
LIBOR
Risk
LIBOR
has been used extensively in the U.S. and globally as a “benchmark” or
“reference rate” for various commercial and financial contracts, including
corporate and municipal bonds, bank loans, asset-backed and mortgage-related
securities, interest rate swaps and other derivatives. Instruments in which the
Fund invests may have historically paid interest at floating rates based on
LIBOR or have been subject to interest caps or floors based on LIBOR. The Fund
and issuers of instruments in which the Fund invests may also have also
historically obtained financing at floating rates based on LIBOR.
As
of December 31, 2021, all non-U.S. dollar LIBOR publications have been phased
out and a majority of U.S. dollar LIBOR settings will cease publication after
June 30, 2023. It is possible that a subset of LIBOR settings will be published
after these dates on a “synthetic” basis, but any such publications would be
considered non-representative of the underlying market. The U.S. Federal
Reserve, based on the recommendations of the New York Federal Reserve's
Alternative Reference Rate Committee (comprised of major derivative market
participants and their regulators), has begun publishing the forward-looking
Secured Overnight Financing Rate (“SOFR”) that is intended to replace U.S.
dollar LIBOR. Bloomberg has also begun publishing fall-backs that the
International Swaps and Derivatives Association intends to implement in lieu of
LIBOR with respect to swaps and derivatives. Proposals for alternative reference
rates for other currencies have also been announced or have already begun
publication. Markets are slowly developing in
response
to these new reference rates. Uncertainty related to the liquidity impact of the
change in rates, and how to appropriately adjust these rates at the time of
transition, poses risks for the Fund. The effect of any changes to, or
discontinuation of, LIBOR on the Fund will depend on, among other things, (1)
existing fallback or termination provisions in individual contracts and (2)
whether, how, and when industry participants develop and adopt new reference
rates and fallbacks for both legacy and new instruments and contracts.
Any
transition away from LIBOR to one or more alternative benchmark rates is complex
and could have a material adverse effect on the Fund's business, financial
condition and results of operations, including, without limitation, as a result
of any changes in the pricing and/or availability of the Fund's investments,
negotiations and/or changes to the documentation for certain of the Fund's
investments, the pace of such changes, disputes and other actions regarding the
interpretation of current and prospective loan documentation, basis risks
between investments and hedges, basis risks within investments (e.g.,
securitizations), costs of modifications to processes and systems, and/or costs
of administrative services and operations, including monitoring of recommended
conventions and benchmark rates, or any component of or adjustment to the
foregoing.
It
is not possible to predict whether there will be any further changes in the
methods pursuant to which the LIBOR rates are determined and any other reforms
to LIBOR that will be enacted in the United States, the U.K. or elsewhere, or
the effects thereof. Any such changes or further reforms to LIBOR may result in
a sudden or prolonged increase or decrease in reported LIBOR rates, which could
have a material adverse impact on the value of the Fund's investments and any
payments linked to LIBOR thereunder.
LIBOR
is likely to perform differently than in the past until the final phase-outs in
2023 and, ultimately, cease to exist as a global benchmark going forward. Until
an alternative benchmark rate(s) becomes generally accepted and regularly
implemented in the market, the uncertainty as to the future of LIBOR, its
eventual phase-out, the transition to one or more alternate benchmark rate(s),
and the implementation of such new benchmark rate(s) may impact a number of
factors, which, either alone or in the aggregate, may cause a material adverse
effect on the Fund's performance and ability to achieve its investment
objective. Such factors include, without limitation: (i) the administration
and/or management of portfolio investments, including (a) cost of funding or
other operational or administrative costs, (b) costs incurred to transition to
and implement a substitute index or benchmark rate(s) for purposes of
calculating interest, (c) costs of negotiating with counterparties with respect
to an acceptable replacement calculation and potential amendments to existing
debt instruments or credit facilities currently utilizing LIBOR to determine
interest rates, and/or (d) costs of potential disputes and/or litigation
regarding interest calculation, loan value, appropriateness or comparability of
any new benchmark rate(s) or any other dispute over terms relating to or arising
from any of the foregoing; (ii) the availability (or lack thereof) of potential
investments in the market during the transition period; (iii) the time periods
necessary to make investments and deploy capital during the transition period;
(iv) the calculation and value of investments and overall cash flows,
profitability and performance; (v) the liquidity of investments in the secondary
market or otherwise, and the asset-liability management strategies available;
(vi) basis risks between investments and hedges and basis risks within
investments (e.g., securitizations); or (vii) any mismatch, during a transition
period or otherwise, between a benchmark rate used for leverage facilities and
another used for one or more of the Fund's investments.
TEMPORARY
INVESTMENTS
The
Fund may take temporary defensive measures that are inconsistent with the Fund’s
normal fundamental or non-fundamental investment policies and strategies in
response to adverse market, economic, political, or other conditions as
determined by the Adviser. Such measures could include, but are not limited to,
investments in (1) highly liquid short-term fixed income securities issued
by or on behalf of municipal or corporate issuers, obligations of the U.S.
government and its agencies, commercial paper, and bank certificates of deposit;
(2) repurchase agreements involving any such securities; and (3) other
money market instruments. The Fund also may invest in shares of money market
mutual funds to the extent permitted under
applicable
law. Money market mutual funds are investment companies, and the investments in
those companies by the Fund are in some cases subject to certain fundamental
investment restrictions. As a shareholder in a mutual fund, the Fund will bear
its ratable share of its expenses, including management fees, and will remain
subject to payment of the fees to the Adviser, with respect to assets so
invested. The Fund may not achieve its investment objectives during temporary
defensive periods.
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 higher transaction costs and may result in a greater number of taxable
transactions. To the extent net short-term capital gains are realized, any
distributions resulting from such gains will generally be taxed at ordinary
income tax rates for federal income tax purposes.
The
Fund’s portfolio turnover rates for the following fiscal years:
|
|
|
|
|
|
|
|
| |
| Portfolio
turnover rate for: |
Fiscal
Year Ended December 31, 2022 |
Fiscal
Year Ended December 31, 2021 |
| The
Spin-Off Fund |
4% |
1% |
MANAGEMENT
OF THE FUND
Board
of Directors
The
management and affairs of the Fund is supervised by the Board of Directors of
the Company. The Board consists of eight individuals, five of whom are not
“interested persons” of the Company as that term is defined in the 1940 Act
(“Independent Directors). The Board establishes policies for the operation of
the Fund and appoints the officers who conduct the daily business of the Fund.
The Board has appointed Mr. Jay Kesslen, of the Adviser, as their
Anti-Money Laundering Officer.
The
Board believes that each of the Director’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of
the other Directors lead to the conclusion that each Director should serve in
such capacity. Among the attributes common to all Directors is the ability to
review critically, evaluate, question and discuss information provided to them,
to interact effectively with the other Directors, the Adviser, other service
providers, counsel and the independent registered public accounting firm, and to
exercise effective business judgment in the performance of their duties as
Directors. A Director’s ability to perform his duties effectively may have been
attained through the Director’s business, consulting, public service and/or
academic positions; experience as a board member of the Company, other
investment funds, or non-profit entities or other organizations; education or
professional training; and/or other life experiences. In addition to these
shared characteristics, specific details regarding each Director’s principal
occupations during the past five years are included in the table
below.
Officers
and Directors of the Company are listed below with their ages, addresses,
present positions with the Company and principal occupations over at least the
last five years. Each Director may be contacted by writing to the Director c/o
Kinetics Mutual Funds, Inc., 470 Park Avenue South New York, New York
10016.
Independent
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name,
Address and Age |
Position(s)
Held with Company |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past Five Years |
#
of Portfolios in Fund Complex(1)
Overseen by Director |
Other
Directorships Held by Director(2) |
Steven
T. Russell (59)
c/o Horizon Kinetics Asset Management LLC
470 Park
Avenue South
New York, New York 10016 |
Independent
Director |
Indefinite/
22
years |
Professor
of Business Law, Suffolk County Community College (1997 to Present);
Lawyer, Private Practice (2010 to present). |
13 |
N/A |
Douglas
Cohen, CPA (61)
c/o Horizon Kinetics Asset Management LLC
470 Park
Avenue South
New York, New York 10016 |
Independent
Director |
Indefinite/
22
years |
Chief
Financial Officer, Sunrise Credit Services, Inc. (2005 to
present). |
13 |
N/A
|
William
J. Graham (61)
c/o Horizon Kinetics Asset Management LLC
470 Park
Avenue South
New York, New York 10016 |
Independent
Director |
Indefinite/
22
years |
Attorney,
William J. Graham, PC (2001 to present); Assistant Town Attorney, Town of
Islip (2016 to 2021). |
13 |
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name,
Address and Age |
Position(s)
Held with Company |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past Five Years |
#
of Portfolios in Fund Complex(1)
Overseen by Director |
Other
Directorships Held by Director(2) |
Joseph
E. Breslin (69)
c/o Horizon Kinetics Asset Management LLC
470 Park
Avenue South
New York, New York 10016 |
Independent
Director |
Indefinite/
22
years |
Counsel,
White Oak Global Advisors, LLC (2016 to present); J.E. Breslin & Co. –
Consulting (2010 to 2016). |
13 |
Trustee,
Forethought Variable Insurance Trust (23 portfolios); Trustee, BluArc
Multi-Strategy Fund (2014-2017); Chairman and Trustee, Northern Lights
Fund Trust IV (21 portfolios); Trustee, Hatteras Alternative Mutual Funds
Trust (5 portfolios) (2004-2016); Trustee, Underlying Funds Trust (5
portfolios) (2004-2016); Trustee, Director, Hatteras Master Fund, L.P.
(2013-2016); Director, Hatteras Core Alternatives TEI Fund, L.P.
(2013-2016); Director, Hatteras Core Alternatives Fund, L.P. (2013-2016);
Director, Hatteras Core Alternatives Institutional Fund, L.P. (2013-2016);
and Director, Hatteras Core Alternatives TEI Institutional Fund, L.P.
(2013-2016). |
James
M. Breen (64)
c/o Horizon Kinetics Asset Management LLC
470 Park
Avenue South
New York, New York 10016 |
Independent
Director |
Indefinite/
14 years |
Security
Consultant and Licensed Florida Private Investigator (2019 to present);
Special Agent, Florida Department of Law Enforcement (FDLE) (2015 to
2019); Vice President, HBES Consulting, Inc. (2014 to present); Citibank,
Senior AML Analyst (2014-2015); Senior Special Agent, Homeland Security
Investigations, Miami, FL (2011 to 2014); Assistant Attaché Immigration
& Customs Enforcement, Pretoria, South Africa (2008 to
2011). |
13 |
N/A |
Interested
Directors & Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name,
Address and Age |
Position(s)
Held with the Company |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past Five Years |
#
of Portfolios in Fund Complex(1)
Overseen by Director |
Other
Directorships
Held
by Director(2) |
|
Murray
Stahl(3)
(69)
c/o
Horizon Kinetics Asset Management LLC
470
Park Avenue South
New
York, New York 10016 |
Director
& Secretary |
Indefinite/
22
years |
Chairman,
FRMO
Corp. (2001 to present) (provides consulting services to private
investment funds and research services with respect to marketable
securities); Chairman and Chief Investment Officer, Horizon Kinetics LLC,
(including Horizon Asset Management LLC (investment adviser) (1994 to
present); Kinetics Asset Management LLC and Kinetics Advisers, LLC (2000
to 2019); CEO, Horizon Kinetics LLC (2015 to present). |
13 |
Director
and Officer of RENN Fund, Inc. (closed end investment company)
(2017-present). |
|
Peter
B. Doyle(3)
(60)
c/o
Horizon Kinetics Asset Management LLC
470
Park Avenue South
New
York, New York 10016 |
Director
President & Chairman of the Board |
Indefinite/
20
years |
Vice
President, Horizon Asset Management LLC (1997-2011); Vice President, FMRO
Corp. (2001 to present) (provides consulting services to private
investment funds and research services with respect to marketable
securities); Managing Director, Horizon Kinetics LLC (including Horizon
Asset Management LLC (an SEC-registered investment adviser) (1994 to
present); Kinetics Asset Management LLC and Kinetics Advisers LLC (2000 to
2019)); and President of Kinetics Mutual Funds, Inc. (1998 to
present). |
13 |
Director
and Officer, FRMO Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name,
Address and Age |
Position(s)
Held with the Company |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past Five Years |
#
of Portfolios in Fund Complex(1)
Overseen by Director |
Other
Directorships
Held
by Director(2) |
|
Leonid
Polyakov(3)
(64)
c/o
Horizon Kinetics Asset Management LLC
470
Park Avenue South
New York, New York 10016 |
Director
& Treasurer |
Indefinite/
20
years |
CFO,
Kinetics Asset Management LLC (2000 to 2011); CFO and FINOP, Kinetics
Funds Distributor LLC (2002 to 2011); Director, Kinetics Advisers, LLC
(2000 to 2011). |
13 |
N/A |
(1) The
term “fund complex” refers to the Company and the Kinetics Portfolios Trust, a
separate registered investment company that has the Adviser in common with the
Company.
(2) “Other
Directorships Held” includes only directorships of companies required to
register or file reports with the SEC under the Securities Exchange Act of 1934,
as amended, (that is, “public companies”) or investment companies registered
under the 1940 Act.
(3) Directors
who are considered “interested persons” as defined in Section 2(a)(19) of the
1940 Act because of their association with the Adviser and its
affiliates.
Officers
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address and Age |
Position(s)
Held with the Company |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past Five Years |
Andrew
M. Fishman (73)
c/o Horizon Kinetics Asset Management LLC
470 Park
Avenue South
New York, New York 10016 |
Chief
Compliance Officer |
Indefinite/18
years |
Associate
General Counsel, Horizon Kinetics LLC (2011 to present); General Counsel,
Horizon Asset Management, Inc. (1997 to 2011); Secretary, Horizon Asset
Management, Inc. (2006 to 2011); Chief Compliance Officer, Kinetics Asset
Management, Inc. (1999 to 2011); Chief Compliance Officer, Kinetics
Advisers, LLC (2000 to 2011). |
Jay
H. Kesslen (50)
c/o Horizon Kinetics Asset Management LLC
470 Park
Avenue South
New York, New York 10016 |
Vice
President and Assistant Secretary |
Indefinite/18
years |
General
Counsel, Horizon Kinetics LLC (including Horizon Asset Management LLC (an
SEC-registered investment adviser) (2011 to present), Chief Compliance
Officer, Horizon Kinetics LLC (2015-2016), Kinetics Asset Management LLC
(2000 to present), Kinetics Advisers LLC (2000 to 2019), Kinetics Funds
Distributor LLC (2000 to present), KBD Securities LLC (2000 to present);
FRMO Corp. (2014 to present); Chief Compliance Officer, RENN Fund, Inc.
(2017 to present). |
Leadership
Structure and Oversight Responsibilities
Overall
responsibility for oversight of the Fund rests with the Board of Directors of
the Company. The Company, on behalf of the Fund, has engaged the Adviser to
manage the Fund on a day-to-day basis. The Board is responsible for overseeing
the Adviser and other service providers in the operations of the Fund in
accordance with the provisions of the 1940 Act, applicable provisions of state
and other laws and the Company’s Articles of Incorporation and By-laws. The
Board meets in-person at regularly scheduled meetings four times each year. In
addition, the Board may hold special in-person or telephonic meetings or
informal conference calls to discuss specific matters that may arise or require
action between regular meetings. The Independent Directors have also engaged
independent legal counsel to assist them in performing their oversight
responsibility. The Independent Directors meet with their independent legal
counsel in-person during each quarterly in-person board meeting. As described
below, the Board has established an Audit Committee and a Pricing Committee, and
may establish ad hoc committees or working groups from time to time to assist
them in fulfilling their oversight responsibilities.
The
Board has appointed Peter B. Doyle, an interested Director, to serve in the role
of Chairman. The Chairman’s role is to preside at all meetings of the Board and
to act as liaison with the Company’s service providers, counsel and other
Directors generally between meetings. The Chairman may also perform such other
functions as may be delegated by the Board from time to time. The Board does not
have a lead independent Director. The Board has determined that the Board’s
leadership structure is appropriate because it allows the Board to exercise
informed and independent judgment over matters under its purview and it
allocates areas of responsibility among committees of Directors and the full
Board in a manner that enhances effective oversight.
The
Fund is subject to a number of risks, including investment, compliance,
operational and valuation risks, among others. Risk oversight forms part of the
Board’s general oversight of the Company and is addressed as part of various
Board and committee activities. Day-to-day risk management functions are
subsumed within the responsibilities of the Adviser and other service providers
(depending on the nature of the risk), which carry out the Fund’s investment
management and business affairs. The Adviser and other service providers employ
a variety of processes, procedures and controls to identify various events or
circumstances that give rise to risks, to lessen the probability of their
occurrence and/or to mitigate the effects of such events or circumstances if
they do occur. The Adviser and other service providers have their own
independent interests in risk management, and their policies and methods of risk
management will depend on their functions and business models. The Board
recognizes that it is not possible to identify all of the risks that may affect
the Fund or to develop processes and controls to eliminate or mitigate their
occurrence or effects. The Board requires senior officers of the Company,
including the President, Treasurer and Chief Compliance Officer, and the
Adviser, to report to the full Board on a variety of matters at regular and
special meetings of the Board, including matters relating to risk management.
The Board and the Audit Committee also receive regular reports from the
Company’s independent registered public accounting firm on internal control and
financial reporting matters. The Board also receives reports from certain of the
Company’s other primary service providers on a periodic or regular basis,
including the Company’s custodian, distributor and administrator. The Board may,
at any time and in its discretion, change the manner in which it conducts risk
oversight.
Board
Committees
The
Board has two standing committees as described below:
|
|
|
|
|
|
|
|
| |
| Audit
Committee |
| Members |
Description |
#
of Meetings during Past Fiscal Year |
James
M. Breen
Joseph E. Breslin
Douglas Cohen, CPA*
William J.
Graham
Steven T. Russell |
Responsible
for advising the full Board with respect to accounting, auditing and
financial matters affecting the Fund. |
The
Committee met 2 times during the year ended December 31, 2022.
|
|
|
|
|
|
|
|
|
| |
| Pricing
Committee |
| Members |
Description |
#
of Meetings during Past Fiscal Year |
James
M. Breen
Joseph E. Breslin*
Douglas Cohen, CPA
William J.
Graham
Steven T. Russell
|
Responsible
for (1) monitoring the valuation of the Fund’s securities and other
investments; and (2) as required by the Fund’s valuation policies, when
the full Board is not in session, determining the fair value of illiquid
and other holdings after consideration of all relevant factors, which
determinations shall be reported to the full Board. |
The
Committee met 2 times during the year ended December 31,
2022. |
*
Designates the Chairperson of the respective Committee.
Board
Interest in the Fund
As
of December 31, 2022, the Directors owned the following amounts in the Fund and
in all of the Funds overseen by the Directors:
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
of Director |
Dollar
Range of Equity Securities in the Fund |
Aggregate
Dollar Range of Equity Securities in All Funds/Portfolios Overseen by
Director |
|
INDEPENDENT
DIRECTORS |
| Steven
T. Russell |
None |
None |
| Douglas
Cohen, CPA |
None |
Over
$100,000 |
| William
J. Graham |
None |
$50,0001-$100,000 |
| Joseph
E. Breslin |
None |
Over
$100,000 |
| James
M. Breen |
None |
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
of Director |
Dollar
Range of Equity Securities in the Fund |
Aggregate
Dollar Range of Equity Securities in All Funds/Portfolios Overseen by
Director |
|
INTERESTED
DIRECTORS |
| Murray
Stahl |
Over
$100,000 |
Over
$100,000 |
| Leonid
Polyakov |
None |
Over
$100,000 |
| Peter
B. Doyle |
None |
Over
$100,000 |
Compensation
For
their service as Directors of the Company, the Independent Directors receive an
aggregate fee of $50,000 per year and $3,750 per Board meeting attended, with an
additional $2,000 for each Pricing and/or Audit Committee meeting attended, as
well as reimbursement for expenses incurred in connection with attendance
at
such meetings. In addition, each Committee Chairman of the Company (such as the
Audit Committee or Pricing Committee) receives an additional fee of $5,000 per
year for his service as chairman.
Prior
to January 1, 2022, the Independent Directors received an aggregate fee of
$30,000 per year and $3,000 per Board meeting attended, with an additional
$2,000 for each Pricing and/or Audit Committee meeting attended, as well as
reimbursement for expenses incurred in connection with attendance at such
meetings. In addition, each Committee Chairman of the Company received an
additional fee of $5,000 per year for his service as chairman.
The
“interested persons” who serve as Directors of the Company receive no
compensation for their service as Directors. None of the executive officers
receive compensation from the Fund except the Company’s Chief Compliance
Officer. The following table provides compensation information for the Directors
for the year-ended December 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Position |
Aggregate
Compensation From Fund |
Pension
or Retirement Benefits Accrued as Part of Fund/Portfolio
Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from Fund and Fund Complex Paid to Directors
(2) |
|
Interested
Directors/Trustees |
| |
|
Murray
Stahl(1) |
None |
None |
None |
None |
|
Peter
B. Doyle(1) |
None |
None |
None |
None |
|
Leonid
Polyakov(1) |
None |
None |
None |
None |
|
Independent
Directors/Trustees |
| |
|
Steven
T. Russell |
None |
None |
None |
$50,000 |
|
Douglas
Cohen, CPA |
None |
None |
None |
$55,000 |
|
William
J. Graham |
None |
None |
None |
$50,000 |
|
Joseph
E. Breslin |
None |
None |
None |
$55,000 |
|
James
M. Breen |
None |
None |
None |
$50,000 |
(1)“Interested
person” as defined under the 1940 Act.
(2)Includes
compensation paid by Kinetics Portfolios Trust.
Control
Persons and Principal Holders of Securities
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of any class of the Fund as of March 31, 2023. 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. Shareholders with a controlling interest could affect the outcome of
voting or the direction of management of the Fund. For all control persons that
are companies, the parent company and jurisdiction under which the control
person is organized is also provided.
The
Kinetics Spin-Off and Corporate Restructuring Fund (No
Load Shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
|
Janet
H. Murdock IRA
US
Bank NA Cust
Horizon
Kinetics LLC
470
Park Ave South 3rd
Floor
New
York, NY 10016-6957 |
N/A |
N/A |
52.80% |
Beneficial |
|
Mark
L. Murdock IRA
US
Bank NA Cust
Horizon
Kinetics LLC
470
Park Ave South 3rd
Floor
New
York, NY 10016-6957 |
N/A |
N/A |
29.67% |
Beneficial |
|
Horizon
Kinetics LLC
ATTN
Jonathan Kohen
470
Park Ave South 3rd
Floor
New
York, NY 10016-6957 |
N/A |
NY |
17.53% |
Beneficial |
The
Kinetics Spin-Off and Corporate Restructuring Fund (Advisor
Class A Shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
UBS
WM USA
Spec Cdy A/C EBOC UBSFSI
1000 Harbor Boulevard, 8th
Floor
Weehawken, NJ 07086-6761 |
UBS
Americas Inc. |
DE |
37.26% |
Record |
Morgan
Stanley Smith Barney LLC
For the Exclusive Benefit of its
Customers
1 New York Plaza, Floor 12
New York, NY
10004-1901 |
N/A |
N/A |
22.89% |
Record |
|
Kenneth
R. Fisher IRA
c/o
Horizon Kinetics LLC
470 Park Avenue South 3rd
Floor
New York, NY 10016-6957 |
N/A |
N/A |
6.49% |
Beneficial |
National
Financial Services, LLC
499 Washington Boulevard Fl 4th
Jersey City,
NJ 07310-1995 |
N/A |
N/A |
4.92% |
Record |
The
Kinetics Spin-Off and Corporate Restructuring Fund (Advisor
Class C Shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
Wells
Fargo Clearing Services LLC
Special Custody Acct for the
Exclusive
Benefit of Customer
2801 Market Street
Saint Louis, MO
63103-2523 |
Wells
Fargo Advisors, LLC |
DE |
43.61% |
Record |
UBS
WM USA
Spec Cdy A/C EBOC UBSFSI
1000 Harbor Boulevard, 8th
Floor
Weehawken, NJ 07086-6761 |
UBS
Americas Inc. |
DE |
23.05% |
Record |
Robert
W. Baird & Company Inc.
777 E. Wisconsin Avenue
Milwaukee, WI
53202-5300 |
N/A |
N/A |
10.66% |
Record |
National
Financial Services, LLC
499 Washington Boulevard
Jersey City, NJ
07310-1995 |
N/A |
N/A |
8.75% |
Record |
|
RJ
Trust Co NH - Custodian
Fbo
Dorothy E. Kostro Rira
470
Park Avenue South 3rd
Floor
New York, NY 10016-6957 |
N/A |
N/A |
6.69% |
Record |
The
Kinetics Spin-Off and Corporate Restructuring Fund (Institutional
Shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
|
UBS
WM USA
Spec
Cdy A/C EBOC UBSFSI
1000
Harbor Boulevard, 8th
Floor
Weehawken,
NJ 07086 |
UBS
Americas Inc. |
DE |
41.05% |
Record |
|
National
Financial Services, LLC
499
Washington Boulevard Fl 4th
Jersey
City, NJ 07310-1995 |
Fidelity
Global Brokerage Group, Inc. |
DE |
35.03% |
Record |
Charles
Schwab & Co., Inc.
Special Custody A/C FBO Customers
Attn Mutual
Funds
211 Main Street
San Francisco, CA 94105-1901 |
N/A |
N/A |
8.62% |
Record |
Management
Ownership
As
of December 31, 2022, the Directors and officers of the Company as a group
owned 22.17% of the outstanding shares of the No Load Class of the Fund.
Furthermore, neither the Independent Directors, nor members of their immediate
families, own securities beneficially or of record in the Adviser, the Fund’s
distributor, KFD, or any of their respective affiliates.
PROXY
VOTING POLICIES
The
Company, on behalf of the Fund, has delegated the voting of portfolio securities
to the Adviser. The Adviser has adopted policies and procedures for the voting
of proxies on behalf of client accounts, including the Fund, for which the
Adviser has voting discretion. Pursuant to these policies and procedures, the
Adviser’s guiding principles in voting proxies is to ensure that the manner in
which proxies are voted is in the best interest of its clients and the value of
the investment. To this end, an independent third party proxy service,
Institutional Shareholder Services Inc. (“ISS”), has been retained by the
Adviser for their fundamental research on the proxy question and subsequent
recommendations. Proxies are voted by ISS in accordance with their proxy voting
guidelines with the intent of serving the best interests of the Adviser’s
clients.
ISS
will inform the Adviser’s proxy administrator of any proxies that do not fall
within the adopted guidelines. The Adviser’s proxy administrator will send the
proxies in question to the portfolio manager for review, documentation of vote
rationale, and signature. In the event the designated portfolio manager is
unavailable, the proxy will be forwarded to the Chief Investment Strategist for
execution.
ISS
also updates and revises the Guidelines on a periodic basis, and the revisions
are reviewed by the Adviser to determine whether they are consistent with the
Adviser’s guiding principles. ISS also assists the Adviser in the proxy voting
process by providing operational, recordkeeping and reporting
services.
The
Adviser is responsible for reviewing its relationship with ISS and for
evaluating the quality and effectiveness of the various services provided by
ISS. The Adviser may hire other service providers to replace or supplement ISS
with respect to any of the services the Adviser currently receives from
ISS.
The
Adviser has implemented procedures that are intended to prevent conflicts of
interest from influencing proxy voting decisions. These procedures include the
Adviser’s use of ISS as an independent third party and a review and approval
process for individual decisions that do not follow ISS
recommendations.
More
Information
The
Fund’s actual voting records relating to portfolio securities during the most
recent 12‑month period ended June 30 is available without charge, upon
request by calling toll-free at 1-800-930-3828 or by accessing the SEC’s website
at www.sec.gov. In addition, a copy of the Adviser’s proxy voting policies and
procedures are also available on the Fund’s website at www.kineticsfunds.com or
by calling toll-free at 1‑800-930-3828 and will be sent within three business
days of receipt of a request.
INVESTMENT
ADVISER
The
Adviser, Horizon Kinetics Asset Management LLC, serves as investment advisor to
the Fund pursuant to an investment advisory agreement with the Company (the
“Advisory Agreement”). Horizon Kinetics Asset Management LLC, is located at 470
Park Avenue South New York, New York 10016.
Under
the Advisory Agreement, the Adviser furnishes investment advice to the Fund by
continuously reviewing the securities portfolios and recommending to the Fund to
what extent securities should be purchased or sold. Pursuant to the Advisory
Agreement, the Adviser:
(1)renders
research, statistical and advisory services to the Fund;
(2)makes
specific recommendations based on the Fund’s investment requirements;
and
(3)pays
the salaries of those of the Fund’s employees who may be officers or directors
or employees of the Adviser.
The
Advisory Agreement continues on a year-to-year basis provided that specific
approval is voted at least annually by the Board of Directors by the vote of the
holders of a majority of the outstanding voting securities of the Fund, as
applicable. In either event, it must also be approved by a majority of the
Directors of the Company who are neither parties to the Advisory Agreement nor
“interested persons” of the Company as defined in the 1940 Act at a meeting
called for the purpose of voting on such approval. The Adviser’s investment
decisions are made subject to the direction and supervision of the Board of
Directors. The Advisory Agreement may be terminated at any time, without the
payment of any penalty, by the Board of Directors or by vote of a majority of
the outstanding voting securities of the Fund. Ultimate decisions as to the
Fund’s investment policies are made by the Fund’s officers and the
Directors.
A
discussion regarding the basis for the Board of Directors’ approval of the
investment advisory agreement for the Fund is available in the Fund’s
semi-annual report to shareholders.
Advisory
Fees
In
consideration of the services to be provided by the Adviser pursuant to the
Advisory Agreement, for services rendered by the Adviser under the Advisory
Agreement, the Fund pays the Adviser a fee, payable monthly, in an annual amount
equal to 1.00% of the Fund’s average daily net assets.
The
Fund paid the following advisory fees to the Adviser for the fiscal years ended
December 31, 2020, 2021 and 2022:
|
|
|
|
|
|
|
|
|
|
|
| |
|
Period |
Advisory
Fee
Accrued |
Advisory
Fee Reduced or Reimbursed |
Advisory
Fee Retained by Adviser |
| For
the year ended December 31, 2020 |
$156,573 |
$115,185 |
$41,388 |
| For
the year ended December 31, 2021 |
$252,827 |
$106,965 |
$145,862 |
| For
the year ended December 31, 2022 |
$277,034 |
$107,775 |
$169,259 |
The
Adviser has contractually agreed to waive its fees and/or pay for operating
expenses of the Fund to ensure that the total annual fund operating expenses
(excluding, as applicable, front-end or contingent deferred loads, taxes,
leverage interest, brokerage commissions, acquired fund fees and expenses (as
determined in accordance with Form N-1A), expenses incurred in connection with
any merger or reorganization and extraordinary expenses such as litigation
expenses) do not exceed 1.50%, 2.25%, 1.25% and 1.45% of the average daily net
assets of the Advisor Class A Shares, Advisor Class C Shares, Institutional
Class and No Load Class Shares, respectively. This agreement is in effect until
April 30, 2024, and may be terminated before that date only by the
Company’s Board of Directors. The Fund’s advisor is permitted to seek
reimbursement from the Fund for a period ending three full fiscal years after
the date of the waiver or payment.
Any
reduction in advisory fees or payment of the Fund’s expenses made by the Advisor
in a fiscal year may be reimbursed by the Fund for a period ending three full
fiscal years after the date of reduction or payment if the Advisor so requests.
This reimbursement may be requested from the Fund if the aggregate amount of
operating expenses for a fiscal year, as accrued each month, does not exceed the
lesser of (a) the limitation on Fund expenses in effect at the time of the
relevant reduction in advisory fees or payment of the Fund’s expenses, or (b)
the limitation on Fund expenses at the time of the request. However, the
reimbursement amount may not exceed the total amount of fees waived and/or Fund
expenses paid by the Adviser and will not include any amounts previously
reimbursed to the Adviser by the Fund. Any such reimbursement is contingent upon
the Board of Directors’ subsequent review of the reimbursed amounts. The Fund
must pay current ordinary operating expenses before the Adviser is entitled to
any reimbursement of fees and/or Fund expenses.
Fees
of the custodian, administrator, fund accountant and transfer agent are paid by
the Fund as more fully described below. The Fund pays all other expenses,
including:
•fees
and expenses of directors not affiliated with the Adviser;
•legal
and accounting fees;
•interest,
taxes, and brokerage commissions; and
•record
keeping and the expense of operating its offices.
Portfolio
Managers
Investment
Professionals for the Adviser
The
Fund is managed by Steven M. Bregman and Murray Stahl.
As
of December 31, 2022 information on other accounts managed by the Fund’s
portfolio managers is as follows:
Steven
M. Bregman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Category
of Account |
Total
Number of Accounts Managed |
Total
Assets in Accounts Managed
(in Millions) |
Number
of Accounts for which Advisory Fee is Based on Performance |
Assets
in Accounts for which Advisory Fee is Based on Performance
(in
Millions) |
| Other
Registered Investment Companies |
0 |
$0 |
0 |
$0 |
| Other
Pooled Investment Vehicles |
0 |
$0 |
3 |
$474.29 |
| Other
Accounts |
691 |
$1,113.26 |
1 |
$0.19 |
Murray
Stahl
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Category
of Account |
Total
Number of Accounts Managed |
Total
Assets in Accounts Managed
(in Millions) |
Number
of Accounts for which Advisory Fee is Based on Performance |
Assets
in Accounts for which Advisory Fee is Based on Performance
(in
Millions) |
| Other
Registered Investment Companies |
2 |
$245.63 |
0 |
$0 |
| Other
Pooled Investment Vehicles |
0 |
$0 |
16 |
$1114.98 |
| Other
Accounts |
639 |
$1,641.78 |
36 |
$54.11 |
Performance
fee accounts are subject to the same allocation principles and the same
supervisory review.
Compensation
Portfolio
Managers are compensated with a base salary and bonus. The base salary is a
fixed amount. Bonuses are subjective and are not tied to performance of the
Fund, but instead are based on the overall contribution to the Adviser. The
Portfolio Managers also have access to a 401(k) retirement plan. Additionally,
certain Portfolio Managers are also equity owners of the Adviser.
Material
Conflicts of Interest
The
portfolio managers are responsible for managing the Fund, as well as other
accounts. A portfolio manager may manage a separate account or other pooled
investment vehicle that may have a materially higher or lower fee arrangement
than the Fund or that may have a performance fee arrangement. The side-by-side
management of these accounts may raise potential conflicts of interest relating
to cross trading, the allocation of investment opportunities and the aggregation
and allocation of trades. In addition, while portfolio managers generally only
manage accounts with similar investment strategies, it is possible that due to
varying investment restrictions among accounts and for other reasons that
certain investments could be made for some accounts and not others or
conflicting investment positions could be taken among accounts. The Adviser has
a fiduciary responsibility to manage all client accounts in a fair and equitable
manner. The Adviser seeks to provide best execution of all securities
transactions and aggregates and then allocates securities to client accounts in
a fair and timely manner. To this end, the Adviser has developed policies and
procedures designed to mitigate and manage the potential conflicts of interest
that may arise from side-by-side management.
Ownership
of the Fund by Portfolio Managers
The
following chart sets forth the dollar range of shares owned by each portfolio
manager in the Fund as of December 31, 2022:
|
|
|
|
|
| |
|
Name
of Portfolio Manager |
Dollar
Range of Fund shares owned
(None, $1-$10,000, $10,001-$50,000,
$50,001-$100,000, $100,001 - $500,000,
$500,001 -$1,000,000, Over
$1,000,000) |
| Steven
Bregman |
None |
| Murray
Stahl |
$100,001
- $500,000 |
SHAREHOLDER
SERVICING
The
Adviser has entered into shareholder servicing agreements with the Fund under
which the Adviser may perform, or arrange for others to perform, certain
shareholder servicing functions. The Adviser has entered into written agreements
with shareholder servicing agents that perform shareholder services on behalf of
their clients who own shares of the Fund. For these shareholder servicing
functions, the Adviser and/or shareholder servicing agents are entitled to
receive an annual shareholder servicing fee in the amount of 0.25% of the
average daily net assets for each of the No Load Class and Advisor Class A of
the Fund and 0.20% of the average daily net assets of the Institutional Class of
the Fund. The Adviser has contractually agreed to waive and/or reimburse a
portion of the shareholder servicing fee with respect to the Institutional Class
in excess of 0.05% of the average daily net assets of the Institutional Class
until at least May 1, 2024. The Adviser and/or its affiliates may pay additional
compensation from time to time, out of their respective assets and not as an
additional charge to the Fund, to selected shareholder servicing agents and
other persons in connection with providing services to shareholders of the Fund.
During
the fiscal years ended December 31, 2022, 2021, and 2020, the Fund shareholder
servicing fees were as follows:
|
|
|
|
|
|
|
|
|
|
|
| |
| Shareholder
Servicing Fees |
2022 |
2021 |
2020 |
|
Spin-off
Fund(1) |
$ |
59,616 |
| $ |
54,176 |
| $ |
33,819 |
|
(1) The
Adviser waived shareholder servicing fees in the amount of $28,925, $27,094, and
$15,973, for the Institutional Class of the Spin-Off Fund for the fiscal years
ended December 31, 2022, 2021, and 2020, respectively.
ADMINISTRATIVE
SERVICES
U.S.
Bancorp Fund Services, LLC doing business as U.S. Bank Global Fund Services
(“Fund Services”), located at 615 East Michigan Street, Milwaukee, Wisconsin
53202, serves as Administrator of the Fund. The Administrator is entitled to
receive annual fees, payable monthly, based on the Fund’s average net
assets.
Administrative
services include, but are not limited to, providing office space, equipment,
telephone facilities, various personnel, including clerical and supervisory, and
computers, as is necessary or beneficial to:
•establish
and maintain shareholders’ accounts and records,
•process
purchase and redemption transactions,
•process
automatic investments of client account cash balances,
•answer
routine client inquiries regarding the Fund,
•assist
clients in changing dividend options,
•account
designations, and addresses, and
•providing
such other services as the Fund may reasonably request.
During
the fiscal years ended December 31, 2022, 2021, and 2020, the amounts payable by
the Fund to Fund Services for administrative services were as
follows:
|
|
|
|
|
|
|
|
|
|
|
| |
|
Administrative
Services Fees |
2022 |
2021 |
2020 |
| Spin-off
Fund |
$ |
22,697 |
| $ |
23,134 |
| $ |
19,769 |
|
Fund
Services also serves as the Fund’s accountant and transfer agent. As such, Fund
Services provides certain shareholder services and record management services
and acts as the Fund’s dividend disbursement agent.
Distributor
Kinetics
Funds Distributor LLC, 470 Park Avenue South, New York, New York 10016, is the
distributor of the Fund’s shares. KFD is a registered broker-dealer and member
of the Financial Industry Regulatory Authority, Inc. and an affiliate of the
Adviser.
The
Distributor was paid the following commissions on sales of Advisor Class A
shares during the last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund |
2022 |
2021 |
2020 |
| Spin-off
Fund |
$ |
4,281 |
| $ |
114 |
| $ |
6 |
|
|
|
|
| |
The
Distributor retained the commissions on sales of Advisor Class A shares during
the last three fiscal years.
Distribution
Plans
The
Company, on behalf of the Fund, has adopted separate Distribution Plans pursuant
to Rule 12b-1 promulgated by the SEC pursuant to the 1940 Act (the “Plans”) for
each of the Advisor Class A and Advisor Class C shares. Under the Advisor Class
A Plan, Advisor Class A shares may pay up to an annual rate of 0.25% of the
average daily net asset value (“NAV”) of such shares to the Distributor or other
qualified recipient under the Plan. Under the Advisor Class C Plan, Advisor
Class C shares may pay an annual rate of 1.00% of the average daily NAV of
Advisor Class C shares to the Distributor. The Plans were adopted to facilitate
the sale of a sufficient number of shares to allow the Fund to achieve economic
viability.
The
Plan for the Advisor Class A shares is a “reimbursement” Plan that provides the
Company the ability to use assets of the Fund to reimburse KFD and other
qualified recipients (e.g.,
securities dealers, financial institutions and other industry professionals) for
any expenses incurred in connection with any activity that is principally
intended to result in the sale of the Fund’s shares subject to the Plan up to
0.25% of average daily net assets. The Plan for Advisor Class C shares is a
“compensation” type plan that provides the Company with the ability to use
assets of the Fund to pay KFD and other qualified recipients (e.g.,
securities dealers, financial institutions and other industry professionals)
fees in the amount of 1.00% of average daily net assets to finance any activity
that is principally intended to result in the sale of the Fund’s shares subject
to the Plan.
Activities
covered by the Plans include:
•the
advertising and marketing of shares of the Fund covered by the
Plans;
•preparing,
printing, and distributing Prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and
•implementing
and operating the Plans.
The
Plans must be renewed annually by the Board of Directors, including a majority
of the Directors who have no direct or indirect financial interest in the
operation of the Plans (as used in this section, “Independent Directors”), cast
in person at a meeting called for that purpose. As long as the Plans are in
effect, the Independent Directors must select and nominate other Independent
Directors.
The
Plans and any related agreements may not be amended to materially increase the
amounts to be spent for distribution expenses without approval by a majority of
the Fund’s outstanding shares covered by the Plans. All material amendments to
the Plans or any related agreements must be approved by a vote of the
Independent Directors, cast in person at a meeting called for the purpose of
voting on any such amendment.
KFD
is required to report in writing to the Board of Directors, at least quarterly,
on the amounts and purpose of any payments made under the Plans. KFD is also
required to furnish the Board of Directors with such other information as may
reasonably be requested in order to enable the Directors to make an informed
determination of whether the Plans should be continued.
Pursuant
to the Plans, during the fiscal year ended December 31, 2022, the Advisor
Class A and Advisor Class C shares accrued the following fees:
Advisor
Class A shares
|
|
|
|
|
| |
| 12b-1
Fees |
2022 |
| Spin-off
Fund |
$18,559 |
|
| |
Advisor
Class C shares
|
|
|
|
|
| |
| 12b-1
Fees |
2022 |
| Spin-off
Fund |
$6,470 |
|
| |
These
amounts were accrued and paid to broker-dealers as compensation for distribution
services. No payments pursuant to the Plans were made by the Fund for
advertising, printing or mailings Prospectuses, or interest or other carrying or
finance charges.
CUSTODIAN
U.S.
Bank N.A. (“U.S. Bank”), with principal offices at 1555 N. RiverCenter Drive,
Suite 302, Milwaukee, WI 53212 is custodian for the securities and cash of the
Fund. Under a Custody Agreement with the Fund, U.S. Bank holds the Fund’s assets
in safekeeping and keeps all necessary records and documents relating to its
duties. U.S. Bank receives annual fees based on the Fund’s average net
assets.
U.S.
Bank also serves as custodian of the securities and cash held by the Fund
pursuant to a Custody Agreement under which U.S. Bank is responsible for the
safekeeping and keeps all necessary records and documents relating to its
duties.
CODE
OF ETHICS
The
Company, Kinetics and KFD have each adopted Codes of Ethics pursuant to Rule
17j-1 under the 1940 Act that permits investment personnel subject to the
particular Code of Ethics to invest in securities, including securities that may
be purchased or held by the Fund for their own accounts.
Valuation
of Shares
Shares
of the Fund are sold on a continual basis at the NAV per share next computed,
plus any applicable sales charge, following acceptance of an order by the Fund.
The Fund’s NAV per share for the purpose of pricing purchase and redemption
orders is determined at the close of normal trading (currently 4:00 p.m. Eastern
Time) on each day the New York Stock Exchange (“NYSE”) is open for trading. The
NYSE is closed on the following holidays: New Year’s Day, Martin Luther King,
Jr.’s Day, Washington’s Birthday/President’s Day, Good Friday, Memorial Day,
Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
Equity
securities are valued each day at the last quoted sales price on the securities
principal exchange. If there is no sales price, a security is valued at the last
reported bid price. Securities that are listed on the Nasdaq Stock Market Inc.
are valued using the NASDAQ Official Closing Price (“NOCP”), and if no NOCP is
available, then at the last reported bid price. In the event market quotations
are not readily available or if events occur that may materially affect the
value of a particular security between the time trading ends on a particular
security and the close of regular trading on the NYSE, “fair value” will be
determined in good faith in accordance with procedures approved by the Board of
Directors. The Fund may use independent pricing services to assist in
calculating the NAV of the Fund’s shares.
Futures,
options on futures and swap contracts that are listed or traded on a national
securities exchange, commodities exchange, contract market or OTC markets and
that are freely transferable will be valued at the composite price, using the
National Best Bid and Offer quotes (“NBBO”). NBBO consists of the highest bid
price and lowest ask price across any of the exchanges on which an option is
quoted thus providing a view across the entire U.S. options marketplace.
Composite option pricing calculates the mean of the highest bid
price
and lowest ask price across the exchanges where the option is traded. If a
composite price is not available, then a quote provided by one of the authorized
pricing vendors would be used. If neither a composite price or quote from an
authorized pricing provider is available, and it is the day of expiration or
post-expiration, expiring options will be priced at intrinsic value.
Non-exchange traded options also will be valued at the mean between the last bid
and asked quotations. Securities which have no public market and all other
assets of the Fund are considered at such value as the Investment Adviser, as
valuation designee may determine in good faith, in accordance with the Fund’s
valuation procedures as approved by the Company’s Board of
Directors.
Debt
obligations (including convertible securities) that are either investment grade
or below investment grade and irrespective of days to maturity are valued at
evaluated mean by one of the authorized third party pricing agents which rely on
various valuation methodologies such as matrix pricing and other analytical
pricing models as well as market transactions and dealer quotations. Certain
instruments such as repurchase agreements, demand notes, and money market mutual
funds are traded at cost and there are no market values available for those
instruments from third parties. Those instruments are priced at cost. Debt
securities that are not priced by an independent third party pricing agent shall
be valued (a) at the last sale price if such last sale occurred within the
previous five business days, and (b) if there was no sale price during the
previous five business days, at the average of the bids, or the sole bid if
there is only one. Debt securities and other securities which, in the judgment
of the Investment Adviser, do not properly represent the value of a security
will be valued at their fair market value as determined in good faith by the
Investment Adviser, as valuation designee in accordance with procedures adopted
by the Investment Adviser and approved by the Company’s Board of
Directors.
Trading
in foreign securities may be completed at times when the NYSE is closed. In
computing the NAV of the Fund, the value of a foreign security is determined as
of the close of trading on the foreign exchange on which it is principally
traded or as of the scheduled close of trading on the NYSE, whichever is
earlier, at the closing sales prices provided by approved pricing services or
other alternate sources. In the absence of sales, the last available closing bid
will be used. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith the Investment
Adviser, as valuation designee. Values of foreign securities are translated from
the local currency into U.S. dollars on the basis of the foreign currency
exchange rates, as provided by an independent pricing service or reporting
agency, generally prior to the close of the NYSE. Occasionally, events affecting
the value of foreign securities and such exchange rates occur between the time
at which they are determined and the close of the NYSE, which events would not
be reflected in the computation of the Fund’s NAV. If events materially
affecting the value of such securities or currency exchange rates occur during
such time period, the securities will be valued at their fair value as
determined in good faith by the Investment Adviser, as valuation designee, under
the oversight of the Company’s Board of Directors.
The
NAV per share of each Class of shares of a Fund is computed by dividing the
value of the securities held by the Fund plus any cash or other assets
attributable to that Class (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses attributable to that
Class) by the total number of shares of that Class outstanding at such time, as
shown below:
|
|
|
|
|
|
|
|
| |
| (Value
of Assets of the Class) - (Liabilities of the Class) |
= |
NAV
per share |
| Shares
Outstanding of the Class |
|
Marketing
and Support Payments
The
Adviser, out of its own resources and without additional cost to the Fund or its
shareholders, may provide cash payments to certain financial intermediaries who
sell shares of the Fund. These payments are in addition to other fees described
in the Fund’s Prospectus and this SAI, and are generally provided for
shareholder services or marketing support. Payments for marketing support are
typically for inclusion of the Fund on sales lists, including electronic sales
platforms. Investors may wish to take these payments into account when
considering and evaluating recommendations to purchase shares of the
Fund.
PORTFOLIO
HOLDINGS INFORMATION
The
Company, on behalf of the Fund, maintains policies and procedures relating to
selective disclosure of portfolio holdings (“Portfolio Holdings Policies”) that
govern the timing and circumstances of disclosure to shareholders and third
parties of information regarding the portfolio investments held by the Fund.
These Portfolio Holdings Policies have been approved by the Board of Directors
of the Company on behalf of the Fund. Disclosure of the Fund’s complete holdings
is required to be made twice each fiscal year on Form N-CSR (with respect to
each annual and semi-annual period) and twice each fiscal year on Form N-PORT
(with respect to the first and third quarters of the Fund's fiscal year). These
reports are available, free of charge, on the EDGAR database on the SEC’s
website at www.sec.gov. Under the Portfolio Holdings Policies, neither the
Company nor any representative of the Company may solicit or accept any
compensation or other consideration in connection with Portfolio
Holdings.
The
Adviser only discloses information concerning securities held by the Fund under
the following circumstances:
•twenty
calendar days after the end of each calendar quarter, the Adviser may post (a)
the top twenty (20) securities held by the Fund and their respective percentage
of the Fund on the Company’s website, (b) the top five (5) performing and the
bottom five (5) performing securities held by the Fund, and (c) if the Fund
invests primarily in derivatives, cash and fixed income instruments, the top ten
(10) derivative and top ten (10) fixed income holdings, along with their
respective percentage of net assets in the Fund; and
•as
required by the federal securities laws, the Fund will disclose portfolio
holdings in its applicable regulatory filings, including shareholder reports,
reports on Forms N-CSR and N-PORT or such other filings, reports or disclosure
documents as the applicable regulatory authorities may require.
Portfolio
holdings information that is not filed with the SEC or posted on the Company’s
website may be provided to third parties only if the third party recipients are
required to keep all portfolio holdings information confidential and are
prohibited from trading on the information they receive. Disclosure to such
third parties must be approved in advance by the Company’s or Adviser’s
President. The Administrator is responsible for portfolio holdings disclosure to
third party service providers of auditing, custody, proxy voting and other
similar services for the Fund, as well as rating and ranking organizations,
which will generally be permitted; however, information may be disclosed to
other third parties (including, without limitation, individuals, institutional
investors, and intermediaries that sell shares of a Fund) only upon approval by
the Company’s or Adviser’s President, who must first determine that the Fund has
a legitimate business purpose for doing so. In general, each recipient of
non-public portfolio holdings information must sign a confidentiality and
non-trading agreement, although this requirement will not apply when the
recipient is otherwise subject to a duty of confidentiality. In accordance with
the policy, the identity of those recipients who receive non-public portfolio
holdings information on an ongoing basis is as follows: the Adviser, the
Company’s transfer agent and Administrator – U.S. Bank Global Fund Services, the
Company’s independent registered public accounting firm, the Company’s
custodian, the Company’s legal counsel and the Company’s proxy voting service.
Such holdings are released on conditions of confidentiality, which include
appropriate trading prohibitions. “Conditions of confidentiality” include
confidentiality terms included in written
agreements,
implied by the nature of the relationship (e.g.,
attorney-client relationship), or required by fiduciary or regulatory principles
(e.g.,
custody services provided by financial institutions). Portfolio holdings may
also be provided earlier to shareholders and their agents who receive
redemptions in kind that reflect a pro rata allocation of all securities held in
the portfolio. Third party providers of custodial or accounting services to the
Fund may release non-public portfolio holdings information of the Fund only with
the permission of the Administrator. From time to time portfolio holdings
information may be provided to broker-dealers solely in connection with the Fund
seeking portfolio securities trading suggestions. In providing this information
reasonable precautions, including limitations on the scope of the portfolio
holdings information disclosed, are taken to avoid any potential misuse of the
disclosed information.
The
Company’s Portfolio Holdings Policies set forth the third parties who receive
portfolio holdings information pursuant to ongoing arrangements. Furthermore,
the Portfolio Holdings Policies can only be revised by Board approval. The Board
will be notified by the Adviser and the Administrator if disclosures are made
concerning the Company’s portfolio holdings in contravention of the Company’s
Portfolio Holdings Policies.
In
determining the existence of a legitimate business purpose, and in order to
ensure that the disclosure of the Company’s portfolio holdings is in the best
interests of the Company’s shareholders, the following factors, and any
additional relevant factors, shall be considered by the Company or its service
providers when disclosing non-public portfolio holdings information to selected
third parties: (1) whether the disclosure is consistent with the anti-fraud
provisions of the federal securities laws; and (2) avoidance of any conflicts of
interest between the interests of the Company’s shareholders and the service
providers.
Purchasing
Shares
Shares
of the Fund are sold in a continuous offering and may be purchased on any
business day through authorized investment dealers or directly from the Fund.
Shares of the Fund are sold at their NAV plus any applicable sales charge.
Except for the Fund itself (through KFD), only investment dealers that have an
effective selling agreement with the Fund are authorized to sell shares of the
Fund.
Anti-Money
Laundering Program
The
Fund 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 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.
Procedures
to implement the Program include, but are not limited to, determining that the
Fund’s Distributor and transfer agent have established proper anti-money
laundering procedures, reporting suspicious and/or fraudulent activity and
completing a thorough review of all New Account Application Forms. The Fund will
not transact business with any person or legal entity and beneficial owners, if
applicable, whose identity cannot be adequately verified under the provisions of
the USA PATRIOT Act.
Offering
Price of Advisor Class A Shares
A
financial intermediary may offer Fund shares subject to variations in or
elimination of the Fund sales charges (“variations”), provided such variations
are described in the Fund’s Prospectus. All variations described in Appendix A –
Financial Intermediary Sales Charge Variations (“Appendix A”) to the Fund’s
Prospectus are applied by the identified financial intermediary. Sales charge
variations may apply to purchases, sales, exchanges and reinvestments of Fund
shares and a shareholder transacting in Fund shares
through
the financial intermediary identified on Appendix A to the Fund’s Prospectus
should read the terms and conditions of Appendix A carefully. A variation that
is specific to the financial intermediary is not applicable to shares held
directly with the Fund or through another intermediary. Please consult the
financial intermediary with respect to any variations listed on Appendix A to
the Fund’s Prospectus.
Advisor
Class A Shares of the Funds are sold with a maximum front-end sales charge of
5.75%. Using the NAV per share as of April 3, 2023, the maximum offering price
of each Fund’s Advisor Class A Shares would be as follows:
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund |
Net
Asset Value |
Maximum
Sales Charge |
Offering
Price to Public |
| The
Spin-off Fund |
$21.17 |
5.75% |
$22.46 |
The
actual sales charge that is paid by an investor on the purchase of Advisor Class
A Shares may differ slightly from the sales charge listed above or in the
Prospectus due to rounding in the calculations. Contact your broker or dealer
for further information.
Advisor
Class A Shares – Sales Load Waivers
You
will not have to pay a sales charge on purchases of Advisor Class A shares
if:
•You
are an employee of a broker-dealer or agent that has a selling agreement with
the Distributor;
•You
buy Advisor Class A shares under a wrap program or other all-inclusive program
offered by your broker-dealer or agent; or
•The
sales charge is waived by a broker-dealer or agent who has entered into an
agreement with the Distributor that allows for load-waived Class A shares
purchases.
Please
consult your broker-dealer or agent to determine whether you may be eligible for
these waivers.
Employees,
directors of the Adviser, KFD, the Company or any of their affiliates, and
members of the families (including parents, grandparents, siblings, spouses,
children, and in-laws) of such entities’ employees, or directors will also not
have to pay a sales charge on Advisor Class A shares.
Advisor
Class A Shares – Reducing the Sales Charge
Advisor
Class A shares of the Fund are sold at their NAV plus a sales charge as
described in the Prospectus. Shareholders can reduce the sales charge on
purchases of Advisor Class A shares by:
•purchasing
larger quantities of shares or putting a number of purchases together to obtain
the discounts
•signing
a 13-month letter
of intent
•using
the reinvestment privilege
•making
concurrent purchases
Certain
broker-dealers may reduce sales charges under certain circumstances. Consult
your broker-dealer. For the variations applicable to shares offered through a
financial intermediary, please see “Appendix A – Financial Intermediary Sales
Charge Variations” in the Fund’s Prospectus.
Large
Purchases and Quantity Discounts.
As indicated in the Prospectus, the more Advisor Class A shares a shareholder
purchases, the smaller the sales charge per share. Shareholders who purchase $1
million or more worth of Class A shares will pay no initial sales charge. If a
shareholder purchases Advisor Class A shares on
the
same day as his or her spouse or children under 21, all such purchases will be
combined in calculating the sales charges.
Also,
if shareholders later purchase additional shares of a Fund, the purchases will
be added together with the amount already invested in the Fund. For example, if
a shareholder already owns shares of the Fund with a value at the current NAV of
$40,000 and subsequently purchases $10,000 more of that same Fund at the current
NAV, the sales charge on the additional purchase would be 4.75%, not 5.75% as
shown in the Prospectus. At the time of purchasing additional purchases,
shareholders should inform the Fund
in writing
that they already own Advisor Class A shares of the Fund.
Signing
a Letter of Intent.
If investors intend to purchase at least $50,000 of Advisor Class A shares over
the next 13 months, they should consider signing a
letter of intent (“LOI”) to
reduce the sales charge. A letter of intent includes a provision providing for
the assessment of the sales charge for each purchase based on the amount you
intend to purchase within the 13-month period. It also allows the custodian to
hold the maximum sales charge (i.e.,
5.75%) in shares in escrow until the purchases are completed. The shares held in
escrow in the investor’s account will be released when the 13-month period is
over. If the investor does not purchase the amount stated in the letter of
intent, the Fund will redeem the appropriate number of escrowed shares to cover
the difference between the sales charge paid and the sales charge applicable to
the individual purchases had the LOI not been in effect. Any remaining escrow
shares will be released from escrow.
The
letter of intent does not obligate the investor to purchase shares, but simply
allows the investor to take advantage of the lower sales charge applicable to
the total amount intended to be purchased. Any shares purchased within 90 days
of the date you establish a letter of intent may be used as credit toward
fulfillment of the letter of intent, but the reduced sales charge will only
apply to new purchases made on or after that date. The investor’s prior trade
prices will not be adjusted.
Reinvestment
Privilege. If
Advisor Class A shares of the Fund have been redeemed, the investor has a
one‑time right, within 60 days, to reinvest the redemption proceeds at the
next‑determined NAV without any sales charge. Shareholders should inform the
Fund, in
writing,
that they are reinvesting so that they will not be overcharged.
Concurrent
Purchases. Another
way to reduce the sales charge is to combine purchases made at the same time in
a Fund and one or more other funds offered by the Company that apply sales
charges. For example, if an investor invests $30,000 in Advisor Class A shares
of one of the Funds, and $70,000 in Advisor Class A shares of another Fund
offered by the Company, the sales charge would be lower. Investors should inform
the Fund
in writing about
the concurrent purchases so that they will not be overcharged.
Broker-Dealer
Purchases. Purchases
of Advisor Class A shares may be made with no initial sales charge (i) by
an investment adviser, broker or financial planner, provided arrangements are
pre-approved through an existing agreement between the investment adviser,
broker or financial planner and the Fund’s distributor, and purchases are placed
through an omnibus account with the Fund; (ii) by clients of such
investment adviser or financial planner who place trades for their own accounts,
if such accounts are linked to a master account of such investment adviser or
financial planner on the books and records of the broker or agent or
(iii) in other circumstances at the Fund’s discretion. Such purchases may
also be made for retirement and deferred compensation plans and trusts used to
fund those plans.
Involuntary
Redemptions. The
Fund reserves the right to redeem shares of accounts where the account balance
is less than $1,000 with respect to the No Load, Advisor Class A and Advisor
Class C shares and less than $100,000 with respect to the Institutional Class.
See the Prospectus for more information on accounts with low
balances.
Exchange
Privilege
Shareholders
may exchange shares of a Fund for shares of any other Fund offered by the
Company. Exercising the exchange privilege is treated as a sale for federal
income tax purposes and you may realize short or long‑term capital gains or
losses on the exchange. An exchange of Fund shares held for 30 days or less may
be subject to a 2.00% redemption fee.
Shareholders
may exchange shares by telephone or in writing as follows:
•By
Telephone
You
may exchange shares by telephone only if the shareholders registered on your
account are the same shareholders registered on the account into which you are
exchanging. Exchange requests must be received before 4:00 p.m. Eastern time to
be processed that day.
•In
Writing
You
may send your exchange request in writing. Please provide the Fund name and
account number for each of the Funds involved in the exchange and make sure the
letter of instruction is signed by all shareholders on the account.
Generally,
you may only exchange No Load shares for No Load shares, Institutional Class
shares for Institutional Class shares, Advisor Class A shares for Advisor Class
A shares and Advisor Class C shares for Advisor Class C shares. In all cases
involving Advisor Class A share exchanges, shareholders will be required to pay
a sales charge only once, assuming they are not eligible for a sales charge
waiver.
NOTE:
The
Fund may modify or terminate the exchange privilege at any time upon 60 days’
prior notice to shareholders. Investors may have difficulty making exchanges by
telephone through brokers or banks during times of drastic market changes. If
you cannot contact your broker or bank by telephone, you should send your
request in writing via overnight mail.
Stock
Certificates and Confirmations
The
Fund does not intend to issue stock certificates representing shares purchased.
Confirmations of the opening of an account and of all subsequent transactions in
the account are forwarded by the Fund to the shareholder’s address of
record.
Special
Incentive Programs
At
various times the Fund may implement programs under which a dealer’s sales force
may be eligible to (a) win nominal awards for certain sales efforts or as
part of recognition programs conforming to criteria established by the Fund, or
(b) participate in sales programs sponsored by the Fund. In addition, the
Adviser, in its discretion, may from time to time, pursuant to objective
criteria established by the Adviser, sponsor programs designed to reward
selected dealers for certain services or activities that are primarily intended
to result in the sale of shares of the Fund. These programs will not change the
price you pay for your shares or the amount that the Fund will receive from such
sale.
Investing
Through Authorized Brokers or Dealers
The
Fund may authorize one or more brokers to accept purchase orders on a
shareholder’s behalf. Brokers are authorized to designate intermediaries to
accept orders on the Fund’s behalf. An order is deemed to be
received
when an authorized broker or agent accepts the order. Orders will be priced at
the Fund’s NAV next computed after they are accepted by an authorized broker or
agent.
For
all classes other than the Institutional Class, if any authorized dealer
receives an order of at least $1,000, the dealer may contact the Fund directly.
Orders received by dealers by the close of trading on the NYSE on a business day
that are transmitted to the Fund by 4:00 p.m. Eastern Time on that day will be
effected at the NAV per share determined as of the close of trading on the NYSE
on that day. Otherwise, the orders will be effected at the next determined NAV.
It is the dealer’s responsibility to transmit orders so that they will be
received by the Distributor before 4:00 p.m. Eastern Time.
Redemption
of Shares
To
redeem shares, shareholders may send a written request in “good order”
to:
Kinetics
Mutual Funds, Inc.
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
WI 53201-0701
1-800-930-3828
A
written request in “good order” to redeem shares must include:
•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.
The
proceeds will be wired or sent via electronic funds transfer through the ACH
network to the bank account of record or sent to the address of record within
seven days.
If
shareholders request redemption proceeds be sent to an address or bank other
than that on record with the Fund or proceeds be made payable other than to the
shareholder(s) of record, the written request must have signatures guaranteed
by:
•a
trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation (“FDIC”);
•a
member of the New York, Boston, American, Midwest, or Pacific Stock
Exchange;
•a
savings bank or savings association whose deposits are insured by the Savings
Association Insurance Fund, which is administered by the FDIC; or
•any
other “eligible guarantor institution” as defined in the Securities Exchange Act
of 1934.
The
Fund does not accept signatures guaranteed by a notary public.
The
Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. 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 its transfer agent reserve the right
to amend these standards at any time without notice.
Redemption
Fees
The
Fund is designed for long-term investors willing to accept the risks associated
with a long-term investment. The Fund is not designed for short-term traders.
For
these reasons, the Fund assesses a 2.00% fee on the redemption or exchange of
Fund shares held for 30 days or less. These fees will be paid to the Fund
to help offset transaction costs. The Fund reserves the right to waive the
redemption fee, subject to its sole discretion in instances it deems not to be
disadvantageous to the Fund.
The
Fund will use the first-in, first-out (“FIFO”) method to determine the 30-day
holding period. Under this method, the date of the redemption or exchange will
be compared to the earliest purchase date of shares held in the account. If this
holding period is 30 days or less, the redemption fee will be assessed using the
current NAV of those shares. The redemption fee will be applied on redemptions
and exchanges of each investment made by a shareholder that does not remain in a
Fund for a 30-day period from the date of purchase.
The
redemption fee will not apply to any shares purchased through reinvested
distributions (dividends and capital gains), or to redemptions made under the
Fund’s systematic programs, as these transactions are typically de minimis. This
fee will also not be assessed to the participants in employer-sponsored
retirement plans that are held at the Fund in an omnibus account (such as
401(k), 403(b), 457, Keogh, Profit Sharing Plans, and Money Purchase Pension
Plans) or to accounts held under trust agreements at a trust institution held at
the Fund in an omnibus account. The redemption fee will also not be assessed to
accounts of the Adviser or its affiliates used to capitalize the Fund as such
accounts will be used specifically to control the volatility of shareholder
subscriptions and redemptions to avoid adverse effects to the Fund. In addition,
the Fund is authorized to waive redemption fees for redemptions to asset
allocation programs, wrap fee programs and other investment programs offered by
financial institutions. Although frequent purchases and redemptions of Fund
shares are generally permitted, the Fund only intends to waive redemption fees
for redemptions the Fund reasonably believes do not raise frequent trading or
market timing concerns.
Brokerage
The
Fund’s assets are invested by the Adviser in a manner consistent with the
Portfolio’s investment objective, strategies, policies and restrictions and with
any instructions the Board of Directors may issue from time to time. Within this
framework, the Adviser is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of the Fund.
Transactions
on U.S. stock exchanges, commodities markets and futures markets and other
agency transactions may involve the payment by the Adviser, on behalf of the
Fund, of negotiated brokerage commissions. Such commissions vary among different
brokers. A particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over‑the‑counter markets, but
the price paid by the Adviser usually includes an undisclosed dealer commission
or mark-up. In underwritten offerings, the price paid by the Adviser on behalf
of the Fund includes a disclosed, fixed commission or discount retained by the
underwriter or dealer.
U.S.
government securities generally are traded in the OTC market through
broker-dealers. A broker-dealer is a securities firm or bank that makes a market
for securities by offering to buy at one price and sell at a slightly higher
price. The difference between the prices is known as a spread.
In
placing orders for the purchase and sale of portfolio securities for the Fund,
the Adviser seeks to obtain the best price and execution, taking into account
such factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. For securities traded in the OTC
markets, the Adviser deals directly with the dealers who make markets in these
securities unless better prices and execution are available elsewhere. The
Adviser negotiates commission rates with brokers based on the quality and
quantity of services provided in light of generally prevailing rates, and while
the Adviser generally seeks reasonably competitive commission rates, the Fund
does not necessarily pay the lowest commissions available. The Company’s Board
of Directors periodically reviews the commission rates and allocation of
orders.
When
consistent with the objectives of best price and execution, business may be
placed with broker-dealers who furnish investment research or services to the
Adviser. Such research or services include advice, both orally and in writing,
as to the value of securities; the advisability of investing in, purchasing or
selling securities; and the availability of securities, or purchasers or sellers
of securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. To the extent portfolio transactions are effected with
broker-dealers who furnish research services to the Adviser, the Adviser
receives a benefit, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Fund from these transactions. The
Adviser believes that most research services obtained by it generally benefit
several or all of the investment companies and private accounts that they
manage, as opposed to solely benefiting one specific managed fund or
account.
From
time-to-time, the Adviser may effect transactions in portfolio securities with
executing brokers that may also promote or sell shares of the Fund (“selling
brokers”) pursuant to policies adopted by the Company’s Board of Directors.
These policies provide that the Adviser shall not (i) take into
consideration the promotion or sale of the Fund’s shares as a factor in
selecting executing brokers for the Fund, (ii) enter into an arrangement or
understanding (whether oral or written) pursuant to which the Adviser directs,
or is expected to direct, portfolio securities transactions or any other
remuneration (as described below) to any broker or dealer in consideration for
the promotion or sale of the Fund, and (iii) enter into a “step out” or any
other type of arrangement under which a portion of the Fund’s commission is
directed to the selling brokers for the purpose of compensating such brokers for
promoting or selling shares of the Fund. This prohibition applies to all
transactions whether such transaction involves a commission, mark-up, mark down,
other fee or portion of another fee paid or to be paid from a transaction
effected through an executing broker. The Fund paid the following in brokerage
commissions in the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
| |
| Total
Brokerage Commissions Paid |
2022 |
2021 |
2020 |
| Spin-off
Fund |
$ |
903 |
| $ |
813 |
| $ |
2,218 |
|
Taxes
The
following summarizes certain additional income tax considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisor with specific reference to their own
tax situations.
The
discussions of the federal income tax consequences in the Prospectus and this
SAI are based on the Code (the “Code”) and the regulations issued under it, and
court decisions and administrative interpretations as in effect on the date of
this SAI. Future legislative or administrative changes or court decisions may
significantly alter the statements included herein, and any such changes or
decisions may be retroactive.
Federal
– General Information
The
Fund has elected to be treated and intends to qualify for each taxable year as a
regulated investment company under Subchapter M of Subtitle A, Chapter 1, of the
Code. As a regulated investment company, the Fund generally is exempt from
federal income tax on its net investment income and realized capital gains that
it distributes to shareholders. To qualify for treatment as a regulated
investment company, the Fund must meet three important tests each
year.
First,
the Fund must derive with respect to each taxable year at least 90% of its gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies, other income derived with respect to its business of
investing in stock, securities, or currencies or net income derived from
interests in qualified publicly traded partnerships.
Second,
generally, at the close of each quarter of its taxable year, at least 50% of the
value of the Fund’s assets must consist of cash and cash items, U.S. government
securities, securities of other regulated investment companies and securities of
other issuers as to which the Fund has not invested more than 5% of the value of
its total assets in securities of the issuer and as to which the Fund does not
hold more than 10% of the outstanding voting securities of the issuer, and no
more than 25% of the value of the Fund’s total assets may be invested in the
securities of (1) any one issuer (other than U.S. government securities and
securities of other regulated investment companies), (2) two or more
issuers that the Fund controls and which are engaged in the same or similar
trades or businesses, or (3) one or more qualified publicly traded
partnerships.
Third,
the Fund must distribute an amount equal to at least the sum of 90% of its
investment company taxable income (net investment income and the excess of net
short-term capital gain over net long-term capital loss) and 90% of its net
tax-exempt income, if any, for the year.
The
Fund intends to comply with this distribution requirement. If the Fund were to
fail to make sufficient distributions, it could be liable for corporate income
tax and for excise tax in respect of the shortfall or, if the shortfall is large
enough, the Fund could be disqualified as a regulated investment
company.
If
for any taxable year the Fund were not to qualify as a regulated investment
company, all its taxable income would be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In that event,
taxable shareholders would recognize dividend income on distributions to the
extent of the Fund’s current and accumulated earnings and profits, and corporate
shareholders could be eligible for the dividends-received
deduction.
The
Code imposes a nondeductible 4% excise tax on regulated investment companies
that fail to distribute each year an amount equal to specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). The Fund intends to make sufficient distributions or
deemed distributions each year to avoid liability for this excise
tax.
Taxation
of Certain Financial Instruments
The
tax principles applicable to transactions in financial instruments, such as
futures contracts and options, that may be engaged in by the Fund, and
investments in passive foreign investment companies (“PFICs”), are complex and,
in some cases, uncertain. The tax consequences of such transactions and
investments may cause the Fund to recognize taxable income prior to the receipt
of cash, thereby requiring the Fund to liquidate other positions, or to borrow
money, so as to make sufficient distributions to shareholders to avoid
corporate-level tax. Moreover, some or all of the taxable income recognized may
be ordinary income or short-term capital gain, so that the distributions may be
taxable to shareholders as ordinary income.
In
addition, in the case of any shares of a PFIC in which the Fund invests, the
Fund may be liable for corporate-level tax on any ultimate gain or distributions
on the shares if the Fund fails to make an election to recognize income annually
during the period of its ownership of the shares of the PFIC.
For
the year ended December 31, 2022, the Fund did not have any short-term or
long-term capital loss carryforwards.
State
and Local Taxes
Although
the Fund expects to qualify as a regulated investment company and to be relieved
of all or substantially all federal income taxes, depending upon the extent of
its activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, the Fund could be subject to the tax
laws of such states or localities.
Independent
Registered Public Accounting Firm
Tait,
Weller & Baker LLP, Two Liberty Place, 50 South 16th Street, Suite 2900,
Philadelphia, Pennsylvania 19102 serves as the Fund’s independent registered
public accounting firm. Its services include an audit of the Fund’s financial
statements and the performance of other related audit and tax services.
Financial
Statements
The
Fund’s annual report to shareholders for the fiscal year ended December 31, 2022
has been filed with the SEC. The financial statements, notes thereto and Report
of Independent Registered Public Accounting Firm included in the Annual Report
are incorporated by reference into this SAI and is available by following the
hyperlink to the Annual
Report.
Financial
statements certified by the Fund’s independent registered public accounting firm
will be submitted to shareholders at least annually.
APPENDIX
A
DESCRIPTION
OF SECURITIES RATINGS
Short-Term
Credit Ratings
An
S&P
Global Ratings short-term
issue credit rating is generally assigned to those obligations considered
short-term in the relevant market. The following summarizes the rating
categories used by S&P Global Ratings for short-term issues:
“A-1”
– A short-term obligation rated “A-1” is rated in the highest category by
S&P Global Ratings. The obligor’s capacity to meet its financial commitments
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor’s capacity to
meet its financial commitment on these obligations is extremely
strong.
“A-2”
– A short-term obligation rated “A-2” is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity to meet
its financial commitments on the obligation is satisfactory.
“A-3”
– A short-term obligation rated “A-3” exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to weaken an obligor’s capacity to meet its financial commitments on the
obligation.
“B”
– A short-term obligation rated “B” is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing uncertainties
that could lead to the obligor’s inadequate capacity to meet its financial
commitments.
“C”
– A short-term obligation rated “C” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitments on the obligation.
“D”
– A short-term obligation rated “D” is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the “D” rating category is used
when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The “D” rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay
provisions. A rating on an obligation is lowered to “D” if it is subject to a
distressed debt restructuring.
Local
Currency and Foreign Currency Ratings – S&P Global Ratings’ issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. A foreign currency rating on an issuer can differ from the local
currency rating on it when the obligor has a different capacity to meet its
obligations denominated in its local currency, versus obligations denominated in
a foreign currency.
“NR”
– This indicates that a rating has not been assigned or is no longer
assigned.
Moody’s
Investors Service (“Moody’s”)
short-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of thirteen months or less and
reflect both on the likelihood of a default or impairment on contractual
financial obligations and the expected financial loss suffered in the event of
default or impairment.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
“P-1”
– Issuers (or supporting institutions) rated Prime-1 reflect a superior ability
to repay short-term obligations.
“P-2”
– Issuers (or supporting institutions) rated Prime-2 reflect a strong ability to
repay short-term obligations.
“P-3”
– Issuers (or supporting institutions) rated Prime-3 reflect an acceptable
ability to repay short-term obligations.
“NP”
– Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
“NR”
– Is assigned to an unrated issuer, obligation and/or program.
Fitch,
Inc. / Fitch Ratings Ltd. (“Fitch”)
short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity and relates to the capacity to meet
financial obligations in accordance with the documentation governing the
relevant obligation. Short-term deposit ratings may be adjusted for loss
severity. Short-term ratings are assigned to obligations whose initial maturity
is viewed as “short-term” based on market convention.[1]
Typically, this means up to 13 months for corporate, sovereign, and structured
obligations and up to 36 months for obligations in U.S. public finance markets.
The following summarizes the rating categories used by Fitch for short-term
obligations:
“F1”
– Securities possess the highest short-term credit quality. This designation
indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong credit
feature.
“F2”
– Securities possess good short-term credit quality. This designation indicates
good intrinsic capacity for timely payment of financial
commitments.
“F3”
– Securities possess fair short-term credit quality. This designation indicates
that the intrinsic capacity for timely payment of financial commitments is
adequate.
“B”
– Securities possess speculative short-term credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
heightened vulnerability to near term adverse changes in financial and economic
conditions.
“C”
– Securities possess high short-term default risk. Default is a real
possibility.
“RD”
– Restricted default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Typically applicable to entity ratings only.
“D”
– Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
“NR”
– Is assigned to an issue of a rated issuer that are not and have not been
rated.
The
DBRS
Morningstar® Ratings Limited (“DBRS Morningstar”)
short-term obligation ratings provide DBRS Morningstar’s opinion on the risk
that an issuer will not meet its short-term financial obligations in a timely
manner. The obligations rated in this category typically have a term of shorter
than one year. The R-1 and R-2 rating categories are further denoted by the
subcategories “(high)”, “(middle)”, and “(low)”.
1
A
long-term rating can also be used to rate an issue with short
maturity.
The
following summarizes the ratings used by DBRS Morningstar for commercial paper
and short-term debt:
“R-1
(high)”
-
Short-term
debt rated “R-1 (high)” is of the highest credit quality. The capacity for the
payment of short-term financial obligations as they fall due is exceptionally
high. Unlikely to be adversely affected by future events.
“R-1
(middle)” – Short-term debt rated “R-1 (middle)” is of superior credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is very high. Differs from “R-1 (high)” by a relatively modest degree.
Unlikely to be significantly vulnerable to future events.
“R-1
(low)” – Short-term debt rated “R-1 (low)” is of good credit quality. The
capacity for the payment of short-term financial obligations as they fall due is
substantial. Overall strength is not as favorable as higher rating categories.
May be vulnerable to future events, but qualifying negative factors are
considered manageable.
“R-2
(high)” – Short-term debt rated “R-2 (high)” is considered to be at the upper
end of adequate credit quality. The capacity for the payment of short-term
financial obligations as they fall due is acceptable. May be vulnerable to
future events.
“R-2
(middle)” – Short-term debt rated “R-2 (middle)” is considered to be of adequate
credit quality. The capacity for the payment of short-term financial obligations
as they fall due is acceptable. May be vulnerable to future events or may be
exposed to other factors that could reduce credit quality.
“R-2
(low)” – Short-term debt rated “R-2 (low)” is considered to be at the lower end
of adequate credit quality. The capacity for the payment of short-term financial
obligations as they fall due is acceptable. May be vulnerable to future events.
A number of challenges are present that could affect the issuer’s ability to
meet such obligations.
“R-3”
– Short-term debt rated “R-3” is considered to be at the lowest end of adequate
credit quality. There is a capacity for the payment of short-term financial
obligations as they fall due. May be vulnerable to future events and the
certainty of meeting such obligations could be impacted by a variety of
developments.
“R-4”
– Short-term debt rated “R-4” is considered to be of speculative credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is uncertain.
“R-5”
– Short-term debt rated “R-5” is considered to be of highly speculative credit
quality. There is a high level of uncertainty as to the capacity to meet
short-term financial obligations as they fall due.
“D”
– Short-term debt rated “D” is assigned when the issuer has filed under any
applicable bankruptcy, insolvency or winding-up statute or there is a failure to
satisfy an obligation after the exhaustion of grace periods. DBRS Morningstar
may also use “SD” (Selective Default) in cases where only some securities are
impacted, such as the case of a “distressed exchange”.
Long-Term
Issue Credit Ratings
The
following summarizes the ratings used by S&P
Global Ratings for
long-term issues:
“AAA”
– An obligation rated “AAA” has the highest rating assigned by S&P Global
Ratings. The obligor’s capacity to meet its financial commitments on the
obligation is extremely strong.
“AA”
– An obligation rated “AA” differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitments on the
obligation is very strong.
“A”
– An obligation rated “A” is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitments on the obligation is still strong.
“BBB”
– An obligation rated “BBB” exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to weaken
the obligor’s capacity to meet its financial commitments on the
obligation.
“BB,”
“B,” “CCC,” “CC” and “C” – Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are
regarded as having significant speculative characteristics. “BB” indicates the
least degree of speculation and “C” the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposure to adverse conditions.
“BB”
– An obligation rated “BB” is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to the
obligor’s inadequate capacity to meet its financial commitments on the
obligation.
“B”
– An obligation rated “B” is more vulnerable to nonpayment than obligations
rated “BB”, but the obligor currently has the capacity to meet its financial
commitments on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitments on the obligation.
“CCC”
– An obligation rated “CCC” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitments on the
obligation.
“CC”
– An obligation rated “CC” is currently highly vulnerable to nonpayment. The
“CC” rating is used when a default has not yet occurred but S&P Global
Ratings expects default to be a virtual certainty, regardless of the anticipated
time to default.
“C”
– An obligation rated “C” is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared with obligations that are rated higher.
“D”
– An obligation rated “D” is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the “D” rating category is used when payments on
an obligation are not made on the date due, unless S&P Global Ratings
believes that such payments will be made within the next five business days in
the absence of a stated grace period or within the earlier of the stated grace
period or the next 30 calendar days. The “D” rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered to “D” if it is subject to
a distressed debt restructuring
Plus
(+) or minus (-) – Ratings from “AA” to “CCC” may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within the rating
categories.
“NR”
– This indicates that a rating has not been assigned, or is no longer
assigned.
Local
Currency and Foreign Currency Ratings - S&P Global Ratings’ issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. A foreign currency rating on an issuer can differ from the local
currency rating on it when the obligor has a different capacity to meet its
obligations denominated in its local currency, versus obligations denominated in
a foreign currency.
Moody’s
long-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of eleven months or more. Such
ratings reflect both on the likelihood of default or impairment on contractual
financial obligations and the expected financial loss suffered in the event of
default or impairment. The following summarizes the ratings used by Moody’s for
long-term debt:
“Aaa”
– Obligations rated “Aaa” are judged to be of the highest quality, subject to
the lowest level of credit risk.
“Aa”
– Obligations rated “Aa” are judged to be of high quality and are subject to
very low credit risk.
“A”
– Obligations rated “A” are judged to be upper-medium grade and are subject to
low credit risk.
“Baa”
– Obligations rated “Baa” are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative
characteristics.
“Ba”
– Obligations rated “Ba” are judged to be speculative and are subject to
substantial credit risk.
“B”
– Obligations rated “B” are considered speculative and are subject to high
credit risk.
“Caa”
– Obligations rated “Caa” are judged to be speculative of poor standing and are
subject to very high credit risk.
“Ca”
– Obligations rated “Ca” are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
“C”
– Obligations rated “C” are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from “Aa” through “Caa.” The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
“NR”
– Is assigned to unrated obligations, obligation and/or program.
The
following summarizes long-term ratings used by Fitch:
“AAA”
– Securities considered to be of the highest credit quality. “AAA” ratings
denote the lowest expectation of credit risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
“AA”
– Securities considered to be of very high credit quality. “AA” ratings denote
expectations of very low credit risk. They indicate very strong capacity for
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
“A”
– Securities considered to be of high credit quality. “A” ratings denote
expectations of low credit risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more
vulnerable to adverse business or economic conditions than is the case for
higher ratings.
“BBB”
– Securities considered to be of good credit quality. “BBB” ratings indicate
that expectations of credit risk are currently low. The capacity for payment of
financial commitments is considered adequate, but adverse business or economic
conditions are more likely to impair this capacity.
“BB”
– Securities considered to be speculative. “BB” ratings indicates an elevated
vulnerability to credit risk, particularly in the event of adverse changes in
business or economic conditions over time; however, business or financial
alternatives may be available to allow financial commitments to be
met.
“B”
– Securities considered to be highly speculative. “B” ratings indicate that
material credit risk is present
“CCC”
– A “CCC” rating indicates that substantial credit risk is present.
“CC”
– A “CC” rating indicates very high levels of credit risk.
“C”
– A “C” rating indicates exceptionally high levels of credit risk.
Defaulted
obligations typically are not assigned “RD” or “D” ratings but are instead rated
in the “CCC” to “C” rating categories, depending on their recovery prospects and
other relevant characteristics. Fitch believes that this approach better aligns
obligations that have comparable overall expected loss but varying vulnerability
to default and loss.
Plus
(+) or minus (-) may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the “AAA” obligation
rating category, or to corporate finance obligation ratings in the categories
below “CCC”.
“NR”
– Is assigned to an unrated issue of a rated issuer.
The
DBRS
Morningstar long-term obligation ratings provide DBRS Morningstar’s opinion on
the risk that investors may not be repaid in accordance with the terms under
which the long-term obligation was issued. The obligations rated in this
category typically have a term of one year or longer. All rating categories
other than AAA and D also contain subcategories “(high)” and “(low)”. The
absence of either a “(high)” or “(low)” designation indicates the rating is in
the middle of the category. The following summarizes the ratings used by DBRS
Morningstar for long-term debt:
“AAA”
– Long-term debt rated “AAA” is of the highest credit quality. The capacity for
the payment of financial obligations is exceptionally high and unlikely to be
adversely affected by future events.
“AA”
– Long-term debt rated “AA” is of superior credit quality. The capacity for the
payment of financial obligations is considered high. Credit quality differs from
“AAA” only to a small degree. Unlikely to be significantly vulnerable to future
events.
“A”
– Long-term debt rated “A” is of good credit quality. The capacity for the
payment of financial obligations is substantial, but of lesser credit quality
than “AA.” May be vulnerable to future events, but qualifying negative factors
are considered manageable.
“BBB”
– Long-term debt rated “BBB” is of adequate credit quality. The capacity for the
payment of financial obligations is considered acceptable. May be vulnerable to
future events.
“BB”
–
Long-term
debt rated “BB” is of speculative, non-investment grade credit quality. The
capacity for the payment of financial obligations is uncertain. Vulnerable to
future events.
“B”
– Long-term debt rated “B” is of highly speculative credit quality. There is a
high level of uncertainty as to the capacity to meet financial
obligations.
“CCC”,
“CC” and “C” – Long-term debt rated in any of these categories is of very highly
speculative credit quality. In danger of defaulting on financial obligations.
There is little difference between these three categories, although “CC” and “C”
ratings are normally applied to obligations that are seen as highly likely to
default or subordinated to obligations rated in the “CCC” to “B” range.
Obligations in respect of which default has not technically taken place but is
considered inevitable may be rated in the “C” category.
“D”
–
A
security rated “D” is assigned when the issuer has filed under any applicable
bankruptcy, insolvency or winding up statute or there is a failure to satisfy an
obligation after the exhaustion of grace periods. DBRS Morningstar may also use
“SD” (Selective Default) in cases where only some securities are impacted, such
as the case of a “distressed exchange”.
Municipal
Note Ratings
An
S&P
Global Ratings U.S.
municipal note rating reflects S&P Global Ratings’ opinion about the
liquidity factors and market access risks unique to the notes. Notes due in
three years or less will likely receive a note rating. Notes with an original
maturity of more than three years will most likely receive a long-term debt
rating. In determining which type of rating, if any, to assign, S&P Global
Ratings’ analysis will review the following considerations:
•
Amortization schedule - the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
•
Source of payment - the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Municipal
Short-Term Note rating symbols are as follows:
“SP-1”
– A municipal note rated “SP-1” exhibits a strong capacity to pay principal and
interest. An issue determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
“SP-2”
– A municipal note rated “SP-2” exhibits a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
“SP-3”
– A municipal note rated “SP-3” exhibits a speculative capacity to pay principal
and interest.
“D”
– This rating is assigned upon failure to pay the note when due, completion of a
distressed debt restructuring, or the filing of a bankruptcy petition or the
taking of similar action and where default on an obligation is a virtual
certainty, for example due to automatic stay provisions.
Moody’s
uses the global short-term Prime rating scale (listed above under Short-Term
Credit Ratings) for commercial paper issued by U.S. municipalities and
nonprofits. These commercial paper programs may be backed by external letters of
credit or liquidity facilities, or by an issuer’s self-liquidity.
For
other short-term municipal obligations, Moody’s uses one of two other short-term
rating scales, the Municipal Investment Grade (“MIG”) and Variable Municipal
Investment Grade (“VMIG”) scales provided below.
Moody’s
uses the MIG scale for U.S. municipal cash flow notes, bond anticipation notes
and certain other short-term obligations, which typically mature in three years
or less. Under certain circumstances, Moody’s uses the MIG scale for bond
anticipation notes with maturities of up to five years.
MIG
Scale
“MIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
“MIG-2”
– This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
“MIG-3”
– This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
“SG”
– This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
“NR”
– Is assigned to an unrated obligation, obligation and/or program.
In
the case of variable rate demand obligations (“VRDOs”), Moody’s assigns both a
long-term rating and a short-term payment obligation rating. The long-term
rating addresses the issuer’s ability to meet scheduled
principal
and interest payments. The short-term payment obligation rating addresses the
ability of the issuer or the liquidity provider to meet any purchase price
payment obligation resulting from optional tenders (“on demand”) and/or
mandatory tenders of the VRDO. The short-term payment obligation rating uses the
VMIG scale. Transitions of VMIG ratings with conditional liquidity support
differ from transitions of Prime ratings reflecting the risk that external
liquidity support will terminate if the issuer’s long-term rating drops below
investment grade.
Moody’s
typically assigns the VMIG rating if the frequency of the payment obligation is
less than every three years. If the frequency of the payment obligation is less
than three years but the obligation is payable only with remarketing proceeds,
the VMIG short-term rating is not assigned and it is denoted as
“NR”.
“VMIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections.
“VMIG-2”
– This designation denotes strong credit quality. Good protection is afforded by
the strong short-term credit strength of the liquidity provider and structural
and legal protections.
“VMIG-3”
– This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections.
“SG”
– This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have a sufficiently strong short-term rating or may lack the structural and/or
legal protections.
“NR”
– Is assigned to an unrated obligation, obligation and/or program.
About
Credit Ratings
An
S&P
Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The opinion reflects S&P Global
Ratings’ view of the obligor’s capacity and willingness to meet its financial
commitments as they come due, and this opinion may assess terms, such as
collateral security and subordination, which could affect ultimate payment in
the event of default.
Ratings
assigned on Moody’s
global long-term and short-term rating scales are forward-looking opinions of
the relative credit risks of financial obligations issued by non-financial
corporates, financial institutions, structured finance vehicles, project finance
vehicles, and public sector entities.
Fitch’s
credit
ratings are forward-looking opinions on the relative ability of an entity or
obligation to meet financial commitments. Issuer Default Ratings (IDRs) are
assigned to corporations, sovereign entities, financial institutions such as
banks, leasing companies and insurers, and public finance entities (local and
regional governments). Issue-level ratings are also assigned and often include
an expectation of recovery, which may be notched above or below the issuer-level
rating. Issue ratings are assigned to secured and unsecured debt securities,
loans, preferred stock and other instruments. Credit ratings are indications of
the likelihood of repayment in accordance with the terms of the issuance. In
limited cases, Fitch may include additional considerations (i.e., rate to a
higher or lower standard than that implied in the obligation’s
documentation).
DBRS
Morningstar offers
independent, transparent, and innovative credit analysis to the market.
Credit
ratings are forward-looking opinions about credit risk that reflect the
creditworthiness of an issuer, rated entity, security and/or obligation based on
DBRS Morningstar’s quantitative and qualitative analysis in accordance with
applicable methodologies and criteria. They are meant to provide opinions on
relative measures of risk and are not based on expectations of, or meant to
predict, any specific default probability. Credit ratings are not statements of
fact. DBRS Morningstar issues credit ratings using one or more categories, such
as public, private,
provisional,
final(ized), solicited, or unsolicited. From time to time, credit ratings may
also be subject to trends, placed under review, or discontinued. DBRS
Morningstar credit ratings are determined by credit rating
committees.