New
Path Tactical Allocation Fund
Investor
Class Shares — GTAAX
Institutional
Class Shares — GTAIX
Statement
of Additional Information
February
28, 2014
This
Statement of Additional Information (“SAI”) provides general information about
the New Path Tactical Allocation Fund (the “Fund”), a series of Managed
Portfolio Series (the “Trust”). This SAI is not a prospectus and
should be read in conjunction with the Fund’s current prospectus dated February
28, 2014 (the “Prospectus”), as supplemented and amended from time to time,
which is incorporated herein by reference. To obtain a copy of the
Prospectus, free of charge, please write or call the Fund at the address or
toll-free telephone number below, or visit the Fund’s website at www.NewPathGTAAFund.com.
New
Path Tactical Allocation Fund
c/o
U.S. Bancorp Fund Services, LLC
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
(855)
482-2363
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A-1 |
The Trust
is a Delaware statutory trust organized on January 27, 2011, and is registered
with the Securities and Exchange Commission (“SEC”) as an open-end management
investment company. The Fund is one series, or mutual fund of the
Trust. The Fund has two classes of shares: Investor Class shares and
Institutional Class shares. The Fund is a non-diversified series and
has its own investment objective and policies. Shares of other series
of the Trust are offered in separate prospectuses and SAIs. The Fund
does not hold itself out as related to any other series within the Trust for
purposes of investment and investor services, nor does it share the same
investment adviser with any other series of the Trust. The Fund’s
Prospectus and this SAI are a part of the Trust’s Registration Statement filed
with the SEC. Copies of the Trust’s complete Registration Statement
may be obtained from the SEC upon payment of the prescribed fee or may be
accessed free of charge at the SEC’s website at www.sec.gov. The
Trust may create additional classes of the Fund and may create additional series
(and classes thereof) of the Trust and offer shares of these series and classes
under the Trust at any time.
All
shares of a series shall represent an equal proportionate interest in the assets
held with respect to that series (subject to the liabilities held with respect
to that series and such rights and preferences as may have been established and
designated with respect to classes of shares of such series), and each share of
a series shall be equal to each other share of that series.
Shares
are voted in the aggregate and not by series or class, except in matters where a
separate vote is required by the Investment Company Act of 1940, as amended (the
“1940 Act”), or when the matters affect only the interest of a particular series
or class. When matters are submitted to shareholders for a vote, each
shareholder is entitled to one vote for each full share owned and fractional
votes for fractional shares owned.
The Trust
does not normally hold annual meetings of shareholders. Meetings of
the shareholders shall be called by any member of the Board of Trustees upon
written request of shareholders holding, in the aggregate, not less than 10% of
the shares, such request specifying the purpose or purposes for which such
meeting is to be called.
Interests
in the Fund are represented by shares of beneficial interest each with no par
value per share. Each share of the Fund represents an equal
proportionate interest in the assets and liabilities belonging to the Fund and
is entitled to such distributions out of the income belonging to the Fund as may
be declared by the Board of Trustees.
The Board
of Trustees has the authority from time to time to divide or combine the shares
of any series into a greater or lesser number of shares of that series without
materially changing the proportionate beneficial interest of the shares of that
series in the assets belonging to that series or materially affecting the rights
of shares of any other series. In case of the liquidation of a
series, the holders of shares of the series being liquidated are entitled to
receive a distribution out of the assets, net of the liabilities, belonging to
that series. Expenses attributable to any series (or class thereof)
are borne by that series (or class). Any general expenses of the
Trust not readily identifiable as belonging to a particular series are allocated
by, or under the direction of, the Board of Trustees to all applicable series
(and classes thereof) in such manner and on such basis as the Board of Trustees
in its sole discretion deems fair and equitable. No shareholder is
liable to further calls for the payment of any sum of money or assessment
whatsoever without his or her express consent.
All
consideration received by the Trust for the issue or sale of its shares,
together with all assets in which such consideration is invested or reinvested,
and all income, earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds, subject only to the
rights of creditors, shall constitute the underlying assets of the
Fund.
New Path
Capital Advisors (the “Adviser”) serves as the investment adviser for the
Fund.
Investment Policies, Strategies and Associated
Risks
The
following discussion supplements the description of the Fund’s investment
objective and principal investment strategies set forth in the
Prospectus. Except for the fundamental investment limitations listed
below (see “Fundamental Investment Limitations”), the Fund’s investment
strategies and policies are not fundamental and may be changed by sole action of
the Board of Trustees, without shareholder approval. While the Fund
is permitted to hold securities and engage in various strategies as described
hereafter, it is not obligated to do so.
Investment
Objective
The
investment objective of the Fund is total return. There is no
assurance that the Fund will achieve its investment objective.
The Fund
seeks to achieve its investment objective by investing primarily in shares of
index based exchange-traded funds (“ETFs”), sometimes referred to in this SAI as
“Underlying Funds.” Some of the risks described below with respect to
the Fund’s investment in securities other than ETFs and exchange-traded notes
(“ETNs”) are as a result of the Fund’s investment in the Underlying Funds, which
may directly invest in these other securities.
Diversification
The Fund
is non-diversified. A non-diversified fund is a fund that does not
satisfy the definition of a “diversified company” set forth in the 1940
Act. A “diversified company” means that as to 75% of the Fund’s total
assets (1) no more than 5% may be invested in the securities of a single issuer,
and (2) the Fund may not hold more than 10% of the outstanding voting securities
of a single issuer.
Since the
Fund intends to qualify as a “regulated investment company” under the Internal
Revenue Code of 1986, as amended, (the “Code”), the Fund will limit its
investment, excluding cash, cash items (including receivables), U.S. government
securities and securities of other regulated investment companies, so that at
the close of each quarter of the taxable year, (1) not more than 25% of the
Fund’s total assets will be invested in the securities of a single issuer, and
(2) with respect to 50% of its total assets, not more than 5% of the Fund’s
total assets will be invested in the securities of a single issuer nor represent
more than 10% of the issuer’s outstanding voting securities.
Because the Fund may invest a great
percentage of its assets in the securities of fewer issuers, the Fund is subject
to the risk that its performance may be hurt disproportionately by the poor
performance of relatively few securities.
Percentage
Limitations
The
Fund’s compliance with its investment policy and limitation will be determined
immediately after and as a result of the Fund’s acquisition of such security or
other asset. Accordingly, except with respect to borrowing or
illiquid securities, any subsequent change in values, net assets or other
circumstances will not be considered when determining whether an investment
complies with the Fund’s investment policies and limitations. In
addition, if a bankruptcy or other extraordinary event occurs concerning a
particular investment by the Fund, the Fund may receive stock, real estate or
other investments that the Fund would not, or could not, buy. If this
happens, the Fund will sell such investments as soon as practicable while trying
to maximize the return to its shareholders.
Recent
Market Events
U.S. and
international markets have experienced significant volatility since
2008. The fixed income markets have experienced substantially lower
valuations, reduced liquidity, price volatility, credit downgrades, increased
likelihood of default and valuation difficulties. Concerns have
spread to domestic and international equity markets. In some cases,
the stock prices of individual companies have been negatively impacted even
though there may be little or no apparent degradation in the financial
conditions or prospects of that company. As a result of this
significant volatility, many of the following risks associated with an
investment in the Fund may be increased. Continuing market problems
may have adverse effects on the Fund.
Investment
Company Securities
The Fund
currently intends to limit its investments in Underlying Funds in accordance
with the Investment Company Act of 1940, as amended, (the “1940 Act”) or with
certain terms and conditions of applicable exemptive orders issued by the SEC if
such terms and conditions are approved by the Board. This prohibition
may prevent the Fund from allocating its investment in the manner the Adviser
considers optimal.
The
acquisition of shares by the Fund in other registered investment companies is
subject to the restrictions of Section 12(d)(1)(F) of the 1940 Act and the rules
thereunder. Those provisions limit investments in securities issued
by other registered investment companies (except for money market funds) so that
not more than 3% of the outstanding stock of any one investment company will be
owned by the Fund, or its affiliated persons, as a whole. Investments
beyond the 3% limit may, however, be permitted by an
exemptive order obtained by the other registered investment companies that
permits the Fund to invest in the other registered investment companies beyond
the limits of Section 12(d)(1) and the rules thereunder, subject to certain
terms and conditions, including that the Fund enters into an agreement with the
other registered investment companies regarding the terms of the
investment.
The
Fund’s strategy of indirect investment through other investment companies is
non-fundamental and may therefore be changed, without shareholder approval, to a
strategy of direct investment as a means to achieve its investment
objectives. As a shareholder of other investment companies, the Fund
bears, along with other shareholders, its pro rata portion of the other
investment companies’ expenses, including management fees, and such fees and
other expenses will be borne indirectly by the Fund’s
shareholders. These expenses are in addition to the advisory and
other expenses that the Fund bears directly in connection with its own
operations.
The Fund
primarily invests in ETFs. ETFs are open-end investment companies
with shares that are listed on a national securities exchange. An ETF
is similar to a traditional mutual fund, but trades at different prices during
the day on a security exchange, like a stock. Similar to investments
in other investment companies discussed above, the Fund’s investments in ETFs
will involve duplication of management fees and other expenses since the Fund
will be investing in another investment company. In addition, the
Fund’s investment in ETFs is also subject to its limitations on investments in
investment companies discussed above. To the extent the Fund invests
in ETFs which focus on a particular market segment or industry, the Fund will
also be subject to the risks associated with investing in those sectors or
industries. The shares of the ETFs in which the Fund will invest will
be listed on a national securities exchange and the Fund will purchase and sell
these shares on the secondary market at its current market price, which may be
more or less than its net asset value (“NAV”) per share.
As a
purchaser of ETF shares on the secondary market, the Fund will be subject to the
market risk associated with owning any security whose value is based on market
price. ETF shares historically have tended to trade at or near their
NAV per share, but there is no guarantee that they will continue to do
so. Unlike traditional mutual funds, shares of an ETF may be
purchased and redeemed directly from the ETF only in large blocks (typically,
50,000 shares or more) and only through participating organizations that have
entered into contractual agreements with the ETF. The Fund does not
expect to enter into such agreements and therefore will not be able to purchase
and redeem its shares directly from the ETF.
Exchange-Traded
Notes
The Fund
may invest in ETNs. An ETN is a type of unsecured,
unsubordinated debt security that differs from other types of bonds and notes
because ETN returns are typically based upon the performance of a market
index. ETNs are publicly traded on a U.S. securities
exchange. An ETN incurs certain expenses not incurred by its
applicable index, and an investment in an ETN will bear its proportionate share
of any fees and expenses borne by the ETN. The market value of an ETN share may
differ from its NAV; the share may trade at a premium or discount to its NAV,
which may be due to, among other things, differences in the supply and demand in
the market for the share. Although an ETN is a debt security, it is
unlike a typical bond, in that there are no periodic interest payments and
principal is not protected. ETNs are subject to credit risk and the
value of the ETN may drop due to a downgrade in the issuer’s credit rating,
despite the underlying market benchmark or strategy remaining
unchanged.
Equity
Securities
An equity
security represents a proportionate share of the ownership of a
company. Its value is based on the success of the company’s business,
any income paid to stockholders, the value of its assets and general market
conditions. Common stocks and preferred stocks are examples of equity
securities. The fundamental risk of investing in common and preferred
stock is the risk that the value of the stock might
decrease.
Common
Stock
Common
stock represents an ownership interest in a company. In addition to the general
risks set forth above, investments in common stocks are subject to the risk that
in the event a company in which the Fund invests is liquidated, the holders of
preferred stock and creditors of that company will be paid in full before any
payments are made to the Fund as holders of common stock. It is
possible that all assets of that company will be exhausted before any payments
are made to the Fund.
Preferred
Stock
Preferred
stock represents an ownership interest in a company, often pays dividends at a
specific rate and has a preference over common stocks in dividend payments and
liquidation of assets. A preferred stock is a blend of the characteristics of a
bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the
seniority of a bond and, unlike common stock its participation in the issuer’s
growth may be limited. Although the dividend is set at a fixed annual
rate, in some circumstances it can be changed or omitted by the issuer. In
addition, preferred stock usually does not have voting rights.
Foreign
Investments and Currencies
The Fund
may invest in securities of foreign issuers that are not publicly traded in the
United States, purchase and sell foreign currency on a spot basis and enter into
forward currency contracts (see “Forward Currency Contracts,”
below). The Fund may also invest in American Depositary Receipts
(“ADRs”) and foreign securities that are publicly traded on a U.S.
exchange. Investments in ADRs and foreign securities involve certain
inherent risks, including the following:
Depositary
Receipts. Generally, ADRs, in registered form, are denominated
in U.S. dollars and are designed for use in the U.S. securities
markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. ADRs may
be purchased through “sponsored” or “unsponsored” facilities. A
sponsored facility is established jointly by the issuer of the underlying
security and a depositary, whereas a depositary may establish an unsponsored
facility without participation by the issuer of the depositary
security. Holders of unsponsored depositary receipts generally bear
all the costs of such facilities, and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts of the deposited securities. Accordingly,
available information concerning the issuer may not be current and the prices of
unsponsored depositary receipts may be more volatile than the prices of
sponsored depositary receipts. For purposes of the Fund’s investment
policies, ADRs are deemed to have the same classification as the underlying
securities they represent. Thus, an ADR representing ownership of
common stock will be treated as common stock.
Political and Economic
Factors. Individual foreign economies of certain countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not
be as stable as those of the United States. Governments in certain
foreign countries also continue to participate to a significant degree, through
ownership interest or regulation, in their respective
economies. Action by these governments could include restrictions on
foreign investment, nationalization, expropriation of goods or imposition of
taxes, and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are
heavily dependent upon international trade and are accordingly affected by the
trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade
legislation could have a significant adverse effect upon the securities markets
of those countries.
Currency
Fluctuations. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of the Fund’s assets denominated in that
currency. Such changes will also affect the Fund’s
income. The value of the Fund’s assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
Market
Characteristics. The Adviser expects that many foreign
securities in which the Fund may invest could be purchased in over-the-counter
markets or on exchanges located in the countries in which the principal offices
of the issuers of the various securities are located, if that is the best
available market. Foreign exchanges and markets may be more volatile
than those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets, and the Fund’s
investments in foreign securities may be less liquid and more volatile than
investments in U.S. securities. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States. Foreign
security trading practices, including those involving securities settlement
where Fund assets may be released prior to receipt of payment or securities, may
expose the Fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer.
Legal and Regulatory
Matters. Certain foreign countries may have less supervision
of securities markets, brokers and issuers of securities, and less financial
information available from issuers, than is available in the United
States.
Taxes. The
interest and dividends payable on certain of the Fund’s foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to Fund shareholders.
Costs. To the
extent that the Fund invests in foreign securities, its expense ratio is likely
to be higher than those of investment companies investing only in domestic
securities, because related brokerage costs and the cost of maintaining the
custody of foreign securities may be higher.
Additional Risks of Emerging
Markets. In addition, the Fund may invest in foreign
securities of companies that are located in developing or emerging
markets. Investing in securities of issuers located in these markets
may pose greater risks not typically associated with investing in more
established markets, such as increased risk of social, political and economic
instability. Emerging market countries typically have smaller
securities markets than developed countries and therefore less liquidity and
greater price volatility than more developed markets. Securities
traded in emerging markets may also be subject to risks associated with the lack
of modern technology, poor infrastructures, the lack of capital base to expand
business operations and the inexperience of financial intermediaries, custodians
and transfer agents. Emerging market countries are also more likely
to impose restrictions on the repatriation of an investor’s assets and even
where there is no outright restriction on repatriation, the mechanics of
repatriations may delay or impede the Fund’s ability to obtain possession of its
assets. As a result, there may be an increased risk or price
volatility associated with the Fund’s investments in emerging market countries,
which may be magnified by currency fluctuations.
Commodities
Companies
involved in commodity-related businesses may be subject to greater volatility
than investments in companies involved in more traditional businesses. This is
because the value of companies in commodity-related businesses may be affected
by overall market movements and other factors affecting the value of a
particular industry or commodity, such as weather, disease, embargoes, or
political and regulatory developments. The prices of commodities may
move in different directions than investments in traditional equity and debt
securities when the value of those traditional securities is declining due to
adverse economic conditions. As an example, during periods of rising
inflation, historically debt securities have tended to decline in value due to
the general increase in the prevailing interest rates. Conversely,
during those same periods, historically the prices of certain commodities, such
as oil and metals, have tended to increase. However, there can be no
guarantee of such performance in the future.
Real
Estate Investment Trusts (“REITs”)
REITs are
pooled investment vehicles which invest primarily in income producing real
estate or real estate related loans or interest. 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 property that has appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. The real property and
mortgages serving as investment vehicles for REITs may be either residential or
commercial in nature and may include healthcare facilities. Like investment
companies, REITs are not taxed on income distributed to shareholders provided
they comply with several requirements of the Internal Revenue Code. Such tax
requirements may limit a REIT’s ability to respond to changes in the commercial
real estate market.
Fixed-Income
Securities
The Fund
may invest in a wide range of fixed-income securities, which may include
obligations of any rating or maturity. The Fund may invest in
investment grade corporate debt securities and below investment grade corporate
debt securities (commonly known as “junk bonds” or “high yield
bonds”). Investment grade corporate bonds are those rated BBB- or
better by Standard & Poor’s Rating Service, Inc. (“S&P”) or Baa3 or
better by Moody’s Investors Service, Inc. (“Moody’s”) each of which are
considered a nationally recognized statistical rating organization
(“NRSRO”). Securities rated BBB by S&P are considered investment
grade, but Moody’s considers securities rated Baa to have speculative
characteristics. The Fund will not invest in securities that are
rated below D by S&P or Moody’s. The Fund may hold a debt
security rated below D if a downgrade occurs after the security has been
purchased. See Appendix A for a
description of corporate bond ratings. The Fund may also invest in
unrated debt securities that the Adviser believes are of comparable quality to
the rated securities in which the Fund may purchase.
Junk Bonds. Junk
bonds generally offer a higher current yield than that available for investment
grade issues. However, below investment grade debt securities involve
higher risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuations in
response to changes in interest rates. During periods of economic
downturn or rising interest rates, highly leveraged issuers may experience
financial stress that could adversely affect their ability to make payments of
interest and principal and increase the possibility of
default. At times in recent years, the prices of many
below investment grade debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on below investment grade debt
securities rose dramatically, reflecting the risk that holders of such
securities could lose a substantial portion of their value as a result of the
issuers’ financial restructuring or default. There can be no
assurance that such price declines will not recur. The market for
below investment grade debt issues generally is thinner and less active than
that for higher quality securities, which may limit the Fund’s ability to sell
such securities at fair value in response to changes in the economy or financial
markets. Adverse publicity and investor perceptions, whether based on
fundamental analysis, may also decrease the values and liquidity of below
investment grade debt securities, especially in a thinly traded
market. Changes by recognized rating services in their rating of a
debt security may affect the value of these investments. The Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase. However, the Adviser will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Fund’s investment objective.
Variable and Floating Rate
Securities. Variable
and floating rate securities provide for a periodic adjustment in the interest
rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
Corporate Debt
Securities. Corporate debt securities are fixed-income
securities issued by businesses to finance their operations, although corporate
debt instruments may also include bank loans to companies. Notes, bonds,
debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or
unsecured status. Commercial paper has the shortest term and is
usually unsecured.
The broad
category of corporate debt securities includes debt issued by domestic or
foreign companies of all kinds, including those with small-, mid- and
large-capitalizations. Corporate debt may be rated investment grade or below
investment grade and may carry variable or floating rates of
interest.
Because
of the wide range of types and maturities of corporate debt securities, as well
as the range of creditworthiness of its issuers, corporate debt securities have
widely varying potentials for return and risk profiles. For example,
commercial paper issued by a large established domestic corporation that is
rated investment grade may have a modest return on principal, but carries
relatively limited risk. On the other hand, a long-term corporate
note issued by a small foreign corporation from an emerging market country that
has not been rated may have the potential for relatively large returns on
principal, but carries a relatively high degree of risk.
Corporate
debt securities carry credit risk, interest rate risk and prepayment
risk. Credit risk is the risk that the Fund could lose money if the
issuer of a corporate debt security is unable to pay interest or repay principal
when it is due. Some corporate debt securities that are rated below
investment grade are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt
securities. The credit risk of a particular issuer’s debt security
may vary based on its priority for repayment. For example, higher
ranking (senior) debt securities have a higher priority than lower ranking
(subordinated) securities. This means that the issuer might not make
payments on subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of
higher-ranking senior securities may receive amounts otherwise payable to the
holders of more junior securities.
Interest
rate risk is the risk that the value of certain corporate debt securities will
tend to fall when interest rates rise. In general, corporate debt
securities with longer terms tend to fall more in value when interest rates rise
than corporate debt securities with shorter terms. Prepayment
risk occurs when issuers prepay fixed rate debt securities when interest rates
fall, forcing the Fund to invest in securities with lower interest rates.
Issuers of debt securities are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors that
may restrict the ability of the issuer to pay, when due, the principal of and
interest on its debt securities. The possibility exists therefore, that, as a
result of bankruptcy, litigation or other conditions, the ability of an issuer
to pay, when due, the principal of and interest on its debt securities may
become impaired.
Convertible Securities.
Convertible securities include fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer’s underlying
common stock or other equity security at the option of the holder during a
specified period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units consisting
of “usable” bonds and warrants or a combination of the features of several of
these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for a
variety of investment strategies. The Fund will exchange or convert
convertible securities into shares of underlying common stock when, in the
opinion of the Adviser, the investment characteristics of the underlying common
stock or other equity security will assist the Fund in achieving its investment
objectives. The Fund may also elect to hold or trade convertible
securities. In selecting convertible securities, the Adviser
evaluates the investment characteristics of the convertible security as a fixed
income instrument, and the investment potential of the underlying equity
security for capital appreciation.
Asset-Backed Securities.
Asset-backed securities represent an interest in a pool of assets such as car
loans and credit card receivables. Almost any type of fixed income
assets (including other fixed income securities) may be used to create an
asset-backed security. However, most asset-backed securities involve consumer or
commercial debts with maturities of less than ten years. Asset-backed securities
may take the form of commercial paper or notes, in addition to pass-through
certificates or asset-backed bonds.
Mortgage-Backed Securities.
Mortgage-Backed Securities represent interests in pools of mortgages. The
underlying mortgages normally have similar interest rates, maturities and other
terms. Mortgages may have fixed or adjustable interest rates. Interests in pools
of adjustable rate mortgages are known as ARMs. Mortgage-backed
securities come in a variety of forms. Many have extremely complicated terms.
The simplest form of mortgage-backed securities is a “pass-through certificate.”
Holders of pass-through certificates receive a pro rata share of the payments
from the underlying mortgages. Holders also receive a pro rata share of any
prepayments, so they assume all the prepayment risk of the underlying
mortgages.
Collateralized
mortgage obligations (“CMOs”) are complicated instruments that allocate payments
and prepayments from an underlying pass-through certificate among holders of
different classes of mortgage-backed securities. This creates different
prepayment and market risks for each CMO class. In addition, CMOs may
allocate interest payments to one class (Interest Only or IOs) and principal
payments to another class (Principal Only or POs). POs increase in value when
prepayment rates increase. In contrast, IOs decrease in value when prepayments
increase, because the underlying mortgages generate less interest payments.
However, IOs’ prices tend to increase when interest rates rise (and prepayments
fall), making IOs a useful hedge against market risk.
Generally,
homeowners have the option to prepay their mortgages at any time without
penalty. Homeowners frequently refinance high rate mortgages when mortgage rates
fall. This results in the prepayment of the mortgages underlying mortgage-backed
securities, which deprives holders of the securities of the higher yields.
Conversely, when mortgage rates increase, prepayments due to refinancings
decline. This extends the life of mortgage-backed securities with lower yields.
As a result, increases in prepayments of premium mortgage-backed securities, or
decreases in prepayments of discount mortgage-backed securities, may reduce
their yield and price. This relationship between interest rates and
mortgage prepayments makes the price of mortgage-backed securities more volatile
than most other types of fixed income securities with comparable credit risks.
Mortgage-backed securities tend to pay higher yields to compensate for this
volatility.
Municipal
Securities. Municipal Securities are fixed income securities
issued by states, counties, cities and other political subdivisions and
authorities. Although most municipal securities are exempt from federal income
tax, municipalities also may issue taxable securities. Tax-exempt securities are
generally classified by their source of payment.
Zero-Coupon
Securities. Zero-coupon securities make no periodic interest
payments, but are sold at a deep discount from their face value. The
buyer recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity
date. The discount varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the
issuer’s perceived credit quality. If the issuer defaults, the holder
may not receive any return on its investment. Because zero-coupon
securities bear no interest, their price fluctuates more than other types of
bonds. Since zero-coupon bondholders do not receive interest
payments, when interest rates rise, zero-coupon securities fall more
dramatically in value than bonds paying interest on a current
basis. When interest rates fall, zero-coupon securities rise more
rapidly in value because the bonds reflect a fixed rate of return. An
investment in zero-coupon may cause the Fund to recognize income and make
distributions to shareholders before it receives any cash payments on its
investment.
Unrated Debt
Securities. The Fund may also invest in unrated debt
securities. Unrated debt, while not necessarily lower in quality than
rated securities, may not have as broad a market. Because of the size
and perceived demand for the issue, among other factors, certain issuers may
decide not to pay the cost of getting a rating for their bonds. The
creditworthiness of the issuer, as well as any financial institution or other
party responsible for payments on the security, will be analyzed to determine
whether to purchase unrated bonds.
U.S.
Government Obligations
The Fund
may invest in U.S. government obligations. U.S. government
obligations include securities issued or guaranteed as to principal and interest
by the U.S. government, its agencies or instrumentalities. Treasury
bills, the most frequently issued marketable government securities, have a
maturity of up to one year and are issued on a discount basis. U.S.
government obligations include securities issued or guaranteed by
government-sponsored enterprises.
Payment
of principal and interest on U.S. government obligations may be backed by the
full faith and credit of the United States or may be backed solely by the
issuing or guaranteeing agency or instrumentality itself. In the
latter case, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance
that the U.S. government would provide financial support to its agencies or
instrumentalities, including government-sponsored enterprises, where it is not
obligated to do so (see “Agency Obligations,” below). In addition,
U.S. government obligations are subject to fluctuations in market value due to
fluctuations in market interest rates. As a general matter, the value
of debt instruments, including U.S. government obligations, declines when market
interest rates increase and rises when market interest rates
decrease. Certain types of U.S. government obligations are subject to
fluctuations in yield or value due to their structure or contract
terms.
Agency
Obligations
The Fund
may invest in agency obligations, such as the Export-Import Bank of the United
States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Government National Mortgage Association (“GNMA”), commonly known as “Ginnie
Mae,” Federal National Mortgage Association (“FNMA”), commonly known as “Fannie
Mae,” Federal Home Loan Mortgage Corporation (“FHLMC”), commonly known as
“Freddie Mae,” and the Student Loan Marketing Association
(“SLMA”). Some, such as those of the Export-Import Bank of United
States, are supported only by the right of the issuer to borrow from the
Treasury; others, such as those of the FNMA and FHLMC, are supported by only the
discretionary authority of the U.S. government to purchase the agency’s
obligations; still others, such as those of the SLMA, are supported only by the
credit of the instrumentality. No assurance can be given that the
U.S. government would provide financial support to U.S. government-sponsored
instrumentalities because
they are not obligated by law to do so. As a result, there is a risk
that these entities will default on a financial obligation. For
instance, in September 2008, at the direction of the U.S. Treasury, FNMA and
FHLMC were placed into conservatorship under the Federal Housing Finance Agency
(“FHFA”), a newly created independent regulator.
Warrants
and Rights
The Fund
may purchase warrants and rights, which are instruments that permit the Fund to
acquire, by subscription, the capital stock of a corporation at a set price,
regardless of the market price for such stock. The principal
difference between warrants and rights is their term-rights typically expire
within weeks while warrants have longer durations. Neither rights nor
warrants have voting rights or pay dividends. The market price of
warrants is usually significantly less than the current price of the underlying
stock. Thus, there is a greater risk that warrants might drop in
value at a faster rate than the underlying stock.
When-Issued
Securities
When-issued
securities transactions involve a commitment by the Fund to purchase or sell
particular securities with payment and delivery taking place at a future date,
and permit the Fund to lock in a price or yield on a security it owns or intends
to purchase, regardless of future changes in interest rates or market
action. No income accrues to the purchaser of a security on a
when-issued basis prior to delivery. Such securities are recorded as
an asset and its value may fluctuate. Purchasing a security on a
when-issued basis can involve a risk that the market price at the time of
delivery may be lower than the agreed-upon purchase price, in which case there
could be an unrealized loss at the time of delivery. The Fund will
only make commitments to purchase securities on a when-issued basis with the
intention of actually acquiring the securities. The Fund will
establish in a segregated account, or earmark as segregated on the books of the
Custodian, an amount of liquid assets equal to 102% of the amount of its
commitment to purchase securities on a when-issued basis. These
assets will be marked-to-market daily, and the Fund will increase the aggregate
value of the assets, as necessary, to ensure that the assets are at least equal
to 102% of the amount of the Fund’s commitments.
Initial
Public Offerings
The Fund
may invest in securities offered companies in initial public offerings
(“IPOs”). Because IPO shares frequently are volatile in price, the
Fund may hold IPO shares for a very short period of time. This may
increase the turnover of the Fund’s portfolio and may lead to increased expenses
to the Fund, such as commissions and transaction costs. By selling
IPO shares, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Companies that offer securities in IPOs
tend to typically have small market capitalizations and therefore their
securities may be more volatile and less liquid than those issued by larger
companies. Certain companies offering securities in an IPO may have
limited operating experience and, as a result face a greater risk of business
failure.
Repurchase
Agreements
The Fund
may enter into repurchase agreements. Under such agreements, the Fund
agrees to purchase U.S. government obligations from a counterparty and the
counterparty agrees to repurchase the securities at a mutually agreed upon time
and price. The repurchase price may be higher than the purchase
price, the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price on repurchase. In either case, the income
to the Fund is unrelated to the interest rate on the security
itself. Such repurchase agreements will be made only with banks with
assets of $500 million or more that are insured by the Federal Deposit Insurance
Corporation or with government securities dealers recognized by the Federal
Reserve Board and registered as broker-dealers with the SEC or exempt from such
registration. The Fund will generally enter into repurchase
agreements of short durations, from overnight to one week, although the
underlying securities generally have longer maturities. The Fund may
not enter into a repurchase agreement with more than seven days to maturity if,
as a result, more than 5% of the value of the Fund’s net assets would be
invested in illiquid securities including such repurchase
agreements. To the extent necessary to facilitate compliance with
Section 12(d)(3) of the 1940 Act and Rule 12d3-1 promulgated thereunder, the
Fund will ensure that repurchase agreements will be collateralized fully to the
extent required by Rule 5b-3.
For
purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from the
Fund to the seller of the U.S. government obligations that are subject to the
repurchase agreement. It is not clear whether a court would consider
the U.S. government obligations to be acquired by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a
loan by the Fund to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the U.S.
government obligations before its repurchase under a repurchase agreement, the
Fund could encounter delays and incur costs before being able to sell the
underlying U.S. government obligations. Delays may involve loss of
interest or a decline in price of the U.S. government obligations. If
a court characterizes the transaction as a loan and the Fund has not perfected a
security interest in the U.S. government obligations, the Fund may be required
to return the securities to the seller’s estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be
at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the
Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the other party, in this case
the seller of the U.S. government security.
Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the U.S. government
obligations. However, the Fund will always receive as collateral for
any repurchase agreement to which it is a party securities acceptable to the
Adviser, the market value of which is equal to at least 100% of the repurchase
price, and the Fund will make payment against such securities only upon physical
delivery or evidence of book entry transfer to the account of its
Custodian. If the market value of the U.S. government obligations
subject to the repurchase agreement become less than the repurchase price
(including interest), the Fund will direct the seller of the U.S. government
obligations to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund could be unsuccessful
in seeking to enforce on the seller a contractual obligation to deliver
additional securities.
Temporary
Defensive Positions and Cash Investments
The Fund
may temporarily depart from its investment strategies by making short-term
investments in cash, cash equivalents, and high-quality, short-term debt
securities and money market instruments for temporary defensive purposes in
response to adverse market, economic or political conditions. This
may result in the Fund not achieving its investment objective during that
period.
For
longer periods of time, the Fund may hold a substantial position in cash and
cash equivalents. If the market advances during periods when the Fund
is holding a large cash position, the Fund may not participate to the extent it
would have if the Fund had been more fully invested. To the extent
that the Fund uses a money market fund for its cash position, there will be some
duplication of expenses because the Fund would bear its pro rata portion of such
money market fund’s advisory fees and operational expenses.
Investments
in cash equivalents, high quality, short-term debt securities and money market
instruments are subject to credit risk and interest rate risk although to a
lesser extent than longer-term debt securities due to their short-term,
significant liquidity, and the high credit quality typically associated with the
issues of such securities.
The Fund
may invest in any of the following securities and instruments:
Money Market Mutual
Funds. Generally, money market mutual funds seek to earn
income consistent with the preservation of capital and maintenance of
liquidity. They primarily invest in high quality money market
obligations, including U.S. government obligations, bank obligations and
high-grade corporate instruments. These investments generally mature
within 397 days from the date of purchase. An investment in a money
market mutual fund is not a bank deposit and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any government agency.
To the
extent that the Fund invests in money market mutual funds, your cost of
investing in the Fund will generally be higher since you will indirectly bear
fees and expenses charged by the underlying money market mutual funds in
addition to the Fund’s direct fees and expenses. Furthermore,
investing in money market mutual funds could affect the timing, amount and
character of distributions to you and therefore may increase the amount of taxes
payable by you.
Bank Certificates of Deposit,
Bankers’ Acceptances and Time Deposits. The Fund may acquire
certificates of deposit, bankers’ acceptances and time
deposits. Certificates of deposit are negotiable certificates issued
against monies deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers’ acceptances are negotiable
drafts or bills of exchange, normally drawn by an importer or exporter to pay
for specific merchandise, which are “accepted” by a bank, meaning in effect that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Certificates of deposit and bankers’ acceptances acquired
by the Fund will be dollar-denominated obligations of domestic or foreign banks
or financial institutions which at the time of purchase have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully
insured by the U.S. government.
In
addition to purchasing certificates of deposit and bankers’ acceptances, to the
extent permitted under the investment objective and policies stated above and in
the Prospectus, the Fund may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
Savings Association
Obligations. The Fund may invest in certificates of deposit
(interest-bearing time deposits) issued by savings banks or savings and loan
associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than
$100 million if the principal amount of such obligations is fully insured
by the U.S. government.
Commercial Paper, Short-Term Notes
and Other Corporate Obligations. The Fund may invest a portion
of its assets in commercial paper and short-term notes. Commercial
paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes
will normally have maturities of less than nine months and fixed rates of
return, although such instruments may have maturities of up to one
year.
Commercial
paper and short-term notes will consist of issues rated at the time of purchase
“A-2” or higher by S&P, “Prime-1” or “Prime-2” by Moody’s, or similarly
rated by another nationally recognized statistical rating organization or, if
unrated, will be determined by the Adviser to be of comparable
quality.
Corporate
obligations include bonds and notes issued by corporations to finance
longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated “A” or higher by S&P or
“A” or higher by Moody’s.
Illiquid
Securities
Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act, securities which are otherwise not readily marketable, and
securities such as repurchase agreements having a maturity of longer than seven
days and purchased OTC options. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. In recent years, however, a large institutional
market has developed for certain securities that are not registered under the
Securities Act including repurchase agreements, commercial paper, foreign
securities, municipal securities and corporate bonds and
notes. Institutional investors depend on an efficient institutional
market in which the unregistered security can be readily resold or on an
issuer’s ability to honor a demand for repayment. The fact that there
are contractual or legal restrictions on resale to the general public or to
certain institutions may not be indicative of the liquidity of such
investments. The Board of Trustees may determine that such securities
are not illiquid securities notwithstanding their legal or contractual
restrictions on resale. In all other cases, however, securities
subject to restrictions on resale will be deemed illiquid. The Fund
will determine a security to be illiquid if it cannot be sold or disposed of in
the ordinary course of business within seven days at the value at which the Fund
has valued the security. Factors considered in determining whether a
security is illiquid may include, but are not limited to: the frequency of
trades and quotes for the security; the number of dealers willing to purchase
and sell the security and the number of potential purchasers; the number of
dealers who undertake to make a market in the security; the nature of the
security, including whether it is registered or unregistered, and the market
place; whether the security has been rated by an NRSRO; the period of time
remaining until the maturity of a debt instrument or until the principal amount
of a demand instrument can be recovered through demand; the nature of any
restrictions on resale; and with respect to municipal lease obligations and
certificates of participation, there is reasonable assurance that the obligation
will remain liquid throughout the time the obligation is held and, if unrated,
an analysis similar to that which would be performed by an NRSRO is
performed. The Fund will not hold more than 15% of the value of its
net assets in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, over-the-counter options and certain
restricted securities not determined by the Board of Trustees to be
liquid.
Borrowing
The Fund
may borrow money in amounts of up to one-third of its total assets (including
the amount borrowed) from banks. In addition, the Fund is authorized
to borrow money from time to time for temporary, extraordinary or emergency
purposes or for clearance of transactions. The use of borrowing by
the Fund involves special risk considerations that may not be associated with
other funds having similar objectives and policies. Since
substantially all of the Fund’s assets fluctuate in value, while the interest
obligation resulting from a borrowing will be fixed by the terms of the Fund’s
agreement with its lender, the NAV per share of the Fund will tend to increase
more when its portfolio securities increase in value and to decrease more when
its portfolio assets decrease in value than would otherwise be the case if the
Fund did not borrow funds. In addition, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market
conditions, the Fund might have to sell portfolio securities to meet interest or
principal payments at a time when fundamental investment considerations would
not favor such sales.
Fundamental and Non-Fundamental Investment
Limitations
The Trust
(on behalf of the Fund) has adopted the following restrictions as fundamental
policies, which may not be changed without the favorable “vote of the holders of
a majority of the outstanding voting securities” of the Fund, as defined under
the 1940 Act. Under the 1940 Act, the “vote of the holders of a
majority of the outstanding voting securities” means the vote of the holders of
the lesser of (i) 67% of the shares of the Fund represented at a meeting at
which the holders of more than 50% of its outstanding shares are represented; or
(ii) more than 50% of the outstanding shares of the Fund.
The Fund
may not:
1. |
Issue
senior securities, borrow money or pledge its assets, except that
(i) the Fund may borrow from banks in amounts not exceeding one-third
of its total assets (including the amount borrowed) less liabilities
(other than borrowings); and (ii) this restriction shall not prohibit
the Fund from engaging in options transactions, reverse repurchase
agreements, purchasing securities on a when-issued, delayed delivery or
forward delivery basis or short sales in accordance with its objectives
and strategies; |
2. |
Underwrite
the securities of other issuers (except that the Fund may engage in
transactions involving the acquisition, disposition or resale of its
portfolio securities under circumstances where it may be considered to be
an underwriter under the Securities
Act); |
3. |
Purchase
or sell real estate or interests in real estate, unless acquired as a
result of ownership of securities (although the Fund may purchase and sell
securities which are secured by real estate and securities of companies
that invest or deal in real
estate); |
4. |
Purchase
or sell physical commodities or commodities contracts, unless acquired as
a result of ownership of securities or other instruments and provided that
this restriction does not prevent the Fund from engaging in transactions
involving currencies and futures contracts and options thereon or
investing in securities or other instruments that are secured by physical
commodities; |
5. |
Make
loans of money (except for the lending of the Fund’s portfolio securities,
repurchase agreements and purchases of debt securities consistent with the
investment policies of the Fund);
or |
6. |
Invest
in the securities of any one industry or group of industries if, as a
result, 25% or more of the Fund’s total assets would be invested in the
securities of such industry or group of industries, except that the
foregoing does not apply to investments in other investment companies or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. |
The
following lists the non-fundamental investment restriction applicable to the
Fund. This restriction can be changed by the Board of Trustees, but
the change will only be effective after prior written notice is given to
shareholders of the Fund.
The Fund
may not hold more than 15% of the value of its net assets in illiquid
securities. Illiquid securities are those securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued them. Illiquid
securities may include restricted securities not determined by the Board of
Trustees to be liquid, non-negotiable time deposits, over-the-counter options,
and repurchase agreements providing for settlement in more than seven days after
notice.
Except
with respect to borrowing and investments in illiquid securities, if a
percentage or rating restriction on investment or use of assets set forth herein
or in the Prospectus is adhered to at the time a transaction is effected, later
changes in percentage resulting from any cause other than actions by the Fund
will not be considered a violation. With respect to borrowing, if at
any time the Fund’s borrowings exceed one-third of its total assets (including
the amount borrowed) less liabilities (other than borrowings), such borrowings
will be reduced within three days, (not including Sundays and holidays) or such
longer period as may be permitted by the 1940 Act, to the extent necessary to
comply with the one-third limitation.
The
management and affairs of the Fund are supervised by the Board of
Trustees. The Board of Trustees consists of five
individuals. The Trustees are fiduciaries for the Fund’s shareholders
and are governed by the laws of the State of Delaware in this
regard. The Board of Trustees establishes policies for the operation
of the Fund and appoints the officers who conduct the daily business of the
Fund.
The
Role of the Board of Trustees
The Board
of Trustees provides oversight of the management and operations of the
Trust. Like all mutual funds, the day-to-day responsibility for the
management and operation of the Trust is the responsibility of various service
providers to the Trust and its individual series, such as the Adviser,
Distributor, Administrator, Custodian, and Transfer Agent, each of whom are
discussed in greater detail in this SAI. The Board approves all
significant agreements between the Trust and its service providers, including
the agreements with the Adviser, Distributor, Administrator, Custodian and
Transfer Agent. The Board has appointed various individuals of
certain of these service providers as officers of the Trust, with responsibility
to monitor and report to the Board on the Trust’s day-to-day
operations. In conducting this oversight, the Board receives regular
reports from these officers and service providers regarding the Trust’s
operations. The Board has appointed a Chief Compliance Officer who
reports directly to the Board and who administers the Trust’s compliance program
and regularly reports to the Board as to compliance matters, including an annual
compliance review. Some of these reports are provided as part of
formal “Board Meetings,” which are held four times per year, in person, and such
other times as the Board determines is necessary, and involve the Board’s review
of recent Trust operations. From time to time one or more members of
the Board may also meet with Trust officers in less formal settings, between
formal Board Meetings to discuss various topics. In all cases,
however, the role of the Board and of any individual Trustee is one of oversight
and not of management of the day-to-day affairs of the Trust and its oversight
role does not make the Board a guarantor of the Trust’s investments, operations
or activities.
Board
Leadership Structure
The Board
has structured itself in a manner that it believes allows it to effectively
perform its oversight function. The Board of Trustees is comprised of
four Independent Trustees – Messrs. Roel C. Campos, David A. Massart, Leonard M.
Rush and David M. Swanson – and one Interested Trustee – Mr. Robert J.
Kern. Accordingly, 80% of the members of the Board are Independent
Trustees, who are Trustees that are not affiliated with any investment adviser
to the Trust or their respective affiliates or other service providers to the
Trust or any Trust series. The Board of Trustees has established
three standing committees, an Audit Committee, a Nominating Committee and a
Valuation Committee, which are discussed in greater detail under “Board
Committees” below. Each of the Audit Committee and the Nominating
Committee are comprised entirely of Independent Trustees. The
Independent Trustees have engaged independent counsel to advise them on matters
relating to their responsibilities in connection with the Trust.
The
Trust’s Chairman, Mr. Kern, is an “interested person” of the Trust, as defined
by the 1940 Act, by virtue of the fact that he is an interested person of Quasar
Distributors, LLC, which acts as principal underwriter to many of the Trust’s
underlying funds. Mr. Kern also serves as an Executive Vice President
of the Administrator. The Trust has not appointed a lead Independent
Trustee.
In
accordance with the fund governance standards prescribed by the SEC under the
1940 Act, the Independent Trustees on the Nominating Committee select and
nominate all candidates for Independent Trustee positions. Each
Trustee was appointed to serve on the Board of Trustees because of his
experience, qualifications, attributes and skills as set forth in the subsection
“Trustee Qualifications” below.
The Board
reviews its structure regularly in light of the characteristics and
circumstances of the Trust, including: the unaffiliated nature of each
investment adviser; the number of funds that comprise the Trust; the variety of
asset classes that those funds reflect; the net assets of the Trust; the
committee structure of the Trust; and the independent distribution arrangements
of each of the Trust’s underlying funds.
The Board
has determined that the function and composition of the Audit Committee and the
Nominating Committee are appropriate means to address any potential conflicts of
interest that may arise from the Chairman’s status as an Interested
Trustee. In addition, the inclusion of all Independent Trustees as
members of the Audit Committee and the Nominating Committee allows all such
Trustees to participate in the full range of the Board of Trustees’ oversight
duties, including oversight of risk management processes discussed
below. Given the composition of the Board and the function and
composition of its various committees as described above, the Trust has
determined that the Board’s leadership structure is appropriate.
Board
Oversight of Risk Management
As part
of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel, including personnel of the Trust’s service
providers. Because risk management is a broad concept comprised of
many elements (such as, for example, investment risk, issuer and counter-party
risk, compliance risk, operational risks, business continuity risks, etc.) the
oversight of different types of risks is handled in different
ways. For example, the Chief Compliance Officer regularly reports to
the Board during Board Meetings and meets in executive session with the
Independent Trustees and their legal counsel to discuss compliance and
operational risks. In addition, Mr. Rush, the Independent Trustee
designated as the Audit Committee’s “audit committee financial expert,” meets
with the President, Treasurer and the Fund’s independent registered public
accounting firm to discuss, among other things, the internal control structure
of the Fund’s financial reporting function. The full Board receives
reports from the investment advisers to the underlying funds and the portfolio
managers as to investment risks.
The
Trustees and officers of the Trust are listed below with their addresses,
present positions with the Trust and principal occupations over at least the
last five years
Name,
Address and
Age |
Position(s)
Held
with
the
Trust |
Term
of
Office
and
Length
of
Time
Served |
Number
of
Portfolios
in
Trust
Overseen
by
Trustee |
Principal
Occupation(s)
During
the Past Five
Years |
Other
Directorships
Held
by Trustee |
Independent
Trustees |
|
|
|
Roel
C. Campos, Esq.
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
65 |
Trustee
|
Indefinite
Term;
Since
April 2011 |
21
|
Partner,
Locke Lord LLP (a law firm) (2011-present); Partner, Cooley LLP (a law
firm) (2007-2011); Commissioner, U.S. Securities and Exchange Commission
(2002-2007) |
Director,
WellCare
Health
Plans,
Inc.
(2013-Present);
Director,
Regional
Management
Corp.
(2012-Present)
|
David
A. Massart
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
46
|
Trustee
|
Indefinite
Term;
Since
April 2011 |
21
|
Co-Founder
and Chief Investment Strategist, Next Generation Wealth Management, Inc.
(2005-present) |
Independent
Trustee,
ETF
Series Solutions
(3
Portfolios) (2012-Present) |
Leonard
M. Rush, CPA
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
68 |
Trustee
|
Indefinite
Term;
Since
April 2011 |
21
|
Chief
Financial Officer, Robert W. Baird & Co. Incorporated,
(2000-2011) |
Independent
Trustee,
ETF
Series Solutions
(3
Portfolios) (2012-Present); Director, Anchor Bancorp Wisconsin, Inc.
(2011-2013) |
David
M. Swanson
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
57
|
Trustee
|
Indefinite
Term;
Since
April 2011 |
21
|
Founder
and Managing Principal, SwanDog Strategic Marketing, LLC (2006-present);
Executive Vice President, Calamos Investments (2004-2006) |
Independent
Trustee,
ALPS
Variable
Insurance
Trust
(7
Portfolios) (2006-Present) |
Interested
Trustee |
|
|
|
Robert
J. Kern*
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
55 |
Chairman,
and
Trustee
|
Indefinite
Term;
Since
January 2011 |
21
|
Executive
Vice President, U.S. Bancorp Fund Services, LLC (1994-present)
|
None
|
Name,
Address and
Age |
Position(s)
Held
with
the
Trust |
Term
of
Office
and
Length
of
Time
Served |
Number
of
Portfolios
in
Trust
Overseen
by
Trustee |
Principal
Occupation(s)
During
the Past Five
Years |
Other
Directorships
Held
by Trustee |
Officers |
|
|
|
James
R. Arnold
615
E. Michigan St.
Milwaukee,
WI
53202
Age:
56
|
President
and
Principal
Executive
Officer
|
Indefinite
Term,
Since
January 2011 |
N/A
|
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2002-present)
|
N/A
|
Deborah
Ward
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
47
|
Vice
President,
Chief
Compliance
Officer
and
Anti-Money
Laundering
Officer
|
Indefinite
Term;
Since
April 2013 |
N/A
|
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2004-present)
|
N/A
|
Brian
R. Wiedmeyer
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
40
|
Treasurer
and
Principal
Financial
Officer |
Indefinite
Term;
Since
January 2011 |
N/A
|
Vice
President, U.S. Bancorp Fund Services, LLC (2005-present) |
N/A
|
Angela
L. Pingel, Esq.
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
42
|
Secretary
|
Indefinite
Term;
Since
January 2011 |
N/A
|
Vice
President and Counsel, U.S. Bancorp Fund Services, LLC (2011-present);
Vice President and Securities Counsel, Marshall & Ilsley Trust Company
N.A. (2007-2010) |
N/A
|
Ryan
L. Roell
615
E. Michigan St.
Milwaukee,
WI 53202
Age:
40 |
Assistant
Treasurer
|
Indefinite
Term;
Since
September
2012 |
N/A
|
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2005-present)
|
N/A
|
* Mr. Kern is an “interested
person” of the Trust as defined by the 1940 Act by virtue
of the fact that he is an interested person of Quasar Distributors, LLC,
the Fund’s principal underwriter.
The Board
believes that each of the Trustees has the qualifications, experience,
attributes and skills appropriate to their continued service as Trustees of the
Trust in light of the Trust’s business and structure. The Trustees
have substantial business and professional backgrounds that indicate they have
the ability to critically review, evaluate and assess information provided to
them. Certain of these business and professional experiences are set
forth in detail in the table above. In addition, the Trustees have
substantial board experience and, in their service to the Trust, have gained
substantial insight as to the operation of the Trust. The Board
annually conducts a “self-assessment” wherein the effectiveness of the Board and
the individual Trustees is reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each individual Trustee. The
information provided below, and in the table above, is not
all-inclusive. Many of the Trustees’ qualifications to serve on the
Board involve intangible elements, such as intelligence, integrity, work ethic,
the ability to work together, the ability to communicate effectively, the
ability to exercise judgment, the ability to ask incisive questions, and
commitment to shareholder interests.
Mr.
Campos’ trustee attributes include substantial industry experience, including
being named to President Obama’s economic advisory board and transition team. He
previously was a Commissioner of the SEC and has presided over hundreds of
complex enforcement cases applying the Securities Act, the Securities Exchange
Act, the 1940 Act, and the Investment Advisers Act of 1940. Mr.
Campos extensively participated in the crafting and adoption of many of the
SEC’s recent regulatory initiatives, including the Sarbanes-Oxley Act, mutual
fund governance and compliance rules and the new National Market System and has
extensive experience advising corporate management teams and boards of directors
with respect to enforcement, internal investigations, prosecutions, securities
and international regulations and corporate governance. The Board
believes Mr. Campos’ experience, qualifications, attributes and skills on an
individual basis and in combination with those of the other Trustees lead to the
conclusion that he possesses the requisite skills and attributes as a Trustee to
carry out oversight responsibilities with respect to the Trust.
Mr.
Kern’s trustee attributes include substantial industry experience, including his
32 years of service with U.S. Bancorp Fund Services, LLC (the fund accountant,
fund administrator, transfer agent and custodian to the Trust) where he manages
business development and has previously managed the mutual fund transfer agent
operation including investor services, account services, legal compliance,
document processing and systems support. He also serves as a board
member of U.S. Bancorp Fund Services, LLC and Quasar Distributors, LLC (the
principal underwriter to the Trust). The Board believes Mr. Kern’s
experience, qualifications, attributes and skills on an individual basis and in
combination with those of the other Trustees lead to the conclusion that he
possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
Mr.
Massart’s trustee attributes include substantial industry experience, including
21 years working with high net worth individuals, families, trusts and
retirement accounts to make strategic and tactical asset allocation decisions,
evaluate and select investment managers and manage client
relationships. He is currently the Chief Investment Strategist and
lead member of the investment management committee of the SEC registered
investment advisory firm he co-founded. Previously, he served as Managing
Director of Strong Private Client and as a Manager of Wells Fargo Investments,
LLC. The Board believes Mr. Massart’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of
the other Trustees lead to the conclusion that he possesses the requisite skills
and attributes as a Trustee to carry out oversight responsibilities with respect
to the Trust.
Mr.
Rush’s trustee attributes include substantial industry experience, including
serving in several different senior executive roles at various global financial
services firms. He most recently served as Managing Director and
Chief Financial Officer of Robert W. Baird & Co. Incorporated and several
other affiliated entities and served as the Treasurer for Baird
Funds. He also served as the Chief Financial Officer for Fidelity
Investments’ four broker-dealers and has substantial experience with mutual fund
and investment advisory organizations and related businesses, including Vice
President and Head of Compliance for Fidelity Investments, a Vice President at
Credit Suisse First Boston, a Manager with Goldman Sachs, & Co. and a Senior
Manager with Deloitte & Touche. Mr. Rush has been determined to
qualify as an Audit Committee Financial Expert for the Trust. The
Board believes Mr. Rush’s experience, qualifications, attributes and skills on
an individual basis and in combination with those of the other Trustees lead to
the conclusion that he possesses the requisite skills and attributes as a
Trustee to carry out oversight responsibilities with respect to the
Trust.
Mr.
Swanson’s trustee attributes include substantial industry experience, including
33 years of senior management and marketing experience with 26 years dedicated
to the financial services industry. He is currently the Founder and
Managing Principal of a marketing strategy boutique serving asset and wealth
management businesses. He has also served as Chief Operating Officer
and Chief Marketing Officer of Van Kampen Investments, President and Chief
Executive Officer of Scudder, Stevens & Clark, Canada, Ltd., Managing
Director and Head of Global Investment Products at Morgan Stanley, Director of
Marketing for Morgan Stanley Mutual Funds, Director of Marking for Kemper Funds,
and Executive Vice President and Head of Distribution for Calamos
Investments. The Board believes Mr. Swanson’s experience,
qualifications, attributes and skills on an individual basis and in combination
with those of the other Trustees lead to the conclusion that he possesses the
requisite skills and attributes as a Trustee to carry out oversight
responsibilities with respect to the Trust.
This
discussion of experience and qualifications of the Trustees discussed herein are
pursuant to SEC requirements and do not constitute holding out the Board of
Trustees or any Trustee as having special expertise and shall not impose any
greater responsibility or liability on any such Trustee or the Board of Trustees
by reason thereof.
Trustee
and Management Ownership of Fund Shares
The
following table shows the value of any Fund shares and shares in other
portfolios of the Trust owned by the Trustees as of the calendar year ended
December 31, 2013.
Name |
Dollar
Range of Fund Shares (None,
$1-$10,000,
$10,001-$50,000, $50,001-
$100,000,
Over $100,000) |
Aggregate
Dollar Range of
Fund
Shares in the Trust |
Independent
Trustees |
Roel
C. Campos |
None |
None |
David
A. Massart |
None |
None |
Leonard
M. Rush |
None |
None |
David
M. Swanson |
$1-$10,000 |
$10,001-$50,000 |
Interested
Trustee |
Robert
J. Kern |
None |
None |
As of
January 31, 2014, the Trustees and Officers of the Trust as a group did not own
more than 1% of the outstanding shares of the Fund.
Audit
Committee. The Trust has an Audit Committee, which is
comprised of the Independent Trustees. The Audit Committee reviews
financial statements and other audit-related matters for the
Fund. The Audit Committee also holds discussions with management and
with the Fund’s independent registered public accounting firm concerning the
scope of the audit and the auditor’s independence. The Audit
Committee met 2 times with respect to the Fund during its fiscal year ended
October 31, 2013.
Nominating
Committee. The Trust has a Nominating Committee, which is
comprised of the Independent Trustees. The Nominating Committee is
responsible for seeking and reviewing candidates for consideration as nominees
for the position of trustee and meets only as necessary.
The
Nominating Committee will consider nominees recommended by shareholders for
vacancies on the Board of Trustees. Recommendations for consideration
by the Nominating Committee should be sent to the President of the Trust in
writing together with the appropriate biographical information concerning each
such proposed nominee, and such recommendation must comply with the notice
provisions set forth in the Trust’s Bylaws. In general, to comply
with such procedures, such nominations, together with all required information,
must be delivered to and received by the President of the Trust at the principal
executive office of the Trust not later than 120 days, and no more than 150
days, prior to the shareholder meeting at which any such nominee would be voted
on. Shareholder recommendations for nominations to the Board of Trustees will be
accepted on an ongoing basis. The Nominating Committee’s procedures
with respect to reviewing shareholder nominations will be disclosed as required
by applicable securities laws. The Nominating Committee did not meet
during the Fund’s fiscal year ended October 31, 2013.
Valuation
Committee. The Trust has a Valuation Committee. The
Valuation Committee is responsible for the following: (1) monitoring the
valuation of Fund securities and other investments; and (2) as required,
when the Board of Trustees is not in session, determining the fair value of
illiquid securities and other holdings after consideration of all relevant
factors, which determinations are reported to the Board. The
Valuation Committee is currently comprised of one or more Independent Trustees
and the Trust’s Chairman, President, and Treasurer. The Valuation
Committee meets as necessary when a price for a portfolio security is not
readily available. The Valuation Committee did not meet with
respect to the Fund during the Fund’s fiscal year ended October 31, 2013.
The
Independent Trustees receive an annual retainer fee of $55,000 per calendar
year, which shall compensate the Independent Trustees for their service to the
Trust and attendance at the four regularly scheduled quarterly meetings and one
annual meeting, if necessary, and shall receive additional compensation for each
additional meeting attended of $1,500 for an in-person meeting and $1,000 for a
telephonic meeting, as well as reimbursement for expenses incurred in connection
with attendance at meetings. The Interested Trustee does not receive
any compensation for his service as Trustee. Set forth below is the
compensation received by the following Trustees for the Fund’s fiscal year ended
October 31, 2013:
Name
of Person/Position |
Aggregate
Compensation
from
the Fund1 |
Pension
or
Retirement
Benefits
Accrued
as
Part
of Fund
Expenses |
Estimated
Annual
Benefits
Upon
Retirement |
Total
Compensation
from
the Fund
and
the Trust2
Paid
to
Trustees |
Roel
C. Campos, Independent Trustee |
$2,031
|
None |
None |
$33,000
|
David
A. Massart, Independent Trustee |
$2,031
|
None |
None |
$33,000
|
Leonard
M. Rush, Independent Trustee |
$2,031
|
None |
None |
$33,000
|
David
M. Swanson, Independent Trustee |
$2,031
|
None |
None |
$33,000
|
Robert
J. Kern, Interested Trustee |
None |
None |
None |
None |
|
1 |
Trustees
fees and expenses are allocated among the Fund and any other series
comprising the Trust. |
|
2 |
The
Trust includes other portfolios in addition to the
Fund. |
Control
Persons and Principal Shareholders
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of the Fund. A control person is one
who owns beneficially or through controlled companies more than 25% of the
voting securities of the Fund or acknowledges the existence of
control. A controlling person possesses
the ability to control the outcome of matters submitted for shareholder vote by
the Fund. As of January 31, 2014, the following shareholders
were considered to be either a control person or a principal shareholder of the
Fund:
Investor
Class Shares
Name and
Address |
%
Ownership |
Parent
Company |
Jurisdiction |
Type of
Ownership(1) |
Charles
Schwab & Co., Inc
101
Montgomery St.
San
Francisco, CA 94104-4151 |
95.89% |
The
Charles Schwab Corporation |
DE |
Record
|
Institutional
Class Shares
Name and
Address |
%
Ownership |
Parent
Company |
Jurisdiction |
Type of
Ownership(1) |
Garmin
International
1200
E 151st
St
Olathe,
KS 66062-3426 |
98.75% |
Garmin
LTD |
Switzerland |
Beneficial
|
(1)
|
“Record”
ownership means the shareholder of record, or the exact name of the
shareholder on the account, i.e. “ABC Brokerage,
Inc.” “Beneficial” ownership refers to the actual pecuniary, or
financial, interest in the security, i.e. “Jane Doe Shareholder.”
|
Investment
advisory services are provided to the Fund by the Adviser, New Path Capital
Advisors, pursuant to an investment advisory agreement (the “Advisory
Agreement”). The Adviser is majority owned by Ronald G. Bristol,
President.
After an
initial two-year period, the Advisory Agreement will continue in effect from
year to year, only if such continuance is specifically approved at least
annually by: (i) the Board of Trustees or the vote of a majority of the
outstanding voting securities of the Fund (with respect to such Fund); and (ii)
the vote of a majority of the Independent Trustees, cast in person at a meeting
called for the purpose of voting on such approval. The Advisory
Agreement is terminable without penalty by the Trust, on behalf of the Fund,
upon 60 days’ written notice to the Adviser, when authorized by either: (i) a
majority vote of the Fund’s shareholders (with respect to such Fund); or (ii) by
a vote of a majority of the Board of Trustees, or by the Adviser upon 60 days’
written notice to the Trust. The Advisory Agreement will
automatically terminate in the event of its “assignment,” as defined under the
1940 Act. The Advisory Agreement provides that the Adviser under such
agreement shall not be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution of portfolio transactions for the Fund, except for willful
misfeasance, bad faith or negligence in the performance of its duties, or by
reason of reckless disregard of its obligations and duties
thereunder.
In
consideration of the services provided by the Adviser pursuant to the Advisory
Agreement, the Adviser is entitled to receive from the Fund a management fee
computed daily and paid monthly, based on a rate equal to 0.70% of the Fund’s
average annual net assets, as specified in the Prospectus. However,
the Adviser may voluntarily agree to waive a portion of the management fees
payable to it on a month-to-month basis, including additional fees above and
beyond any contractual agreement the Adviser may have to waive management fees
and/or reimburse Fund expenses.
Fund Expenses. The
Fund is responsible for its own operating expenses. Pursuant to an
Operating Expense Limitation Agreement between the Adviser and the Fund, the
Adviser has agreed to reimburse the Fund for its operating expenses, and may
reduce its management fees, in order to ensure that Total Annual Fund Operating
Expenses (excluding acquired fund fees and expenses, leverage, interest, taxes,
brokerage commissions and extraordinary expenses), do not exceed 1.50% of the
average daily net assets of the Investor Class shares and 1.25% of the average
daily net assets of the Institutional Class shares. The Operating
Expense Limitation Agreement will be in effect and cannot be terminated through
at least May 31, 2015. Expenses reimbursed and/or fees reduced by the
Adviser, may be recouped by the Adviser for a period of three fiscal years
following the fiscal year during which such reimbursement or reduction was made
if such recoupment can be achieved without exceeding the expense limit in effect
at the time the waiver and/or reimbursement occurred.
The total
advisory fees paid during the fiscal periods indicated were as follows:
|
Year
Ended
October
31, 2013 |
Inception
to
October
31, 2012 (1)
|
Advisory
Fees Accrued |
$317,904
|
$237,667
|
Advisory
Fees Recouped/(Reimbursed) |
$14,496
|
($20,904)
|
Total
Advisory Fees Paid to Adviser |
$332,400
|
$216,763
|
(1) The Fund’s
Inception date was December 28, 2011.
As
disclosed in the Prospectus, Mr. Ronald G. Bristol and Mr. Kevin P. McDonald are
the portfolio managers for the Fund (the “Portfolio Managers”).
The
following provides information regarding other accounts managed by the Portfolio
Managers as of October 31, 2013:
|
Registered
Investment
Companies
(excluding
the
Fund) |
Other
Pooled
Investment
Vehicles |
Other
Accounts |
Portfolio
Manager |
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Ronald
Bristol |
0 |
$0 |
0 |
$0 |
74
|
$15
Million |
Kevin
McDonald |
0 |
$0 |
0 |
$0 |
49
|
$7
Million |
As of
October 31, 2013, the Portfolio Managers did not manage any accounts pursuant to
a performance-based advisory fee.
The
Portfolio Managers’ management of “other accounts” may give rise to potential
conflicts of interest in connection with the management of the Fund’s
investments, on the one hand, and the investments of the other accounts, on the
other. The other accounts may have the same investment objective as
the Fund. Therefore, a potential conflict of interest may arise as a
result of the identical investment objectives, whereby the Portfolio Managers
could favor one account over another. Another potential conflict
could include the Portfolio Managers’ knowledge about the size, timing and
possible market impact of Fund trades, whereby the Portfolio Managers could use
this information to the advantage of other accounts and to the disadvantage of
the Fund. However, the Adviser has established policies and
procedures to ensure that the purchase and sale of securities among all accounts
it manages are fairly and equitably allocated.
The
Adviser compensates the Portfolio Managers for their management of the
Fund. The Portfolio Managers’ compensation is based on a combination
of competitive salary, a share in the Adviser’s bonus pool based on the
profitability of the firm and individual performance, and a pro rata share of
available corporate profits as principals of the firm. Whereas the
performance of an account may contribute to the overall profitability of the
firm, compensation of the Portfolio Managers is not based on the numerical
performance of any client account. The Portfolio Managers’ entire compensation
package is paid by the Adviser and not by any client account.
The
following indicates the dollar range of Fund shares beneficially owned by the
Portfolio Managers as of October 31, 2013.
Portfolio
Manager |
Dollar
Range of Fund Shares Beneficially Owned
(None,
$1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001 -
$500,000,
$500,001-$1,000,000, Over $1,000,000) |
Ronald
Bristol |
$10,001-$50,000
|
Kevin
McDonald |
$100,001-$500,000
|
Pursuant
to an administration agreement (the “Administration Agreement”) between the
Trust and U.S. Bancorp Fund Services, LLC (“USBFS”), 615 East Michigan Street,
Milwaukee, Wisconsin, 53202 (the “Administrator”), the Administrator acts as the
Fund’s administrator. The Administrator provides certain
administrative services to the Fund, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Fund’s independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust and the Fund with applicable laws and
regulations; arranging for the computation of performance data, including NAV
per share and yield; responding to shareholder inquiries; and arranging for the
maintenance of books and records of the Fund, and providing, at its own expense,
office facilities, equipment and personnel necessary to carry out its
duties. In this capacity, the Administrator does not have any
responsibility or authority for the management of the Fund, the determination of
investment policy, or for any matter pertaining to the distribution of Fund
shares. Pursuant to the Administration Agreement, for its services,
the Administrator receives from the Fund a fee computed daily and payable
monthly based on the Fund’s average net assets, subject to an annual minimum
fee. The Fund paid $85,130 in administration fees to USBFS during the fiscal
period from December 28, 2011 (the Fund’s inception date) to October 31, 2012
and paid $101,414 in administration fees to USBFS during the fiscal year ended
October 31, 2013.
USBFS
also acts as fund accountant (“Fund Accountant”), transfer agent (“Transfer
Agent”) and dividend disbursing agent under separate agreements with the
Trust.
Pursuant
to a custody agreement between the Trust and the Fund, U.S. Bank, N.A., an
affiliate of USBFS, serves as the custodian of the Fund’s assets, whereby the
Custodian provides for fees on a transaction basis plus out-of-pocket
expenses. The Custodian’s address is 1555 North Rivercenter Drive,
Milwaukee, Wisconsin, 53212. The Custodian does not participate in
decisions relating to the purchase and sale of securities by the
Fund. U.S. Bank, N.A. and its affiliates may participate in revenue
sharing arrangements with service providers of mutual funds in which the Fund
may invest.
Bernstein,
Shur, Sawyer & Nelson, P.A., 100 Middle Street, P.O. Box 9729, Portland,
Maine 04104-5029, serves as counsel to the Fund.
Independent
Registered Public Accounting Firm
Cohen
Fund Audit Services, Ltd., 1350 Euclid Avenue, Suite 800, Cleveland, Ohio 44115,
serves as the independent registered public accounting firm for the
Fund.
Distribution of Fund Shares
The Trust
has entered into a distribution agreement (the “Distribution Agreement”) with
Quasar Distributors, LLC (the “Distributor”), 615 East Michigan Street,
Milwaukee, Wisconsin 53202, pursuant to which the Distributor acts as the Fund’s
principal underwriter, provides certain administration services and promotes and
arranges for the sale of the Fund’s shares on a best efforts
basis. The offering of the Fund’s shares is
continuous. The Distributor, Administrator and Custodian are
affiliated companies. The Distributor is a registered broker-dealer
and member of the Financial Industry Regulatory Authority, Inc.
(“FINRA”).
The
Distribution Agreement has an initial term of up to two years and will continue
in effect only if such continuance is specifically approved at least annually by
the Board of Trustees or by vote of a majority of the Fund’s outstanding voting
securities and, in either case, by a majority of the Independent
Trustees. The Distribution Agreement is terminable without penalty by
the Trust, on behalf of the Fund, on 60 days’ written notice when
authorized either by a majority vote of the Fund’s shareholders or by vote of a
majority of the Board of Trustees, including a majority of the Trustees who are
not “interested persons” (as defined under the 1940 Act) of the Trust, or
by the Distributor on 60 days’ written notice, and will automatically
terminate in the event of its “assignment,” as defined in the
1940 Act.
Distribution
(Rule 12b-1) Plan
The Fund
has adopted a distribution plan for Investor Class shares pursuant to Rule 12b-1
under the 1940 Act (the “12b-1 Plan”). Under the 12b-1 Plan, the Fund
pays a fee to the Distributor for distribution and/or shareholder services
(“Distribution and Service Fees”) at an annual rate of 0.25% of the Fund’s
average daily net asset value of Investor Class shares. The 12b-1
Plan provides that the Distributor may use all or any portion of such
Distribution and Service Fees to finance any activity that is principally
intended to result in the sale of Fund shares, subject to the terms of the 12b-1
Plan, or to provide certain shareholder services. The 12b-1 Plan is intended to
benefit the Fund by increasing its assets and thereby reducing the Fund’s
expense ratio.
The
Fund’s Investor Class Shares incurred $13,512 of 12b-1 fees during the fiscal
period from December 28, 2011 (the Fund’s inception date) through October 31,
2012 and incurred $19,336 of 12b-1 fees during the fiscal year ended October 31,
2013.
The
following table shows the allocation of the 12b-1 fees paid by the Investor
Class Shares of the Fund during the fiscal year ended October 31, 2013:
Investor
Class Shares |
Total
Dollars
Allocated |
Advertising/Marketing |
$0 |
Printing/Postage |
$0 |
Payment
to distributor |
$14,115
|
Payment
to dealers |
$5,221
|
Compensation
to sales personnel |
$0 |
Other |
$0 |
Total |
$19,336
|
The
Distribution and Service Fees are payable to the Distributor regardless of the
distribution-related expenses actually incurred. Because the
Distribution and Service Fees are not directly tied to expenses, the amount of
distribution fees paid by Investor Class shares during any year may be more or
less than actual expenses incurred pursuant to the 12b-1 Plan. For
this reason, this type of distribution fee arrangement is characterized by the
staff of the SEC as a “compensation” plan.
The
Distributor may use the Distribution and Service Fees to pay for services
covered by the 12b-1 Plan including, but not limited to, advertising;
compensating underwriters, dealers and selling personnel engaged in the
distribution of Fund shares; the printing and mailing of prospectuses,
statements of additional information and reports; the printing and mailing of
sales literature pertaining to the Fund; and obtaining whatever information,
analyses and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable.
The 12b-1
Plan provides that it will continue from year to year upon approval by the
majority vote of the Board of Trustees, including a majority of the Independent
Trustees cast in person at a meeting called for that purpose, provided that such
trustees have made a determination that there is a reasonable likelihood that
the 12b-1 Plan will benefit the Fund and its shareholders. It is also
required that the Independent Trustees, select and nominate all other trustees
who are not “interested persons” of the Fund. The 12b-1 Plan and any
related agreements may not be amended to materially increase the amounts to be
spent for distribution expenses without approval of shareholders holding a
majority of the Fund shares outstanding. All material amendments to
the 12b-1 Plan or any related agreements must be approved by a vote of a
majority of the Board of Trustees and the Independent Trustees, cast in person
at a meeting called for the purpose of voting on any such
amendment.
The 12b-1
Plan requires that the Distributor provide to the Board of Trustees, at least
quarterly, a written report on the amounts and purpose of any payment made under
the 12b-1 Plan. The Distributor is also required to furnish the Board
of Trustees with such other information as may reasonably be requested in order
to enable the Board of Trustees to make an informed determination of whether the
12b-1 Plan should be continued.
As noted
above, the 12b-1 Plan provides for the ability to use Fund assets to pay
financial intermediaries (including those that sponsor mutual fund
supermarkets), plan administrators and other service providers to finance any
activity that is principally intended to result in the sale of Fund shares
(distribution services) and for the provision of personal services to
shareholders. The payments made by the Fund to financial
intermediaries are based primarily on the dollar amount of assets invested in
the Fund through the financial intermediaries. These financial
intermediaries may pay a portion of the payments that they receive from the Fund
to their investment professionals. In addition to the ongoing
asset-based fees paid to these financial intermediaries under the 12b-1 Plan,
the Fund may, from time to time, make payments under the 12b-1 Plan that help
defray the expenses incurred by these intermediaries for conducting training and
educational meetings about various aspects of the Fund for their
employees. In addition, the Fund may make payments under the 12b-1
Plan for exhibition space and otherwise help defray the expenses these financial
intermediaries incur in hosting client seminars where the Fund is
discussed.
In
addition, the Fund may participate in various “fund supermarkets” in which a
mutual fund supermarket sponsor (usually a broker-dealer) offers many mutual
funds to the sponsor’s customers without charging the customers a sales
charge. In connection with its participation in such platforms, the
Distributor may use all or a portion of the Distribution and Servicing Fee to
pay one or more supermarket sponsors a negotiated fee for distributing the
Fund’s shares. In addition, in its discretion, the Adviser may pay
additional fees to such intermediaries from its own assets.
Portfolio
Transactions and Brokerage
Pursuant
to the Advisory Agreement, the Adviser determines which securities are to be
purchased and sold by the Fund and which broker-dealers are eligible to execute
the Fund’s portfolio transactions. Purchases and sales of securities
on an exchange are affected through brokers that charge a commission while
purchases and sales of securities in the over-the-counter market will generally
be executed directly with the primary “market-maker” unless, in the opinion of
the Adviser, a better price and execution can otherwise be obtained by using a
broker for the transaction. Purchases and sales of portfolio
securities that are fixed income securities (for instance, money market
instruments and bonds, notes and bills) usually are principal transactions. In a
principal transaction, the party from whom the Fund purchases or to whom the
Fund sells is acting on its own behalf (and not as the agent of some other party
such as a customer). These securities normally are purchased directly from the
issuer or from an underwriter or market maker for the securities. The
price of securities purchased from underwriters includes a disclosed fixed
commission or concession paid by the issuer to the underwriter, and prices of
securities purchased from dealers serving as market makers reflects the spread
between the bid and asked price. The price of over-the-counter
securities usually includes an undisclosed commission or markup.
Purchases
of portfolio securities for the Fund will be effected through broker-dealers
(including banks) that specialize in the types of securities that the Fund will
be holding, unless better executions are available elsewhere. Dealers
usually act as principal for their own accounts. Purchases from
dealers will include a spread between the bid and the asked price. If
the execution and price offered by more than one dealer are comparable, the
order may be allocated to a dealer that has provided research or other services
as discussed below.
In
placing portfolio transactions, the Adviser will use reasonable efforts to
choose broker-dealers capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and
quality of services, such as the size of the order, the difficulty of execution,
the operational facilities of the firm involved, the firm’s risk in positioning
a block of securities and other factors available, will be considered in making
these determinations. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers that furnish or supply research and statistical
information to the Adviser that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other brokerage services
incidental to execution services. Research and statistical
information may include reports that are common in the industry such as industry
research reports and periodicals, quotation systems, software for portfolio
management and formal databases. Typically, the research will be used to service
all of the Adviser’s accounts, although a particular client may not benefit from
all the research received on each occasion. The Adviser considers
research information, which is in addition to and not in lieu of the services
required to be performed by it under its Advisory Agreement with the Fund, to be
useful in varying degrees, but of indeterminable value.
While it
is the Fund’s general policy to first seek to obtain the most favorable price
and execution available in selecting a broker-dealer to execute portfolio
transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Adviser, even if the specific services are not directly useful to the Fund and
may be useful to the Adviser in advising other clients. In
negotiating commissions with a broker or evaluating the spread to be paid to a
dealer, the Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Adviser to be reasonable in relation to the
value of the brokerage and/or research services provided by such
broker-dealer. The standard of reasonableness is to be measured in
light of the Adviser’s overall responsibilities to the Fund.
Investment
decisions for the Fund are made independently from those of other client
accounts. Nevertheless, it is possible that at times identical
securities will be acceptable for both the Fund and one or more of such client
accounts. In such event, the position of the Fund and such client
account(s) in the same issuer may vary and the length of time that each may
choose to hold its investment in the same issuer may likewise
vary. However, to the extent any of these client accounts seek to
acquire the same security as the Fund at the same time, the Fund may not be able
to acquire as large a portion of such security as it desires, or it may have to
pay a higher price or obtain a lower yield for such
security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that the Fund is purchasing
or selling, each day’s transactions in such security will be allocated between
the Fund and all such client accounts in a manner deemed equitable by the
Adviser, taking into account the respective sizes of the accounts and the amount
being purchased or sold. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as the Fund are concerned. In other cases, however, it is
believed that the ability of the Fund to participate in volume transactions may
produce better executions for the Fund. Notwithstanding the above,
the Adviser may execute buy and sell orders for accounts and take action in
performance of its duties with respect to any of its accounts that may differ
from actions taken with respect to another account, so long as the Adviser
shall, to the extent practical, allocate investment opportunities to accounts,
including the Fund, over a period of time on a fair and equitable basis and in
accordance with applicable law.
Portfolio
transactions may be placed with broker-dealers who sell shares of the Fund
subject to rules adopted by FINRA and the SEC. Portfolio transactions
may also be placed with broker-dealers in which the Adviser has invested on
behalf of the Fund and/or client accounts.
The Fund
paid $30,185 in brokerage commissions during the fiscal period from December 28,
2011 (the Fund’s inception date) to October 31, 2012 and paid $31,000 in
brokerage commissions during the fiscal year ended October 31, 2013.
Portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser, investment considerations warrant such
action. Portfolio turnover rate is calculated by dividing
(1) the lesser of purchases or sales of portfolio securities for the fiscal
year by (2) the monthly average of the value of portfolio securities owned
during the fiscal year. A 100% turnover rate would occur if all the
securities in the Fund’s portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of
portfolio turnover (100% or more) generally leads to above-average transaction
costs and could generate capital gains that must be distributed to shareholders
as short-term capital gains taxed at ordinary income rates (currently as high as
39.6%). To the extent that the Fund experiences an increase in
brokerage commissions due to a higher portfolio turnover rate, the performance
of the Fund could be negatively impacted by the increased expenses incurred by
the Fund and may result in a greater number of taxable transactions.
The
Adviser anticipates possible variation in the Fund’s portfolio turnover rate
from year to year due to the Fund’s investment strategy of making aggressive
moves into and out of particular asset classes when market conditions warrant.
The Fund’s portfolio turnover rate was 432% during the fiscal period from
December 28, 2011 (the Fund’s inception date) to October 31, 2012 and 291%
during the fiscal year ended October 31, 2013. This significant variation in the
Fund’s portfolio turnover rate was driven by a change in market conditions that
warranted less frequent asset reallocation during the fiscal year ended October
31, 2013.
The
Trust, the Adviser and the Distributor have each adopted Codes of Ethics under
Rule 17j-1 of the 1940 Act. These Codes permit, subject to certain
conditions, personnel of the Trust, Adviser and Distributor to invest in
securities that may be purchased or held by the Fund.
The Board
of Trustees has adopted proxy voting policies and procedures (“Proxy Policies”)
wherein the Trust has delegated to the Adviser the responsibility for voting
proxies relating to portfolio securities held by the Fund as part of its
investment advisory services, subject to the supervision and oversight of the
Board of Trustees. Notwithstanding this delegation of
responsibilities, however, the Fund retains the right to vote proxies relating
to its portfolio securities. The fundamental purpose of the Proxy
Policies is to ensure that each vote will be in a manner that reflects the best
interest of the Fund and its shareholders, taking into account the value of the
Fund’s investments.
The
actual voting records relating to portfolio securities during the most recent
12-month period ended June 30 will be available without charge, upon request, by
calling toll-free, (800) SEC-0330 or by accessing the SEC’s website at
www.sec.gov.
The
Adviser’s Proxy Voting Policies and Procedures
The
Adviser will vote proxies on behalf of the Fund in a manner that it believes is
consistent with the best interests of the Fund and its
shareholders. Absent special circumstances, all proxies will be voted
consistent with guidelines established and described in the Adviser’s Proxy
Voting Policies and Procedures. A summary of the Adviser’s Proxy
Voting Policies and Procedures is as follows:
· |
The
Adviser considers information from many sources, including but not limited
to, the investment adviser to a fund, management or shareholders of a
company presenting a proposal, or independent proxy research
services; |
· |
The
Adviser gives substantial weight to the recommendations of the company’s
board, absent guidelines or other specific facts that would support a vote
against its management, with the ultimate decision based on what the
Adviser believes is in the best interests of
clients; |
· |
The
Adviser may delegate its voting responsibility to a third party proxy
voting service that does not serve as a fiduciary to any client of the
Adviser when a material conflict of interest exists or when otherwise
fiscally-practical; and |
· |
The
Adviser may abstain from voting if it is considered in the client’s best
interest (i.e., when the cost of voting exceeds the expected benefit of
voting, such as an in-person vote in a foreign
country). |
Anti-Money
Laundering Compliance Program
The Trust
has established an Anti-Money Laundering Compliance Program (the “Program”) as
required by the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT
Act”). To ensure compliance with this law, the Trust’s Program
provides for the development of internal practices, procedures and controls,
designation of anti-money laundering compliance officers, an ongoing training
program and an independent audit function to determine the effectiveness of the
Program. Ms. Deborah Ward has been designated as the Trust’s
Anti-Money Laundering Compliance Officer.
Procedures
to implement the Program include, but are not limited to: determining that the
Distributor and the Transfer Agent have established proper anti-money laundering
procedures; reporting suspicious and/or fraudulent activity; and a complete and
thorough review of all new account applications. The Fund will not
transact business with any person or entity whose identity cannot be adequately
verified under the provisions of the USA PATRIOT Act.
As a
result of the Program, the Fund may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity or
if certain account information matches information on government lists of known
terrorists or other suspicious persons, or the Fund may be required to transfer
the account or proceeds of the account to a governmental agency.
Portfolio
Holdings Information
The
Trust, on behalf of the Fund, has adopted portfolio holdings disclosure policies
(“Portfolio Holdings Policies”) that govern the timing and circumstances of
disclosure of portfolio holdings of the Fund. The Adviser has also
adopted the Portfolio Holdings Policies. Information about the Fund’s
portfolio holdings will not be distributed to any third party except in
accordance with these Portfolio Holdings Policies. The Adviser and
the Board of Trustees considered the circumstances under which the Fund’s
portfolio holdings may be disclosed under the Portfolio Holdings
Policies. The Adviser and the Board of Trustees also considered
actual and potential material conflicts that could arise in such circumstances
between the interests of the Fund’s shareholders and the interests of the
Adviser, Distributor or any other affiliated person of the
Fund. After due consideration, the Adviser and the Board of Trustees
determined that the Fund has a legitimate business purpose for disclosing
portfolio holdings to persons described in the Portfolio Holdings
Policies. The Board of Trustees also authorized the Adviser or
appointed officers to consider and authorize dissemination of portfolio holdings
information to additional parties, after considering the best interests of the
shareholders and potential conflicts of interest in making such
disclosures.
The Board
of Trustees exercises continuing oversight of the disclosure of the Fund’s
portfolio holdings by (1) overseeing the implementation and enforcement of the
Portfolio Holdings Policies, codes of ethics and other relevant policies of the
Fund and its service providers by the CCO, (2) by considering reports and
recommendations by the CCO concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act), and (3) by considering whether to
approve any amendment to these Portfolio Holdings Policies. The Board
of Trustees reserves the right to amend the Portfolio Holdings Policies at any
time without prior notice in its sole discretion.
Disclosure
of the Fund’s complete holdings is required to be made quarterly within 60 days
of the end of each fiscal quarter, in the annual and semi-annual reports to Fund
shareholders, and in the quarterly holdings report on
Form N-Q. These reports will be made available, free of charge,
on the EDGAR database on the SEC’s website at www.sec.gov. In
addition, the Fund discloses its complete portfolio holdings on the Adviser’s
website at www.NewPathGTAAFund.com within fifteen days of each
month-end. Portfolio holdings information posted on the Adviser’s
website may be separately provided to any person, commencing after the
publication of such portfolio holdings information on the Adviser’s
website.
In the
event of a conflict between the interests of the Fund and its shareholders and
the interests of the Adviser or an affiliated person of the Adviser, the CCO of
the Adviser, in consultation with the Trust’s CCO, shall make a determination in
the best interests of the Fund and its shareholders, and shall report such
determination to the Board of Trustees at the end of the quarter in which such
determination was made. Any employee of the Adviser who suspects a
breach of this obligation must report the matter immediately to the Adviser’s
CCO or to his or her supervisor.
In
addition, material non-public holdings information may be provided without lag
as part of the normal investment activities of the Fund to each of the following
entities which, by explicit agreement or by virtue of their respective duties to
the Fund, are required to maintain the confidentiality of the information
disclosed: the Administrator; the Fund’s accountant; the Custodian; the Transfer
Agent; the Fund’s independent registered public accounting firm; counsel to the
Fund or the Board of Trustees (current parties are identified in this SAI);
broker-dealers (in connection with the purchase or sale of securities or
requests for price quotations or bids on one or more securities); and regulatory
authorities. Portfolio holdings information not publicly available
with the SEC may only be provided to additional third parties, in accordance
with the Portfolio Holdings Policies, when the Fund has a legitimate business
purpose, and the third party recipient is subject to a confidentiality
agreement. Portfolio holdings information may be separately provided
to any person, including rating and ranking organizations such as Lipper and
Morningstar, at the same time that it is filed with the SEC or posted to the
Adviser’s website. Portfolio holdings disclosure may be approved
under the Portfolio Holdings Policies by the Trust’s CCO, Treasurer or
President.
In no
event shall the Adviser, its affiliates or employees, or the Fund receive any
direct or indirect compensation in connection with the disclosure of information
about the Fund’s portfolio holdings.
There can
be no assurance that the Portfolio Holdings Policies and these procedures will
protect the Fund from potential misuse of that information by individuals or
entities to which it is disclosed.
Determination of Net Asset Value
The NAV
of the Fund’s shares will fluctuate and is determined by the Fund Accountant as
of the close of trading on the New York Stock Exchange (the “NYSE”) (generally
4:00 p.m., Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most
recent announcement indicates that it will not be open on the following days:
New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day. However, the NYSE may close on days not included in that
announcement.
The NAV
of each class of shares is computed by determining the “Net Assets” of each
class and dividing by the total number of shares outstanding of each class at
such time. The Net Assets of each class are calculated by (1) taking
the value of all assets held by the Fund (including securities, cash or other
assets such as interest and dividends accrued but not yet received) and
allocating such value to each share class based on the number of shares
outstanding in each share class; (2) subtracting “Class Expenses” from each
respective share class as defined and approved by the Board of Trustees and a
majority of the Independent Trustees under the Trust’s Rule 18f-3 Multiple Class
Plan; and (3) subtracting from each share class non-class specific “Other
Expenses” that are allocated to each class based on the net asset value of each
class relative to the net asset value of the Fund or the Trust, as the case may
be.
Net
Assets |
= |
Net
Asset Value Per Share |
Shares
Outstanding |
The
Fund’s assets are generally valued at their market price on the valuation date
based on valuations provided by independent pricing services consistent with the
Trust’s valuation procedures.
Each
security owned by the Fund that is listed on a securities exchange is valued at
its last sale price on that exchange on the date as of which assets are
valued. Where the security is listed on more than one exchange, the
Fund will use the price of the exchange that the Fund generally considers to be
the principal exchange on which the security is traded. If no sale is
reported, the security is valued at the mean between the last available bid and
asked price.
Portfolio
securities primarily traded on the NASDAQ Stock Market (“NASDAQ”) shall be
valued using the NASDAQ Official Closing Price (“NOCP”) which may not
necessarily represent the last sale price. If the NOCP is not
available, such securities shall be valued at the last sale price on the day of
valuation, or if there has been no sale on such day, at the mean between the bid
and asked prices. OTC securities that are not traded on NASDAQ shall be valued
at the most recent trade price.
Fixed
income securities are valued at the mean of the bid and asked prices as
determined by an independent pricing service, taking into consideration recent
transactions, yield, liquidity, risk, credit quality, coupon, maturity, type of
issue and any other factors or market data the pricing service deems relevant.
Fixed income securities with remaining maturities of 60 days or less are valued
at amortized cost, which approximates fair value.
Exchange
traded options are valued at the composite price, using the National Best Bid
and Offer quotes (“NBBO”). NBBO consists of the highest bid price and
lowest ask price across any of the exchanges on which an option is quoted, thus
providing a view across the entire U.S. options
marketplace. Specifically, composite pricing looks at the last trades
on the exchanges where the options are traded. If there are no trades
for the option on a given business day composite option pricing calculates the
mean of the highest bid price and lowest ask price across the exchanges where
the option is traded.
All other
assets of the Fund are valued in such manner as the Board of Trustees in good
faith deems appropriate to reflect their fair value.
Purchase
and Redemption of Fund Shares
Generally
Shares of
the Fund are sold in a continuous offering and shares may be purchased or
redeemed on any business day that the Fund calculates its NAV. The
Fund may also authorize one or more financial intermediaries to accept purchase
and redemption orders on its behalf (“Authorized
Intermediaries”). Authorized Intermediaries are authorized to
designate other Authorized Intermediaries to accept orders on the Fund’s
behalf. An order is deemed to be received when the Fund or an
Authorized Intermediary accepts the order.
Orders
received by the Fund or an Authorized Intermediary by the close of trading on
the NYSE (generally 4:00 p.m., Eastern time) on a business day will be effected
at the applicable price per share determined as of the close of trading on the
NYSE on that day. Otherwise, the orders will be processed at the
appropriate price on the next business day.
Orders
received by financial intermediaries that are not Authorized Intermediaries will
be processed at the NAV plus applicable sales charge next calculated after the
Transfer Agent receives the order from the financial intermediary.
Purchase
Requests Must be Received in Good Order
“Good
order” generally means that your purchase request includes:
· |
The
class of shares to be purchased; |
· |
The
dollar amount of shares to be
purchased; |
· |
Your
account application or investment stub;
and |
· |
A
check payable to the name of the
Fund. |
Shares of
the Fund have not been registered and are not for sale outside of the United
States. The Fund generally does not sell shares to investors residing
outside the United States, even if they are United States citizens or lawful
permanent residents, except to investors with United States military APO or FPO
addresses or in certain other circumstances where the Chief Compliance Officer
and Anti-Money Laundering Officer for the Trust both conclude that such sale is
appropriate and is not in contravention of United States law.
Redemption
Requests Must be Received in Good Order
Your
share price will be based on the next NAV per share calculated after the
Transfer Agent or an Authorized Intermediary receives your redemption request in
good order. A redemption request will generally be deemed in “good
order” if it includes:
· |
The
shareholder’s name; |
· |
The
name of the Fund you are redeeming; |
· |
The
share or dollar amount to be
redeemed; |
· |
The
class of shares to be redeemed; and |
· |
Signatures
by all shareholders on the account (with signature(s) guaranteed if
applicable). |
Unless
you instruct the Transfer Agent otherwise, redemption proceeds will be sent to
the address of record. The Fund will not be responsible for interest
lost on redemption amounts due to lost or misdirected mail.
A
signature guarantee of each owner is required in the following
situations:
· |
If
ownership is changed on your
account; |
· |
When
redemption proceeds are payable or sent to any person, address or bank
account not on record; |
· |
If
a change of address request was received by the Transfer Agent within the
last 15 calendar days; or |
· |
For
all redemptions in excess of $100,000 from any shareholder
account. |
Non-financial
transactions, including establishing or modifying certain services on an
account, may require a signature guarantee, signature verification from a
Signature Validation Program member, or other acceptable form of authentication
from a financial institution source. Signature guarantees can be
obtained from banks and securities dealers, but not from a notary
public.
The Fund
may elect in the future to limit eligible signature guarantors to institutions
that are members of a signature guarantee program. The Fund and the
Transfer Agent reserve the right to amend these standards at any time without
notice.
Redemption-in-Kind
Under
normal circumstances, the Fund does not intend under normal circumstances to
redeem shares in any form except cash. The Trust, however, has filed
a notice of election under Rule 18f-1 of the 1940 Act that allows the Fund to
redeem in-kind redemption requests during any 90-day period in excess of the
lesser of $250,000 or 1% of the net assets of the Fund, valued at the beginning
of such period. If the Fund pays your redemption proceeds by a
distribution of securities, you could incur brokerage or other charges in
converting the securities to cash, and will bear any market risks associated
with such securities until they are converted into cash.
Cancellations
The Fund
will not accept a request to cancel or modify a transaction once processing has
begun.
Each
series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund, a series of the Trust, intends to qualify and
elect to be treated as a regulated investment company under Subchapter M of
the Code, provided it complies with all applicable requirements regarding the
source of its income, diversification of its assets and timing of
distributions. The Fund’s policy is to distribute to its shareholders
all of its net investment company taxable income and any net realized long-term
capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the
Fund can give no assurances that its anticipated distributions will be
sufficient to eliminate all taxes. If the Fund does not qualify as a
regulated investment company, it would be taxed as a corporation and, in such
case, it would be more beneficial for a shareholder to directly own the Fund’s
underlying investments rather than indirectly owning the underlying investments
through the Fund. If the Fund fails to distribute (or be deemed to
have distributed) by December 31 of each calendar year (i) at least
98% of its ordinary income for such year, (ii) at least 98.2% of the excess
of its realized capital gains over its realized capital losses for the 12-month
period ending on October 31 during such year and (iii) any amounts
from the prior calendar year that were not distributed and on which the Fund
paid no federal income tax, the Fund will be subject to a 4% excise
tax.
Net
investment income generally consists of interest, dividends and short-term
capital gains, less expenses. Net realized capital gains for a fiscal
period are computed by taking into account any capital loss carry forward of the
Fund.
Distributions
of net investment income are taxable to shareholders as ordinary
income. For individual shareholders, a portion of the distributions
paid by the Fund may consist of qualified dividends eligible for taxation at the
rate applicable to long-term capital gains to the extent the Fund designates the
amount distributed as a qualified dividend and the shareholder meets certain
holding period requirements with respect to his or her Fund
shares. In the case of corporate shareholders, a portion of the
distributions may qualify for the intercorporate dividends-received deduction to
the extent the Fund designates the amount distributed as eligible for deduction
and the shareholder meets certain holding period requirements with respect to
its Fund shares. The aggregate amount so designated to either
individuals or corporate shareholders cannot, however, exceed the aggregate
amount of such dividends received by the Fund for its taxable
year. In view of the Fund’s investment policies, it is expected that
part of the distributions by the Fund may be eligible for the qualified dividend
income treatment for individual shareholders and the dividends-received
deduction for corporate shareholders.
Any
long-term capital gain distributions are taxable to shareholders as long-term
capital gains regardless of the length of time shares have been
held. Net capital gains distributions are not eligible for the
qualified dividend income treatment or the dividends-received deduction referred
to in the previous paragraph.
Distributions
of any net investment income and net realized capital gains will be taxable as
described above, whether received in shares or in cash. Shareholders
who choose to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the NAV of a share on the reinvestment date. Distributions are
generally taxable when received. However, distributions declared in
October, November or December to shareholders of record on a date in such a
month and paid the following January are taxable as if received on
December 31. Distributions are includable in alternative minimum
taxable income in computing a shareholder’s liability for the alternative
minimum tax.
A
redemption of Fund shares may result in recognition of a taxable gain or
loss. Any loss realized upon a redemption of shares within six months
from the date of their purchase will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gains
received on those shares. Any loss realized upon a redemption may be
disallowed under certain wash sale rules to the extent shares of the Fund are
purchased (through reinvestment of distributions or otherwise) within
30 days before or after the redemption.
Except in
the case of certain exempt shareholders, if a shareholder does not furnish the
Fund with its correct Taxpayer Identification Number and certain certifications
or the Fund receives notification from the Internal Revenue Service requiring
back-up withholding, the Fund is required by federal law to withhold federal
income tax from the shareholder’s distributions and redemption proceeds
currently at a rate of 28% for U.S. residents.
Foreign
taxpayers (including nonresident aliens) are generally subject to a flat
withholding rate, currently 30% on U.S. source income. This
withholding rate may be lower under the terms of a tax convention.
This
discussion and the related discussion in the Prospectus have been prepared by
Fund management, and counsel to the Fund has expressed no opinion in respect
thereof.
This
section is not intended to be a full discussion of federal tax laws and the
effect of such laws on you. There may be other federal, state,
foreign or local tax considerations to a particular investor. You are
urged to consult your own tax advisor.
The Fund
will receive income in the form of dividends and interest earned on its
investments in securities. This income, less the expenses incurred in
its operations, is the Fund’s net investment income, substantially all of which
will be distributed to the Fund’s shareholders.
The
amount of the Fund’s distributions is dependent upon the amount of net
investment income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board of
Trustees. The Fund does not pay “interest” or guarantee any fixed
rate of return on an investment in its shares.
The Fund
may also derive capital gains or losses in connection with sales or other
dispositions of its portfolio securities. Distributions from net
short-term capital gains will be taxable to you as ordinary income or qualified
dividend income. Distributions from net long-term capital gains will
be taxable to you as long-term capital gain, regardless of how long you have
held your shares in the Fund. Any net capital gains realized by the
Fund generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income taxes
on the Fund. For more information concerning applicable capital gains
tax rates, see your tax advisor.
Any
distribution paid by the Fund reduces that Fund’s NAV per share on the date paid
by the amount of the distribution per share. Accordingly, a
distribution paid shortly after a purchase of shares by a shareholder would
represent, in substance, a partial return of capital (to the extent it is paid
on the shares so purchased), even though it would be subject to income
taxes.
Distributions
will be made in the form of additional shares of the Fund unless the shareholder
has otherwise indicated. Investors have the right to change their
elections with respect to the reinvestment of distributions by notifying the
Transfer Agent in writing. However, any such change will be effective
only as to distributions for which the record date is five or more business days
after the Transfer Agent has received the written request.
The
Fund’s Annual Report to shareholders for the fiscal year ended October 31, 2013
is a separate document, and the financial statements, accompanying notes and
report of the independent registered public accounting firm appearing therein
are incorporated by reference into this SAI.
APPENDIX
“A” DESCRIPTION OF BOND RATINGS
Standard & Poor’s Issue
Credit Rating Definitions
A
Standard & Poor’s 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 Standard
& Poor’s view of the obligor’s capacity and willingness to meet its
financial commitments as they come due, and may assess terms, such as collateral
security and subordination, which could affect ultimate payment in the event of
default.
Issue
credit ratings can be either long term or short term. Short-term ratings are
generally assigned to those obligations considered short-term in the relevant
market. In the U.S., for example, that means obligations with an original
maturity of no more than 365 days—including commercial paper. Short-term ratings
are also used to indicate the creditworthiness of an obligor with respect to put
features on long-term obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in addition to the usual long-term
rating. Medium-term notes are assigned long-term ratings.
Short-Term Issue Credit
Ratings
A-1
A
short-term obligation rated ‘A-1’ is rated in the highest category by Standard
& Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitment on these obligations is extremely strong.
A-2
A
short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is satisfactory.
A-3
A
short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B
A
short-term obligation rated ‘B’ is regarded as having significant speculative
characteristics. Ratings of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned to indicate
finer distinctions within the ‘B’ category. The obligor currently has the
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor’s inadequate
capacity to meet its financial commitment on the obligation.
B-1
A
short-term obligation rated ‘B-1’ is regarded as having significant speculative
characteristics, but the obligor has a relatively stronger capacity to meet its
financial commitments over the short-term compared to other speculative-grade
obligors.
B-2
A
short-term obligation rated ‘B-2’ is regarded as having significant speculative
characteristics, and the obligor has an average speculative-grade capacity to
meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-3
A
short-term obligation rated ‘B-3’ is regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its
financial commitments over the short-term compared to other speculative-grade
obligors.
C
A
short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D
A
short-term obligation rated ‘D’ is in payment default. The ‘D’ rating category
is used when payments on an obligation, including a regulatory capital
instrument, are not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor’s believes that such payments will be
made during such grace period. The ‘D’ rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
SPUR
(Standard & Poor’s Underlying Rating)
This is a
rating of a stand-alone capacity of an issue to pay debt service on a
credit-enhanced debt issue, without giving effect to the enhancement that
applies to it. These ratings are published only at the request of the debt
issuer/obligor with the designation SPUR to distinguish them from the
credit-enhanced rating that applies to the debt issue. Standard & Poor’s
maintains surveillance of an issue with a published SPUR.
Dual
Ratings
Standard
& Poor’s assigns “dual” ratings to all debt issues that have a put option or
demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the second
rating addresses only the demand feature. The long-term rating symbols are used
for bonds to denote the long-term maturity and the short-term rating symbols for
the put option (for example, ‘AAA/A-1+’). With U.S. municipal short-term demand
debt, note rating symbols are used with the short-term issue credit rating
symbols (for example, ‘SP-1+/A-1+’).
The
ratings and other credit related opinions of Standard & Poor’s and its
affiliates are statements of opinion as of the date they are expressed and not
statements of fact or recommendations to purchase, hold, or sell any securities
or make any investment decisions. Standard & Poor’s assumes no
obligation to update any information following publication. Users of ratings and
credit related opinions should not rely on them in making any investment
decision. Standard &Poor’s opinions and analyses do not address
the suitability of any security. Standard & Poor’s Financial Services LLC
does not act as a fiduciary or an investment advisor. While Standard &
Poor’s has obtained information from sources it believes to be reliable,
Standard & Poor’s does not perform an audit and undertakes no duty of due
diligence or independent verification of any information it receives. Ratings
and credit related opinions may be changed, suspended, or withdrawn at any
time.
Active
Qualifiers (Currently applied and/or outstanding)
i
This
subscript is used for issues in which the credit factors, terms, or both, that
determine the likelihood of receipt of payment of interest are different from
the credit factors, terms or both that determine the likelihood of receipt of
principal on the obligation. The ‘i’ subscript indicates that the
rating addresses the interest portion of the obligation only. The ‘i’
subscript will always be used in conjunction with the ‘p’ subscript, which
addresses likelihood of receipt of principal. For example, a rated
obligation could be assigned ratings of “AAAp NRi” indicating that the principal
portion is rated “AAA” and the interest portion of the obligation is not
rated.
L
Ratings
qualified with ‘L’ apply only to amounts invested up to federal deposit
insurance limits.
p
This
subscript is used for issues in which the credit factors, the terms, or both,
that determine the likelihood of receipt of payment of principal are different
from the credit factors, terms or both that determine the likelihood of receipt
of interest on the obligation. The ‘p’ subscript indicates that the
rating addresses the principal portion of the obligation only. The
‘p’ subscript will always be used in conjunction with the ‘i’ subscript, which
addresses likelihood of receipt of interest. For example, a rated
obligation could be assigned ratings of “AAAp NRi” indicating that the principal
portion is rated “AAA” and the interest portion of the obligation is not
rated.
pi
Ratings
with a ‘pi’ subscript are based on an analysis of an issuer’s published
financial information, as well as additional information in the public
domain. They do not, however, reflect in-depth meetings with an
issuer’s management and therefore may be based on less comprehensive information
than ratings without a ‘pi’ subscript. Ratings with a ‘pi’ subscript
are reviewed annually based on a new year’s financial statements, but may be
reviewed on an interim basis if a major event occurs that may affect the
issuer’s credit quality.
preliminary
Preliminary
ratings, with the ‘prelim’ qualifier, may be assigned to obligors or
obligations, including financial programs, in the circumstances described below.
Assignment of a final rating is conditional on the receipt by Standard &
Poor’s of appropriate documentation. Standard & Poor’s reserves the right
not to issue a final rating. Moreover, if a final rating is issued, it may
differ from the preliminary rating.
— |
Preliminary
ratings may be assigned to obligations, most commonly structured and
project finance issues, pending receipt of final documentation and legal
opinions. |
— |
Preliminary
ratings are assigned to Rule 415 Shelf Registrations. As specific issues,
with defined terms, are offered from the master registration, a final
rating may be assigned to them in accordance with Standard & Poor’s
policies |
— |
Preliminary
ratings may be assigned to obligations that will likely be issued upon the
obligor’s emergence from bankruptcy or similar reorganization, based on
late-stage reorganization plans, documentation and discussions with the
obligor. Preliminary ratings may also be assigned to the obligors. These
ratings consider the anticipated general credit quality of the reorganized
or post-bankruptcy issuer as well as attributes of the anticipated
obligation(s). |
— |
Preliminary
ratings may be assigned to entities that are being formed or that are in
the process of being independently established when, in Standard &
Poor’s opinion, documentation is close to final. Preliminary ratings may
also be assigned to these entities’
obligations. |
— |
Preliminary
ratings may be assigned when a previously unrated entity is undergoing a
well-formulated restructuring, recapitalization, significant financing or
other transformative event, generally at the point that investor or lender
commitments are invited. The preliminary rating may be assigned to the
entity and to its proposed obligation(s). These preliminary ratings
consider the anticipated general credit quality of the obligor, as well as
attributes of the anticipated obligation(s), assuming successful
completion of the transformative event. Should the transformative event
not occur, Standard & Poor’s would likely withdraw these preliminary
ratings. |
— |
A
preliminary recovery rating may be assigned to an obligation that has a
preliminary issue credit rating. |
sf
The (sf)
subscript is assigned to all issues and issuers to which a regulation, such as
the European Union Regulation on Credit Rating Agencies, requires the assignment
of an additional symbol which distinguishes a structured finance instrument or
obligor (as defined in the regulation) from any other instrument or obligor. The
addition of this subscript to a credit rating does not change the definition of
that rating or our opinion about the issue’s or issuer’s
creditworthiness.
t
This
symbol indicates termination structures that are designed to honor their
contracts to full maturity or, should certain events occur, to terminate and
cash settle all their contracts before their final maturity date.
unsolicited
Unsolicited
ratings are those credit ratings assigned at the initiative of Standard &
Poor’s and not at the request of the issuer or its agents.
Inactive
Qualifiers (No longer applied or outstanding)
*
This
symbol indicated continuance of the ratings is contingent upon Standard &
Poor’s receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows. Discontinued use in August
1998.
c
This
qualifier was used to provide additional information to investors that the bank
may terminate its obligation to purchase tendered bonds if the long-term credit
rating of the issuer is below an investment-grade level and/or the issuer’s
bonds are deemed taxable. Discontinued use in January
2001.
pr
The
letters ‘pr’ indicate that the rating is provisional. A provisional rating
assumes the successful completion of the project financed by the debt being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful, timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
q
A ‘q’
subscript indicates that the rating is based solely on quantitative analysis of
publicly available information. Discontinued use in April
2001.
r
The ‘r’
modifier was assigned to securities containing extraordinary risks, particularly
market risks, which are not covered in the credit rating. The absence
of an ‘r’ modifier should not be taken as an indication that an obligation will
not exhibit extraordinary non-credit related risks. Standard & Poor’s
discontinued the use of the ‘r’ modifier for most obligations in June 2000 and
for the balance of obligations (mainly structured finance transactions) in
November 2002.
Local
Currency and Foreign Currency Risks
Country
risk considerations are a standard part of Standard & Poor’s analysis for
credit ratings on any issuer or issue. Currency of repayment is a key factor in
this analysis. An obligor’s capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government’s own relatively lower capacity to
repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific
issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Moody’s Credit Rating
Definitions
Purpose
The
system of rating securities was originated by John Moody in 1909. The purpose of
Moody’s ratings is to provide investors with a simple system of gradation by
which relative creditworthiness of securities may be noted.
Rating
Symbols
Gradations
of creditworthiness are indicated by rating symbols, with each symbol
representing a group in which the credit characteristics are broadly the same.
There are nine symbols as shown below, from that used to designate least credit
risk to that denoting greatest credit risk:
Aaa
Aa A Baa Ba B Caa Ca C
Moody’s
appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa.
Absence
of a Rating
Where no
rating has been assigned or where a rating has been withdrawn, it may be for
reasons unrelated to the creditworthiness of the issue.
Should no
rating be assigned, the reason may be one of the following:
1. An
application was not received or accepted.
2. The
issue or issuer belongs to a group of securities or entities that are not rated
as a matter of policy.
3. There
is a lack of essential data pertaining to the issue or issuer.
4. The
issue was privately placed, in which case the rating is not published in Moody’s
publications.
Withdrawal
may occur if new and material circumstances arise, the effects of which preclude
satisfactory analysis; if there is no longer available reasonable up-to-date
data to permit a judgment to be formed; if a bond is called for redemption; or
for other reasons.
Changes
in Rating
The
credit quality of most issuers and their obligations is not fixed and steady
over a period of time, but tends to undergo change. For this reason changes in
ratings occur so as to reflect variations in the intrinsic relative position of
issuers and their obligations.
A change
in rating may thus occur at any time in the case of an individual issue. Such
rating change should serve notice that Moody’s observes some alteration in
creditworthiness, or that the previous rating did not fully reflect the quality
of the bond as now seen. While because of their very nature, changes are to be
expected more frequently among bonds of lower ratings than among bonds of higher
ratings. Nevertheless, the user of bond ratings should keep close and constant
check on all ratings — both high and low — to be able to note promptly any signs
of change in status that may occur.
Limitations
to Uses of Ratings*
Obligations
carrying the same rating are not claimed to be of absolutely equal credit
quality. In a broad sense, they are alike in position, but since there are a
limited number of rating classes used in grading thousands of bonds, the symbols
cannot reflect the same shadings of risk which actually exist.
As
ratings are designed exclusively for the purpose of grading obligations
according to their credit quality, they should not be used alone as a basis for
investment operations. For example, they have no value in forecasting the
direction of future trends of market price. Market price movements in bonds are
influenced not only by the credit quality of individual issues but also by
changes in money rates and general economic trends, as well as by the length of
maturity, etc. During its life even the highest rated bond may have wide price
movements, while its high rating status remains unchanged.
The
matter of market price has no bearing whatsoever on the determination of
ratings, which are not to be construed as recommendations with respect to
“attractiveness”. The attractiveness of a given bond may depend on its yield,
its maturity date or other factors for which the investor may search, as well as
on its credit quality, the only characteristic to which the rating
refers.
Since
ratings involve judgments about the future, on the one hand, and since they are
used by investors as a means of protection, on the other, the effort is made
when assigning ratings to look at “worst” possibilities in the “visible” future,
rather than solely at the past record and the status of the present. Therefore,
investors using the rating should not expect to find in them a reflection of
statistical factors alone, since they are an appraisal of long-term risks,
including the recognition of many non-statistical factors.
Though
ratings may be used by the banking authorities to classify bonds in their bank
examination procedure, Moody’s ratings are not made with these bank regulations
in mind. Moody’s Investors Service’s own judgment as to the desirability or
non-desirability of a bond for bank investment purposes is not indicated by
Moody’s ratings.
Moody’s
ratings represent the opinion of Moody’s Investors Service as to the relative
creditworthiness of securities. As such, they should be used in conjunction with
the descriptions and statistics appearing in Moody’s publications. Reference
should be made to these statements for information regarding the issuer. Moody’s
ratings are not commercial credit ratings. In no case is default or receivership
to be imputed unless expressly stated.
*As set
forth more fully on the copyright, credit ratings are, and must be construed
solely as, statements of opinion and not statements of fact or recommendations
to purchase, sell or hold any securities. Each rating or other opinion must be
weighed solely as one factor in any investment decision made by or on behalf of
any user of the information, and each such user must accordingly make its own
study and evaluation of each security and of each issuer and guarantor of, and
each provider of credit support for, each security that it may consider
purchasing, selling or holding.
Short-Term
Ratings
Moody’s
short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs
or to individual short-term debt instruments. Such obligations generally have an
original maturity not exceeding thirteen months, unless explicitly
noted.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
P-1
Issuers
(or supporting institutions) rated Prime-1 have a superior ability to repay
short-term debt obligations.
P-2
Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations.
P-3
Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to repay
short-term obligations.
NP
Issuers
(or supporting institutions) rated Not Prime do not fall within any of the Prime
rating categories.
Note: Canadian issuers rated
P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term
rating of the issuer, its guarantor or support-provider.
Fitch’s National Credit
Ratings
For those
countries in which foreign and local currency sovereign ratings are below ‘AAA’,
and where there is demand for such ratings, Fitch Ratings will provide National
Ratings. It is important to note that each National Rating scale is unique and
is defined to serve the needs of the local market in question.
The
National Rating scale provides a relative measure of creditworthiness for rated
entities only within the country concerned. Under this rating scale, a ‘AAA’
Long-Term National Rating will be assigned to the lowest relative risk within
that country, which, in most but not all cases, will be the sovereign
state.
The
National Rating scale merely ranks the degree of perceived risk relative to the
lowest default risk in that same country. Like local currency ratings, National
Ratings exclude the effects of sovereign and transfer risk and exclude the
possibility that investors may be unable to repatriate any due interest and
principal repayments. It is not related to the rating scale of any other
national market. Comparisons between different national scales or between an
individual national scale and the international rating scale are therefore
inappropriate and potentially misleading. Consequently they are identified by
the addition of a special identifier for the country concerned, such as
‘AAA(arg)’ for National Ratings in Argentina.
In
certain countries, regulators have established credit rating scales, to be used
within their domestic markets, using specific nomenclature. In these countries,
the agency’s National Short-Term Rating definitions for ‘F1+(xxx)’, ‘F1(xxx)’,
‘F2(xxx)’ and ‘F3(xxx)’ may be substituted by the regulatory scales, e.g. ‘A1+’,
‘A1’, ‘A2’ and ‘A3’. The below definitions thus serve as a template, but users
should consult the individual scales for each country listed on the agency’s
web-site to determine if any additional or alternative category definitions
apply.
National Short-Term Credit
Ratings
F1(xxx)
Indicates
the strongest capacity for timely payment of financial commitments relative to
other issuers or obligations in the same country. Under the agency’s National
Rating scale, this rating is assigned to the lowest default risk relative to
others in the same country. Where the liquidity profile is particularly strong,
a “+” is added to the assigned rating.
F2(xxx)
Indicates
a good capacity for timely payment of financial commitments relative to other
issuers or obligations in the same country. However, the margin of safety is not
as great as in the case of the higher ratings.
F3(xxx)
Indicates
an adequate capacity for timely payment of financial commitments relative to
other issuers or obligations in the same country. However, such capacity is more
susceptible to near-term adverse changes than for financial commitments in
higher rated categories.
B(xxx)
Indicates
an uncertain capacity for timely payment of financial commitments relative to
other issuers or obligations in the same country. Such capacity is highly
susceptible to near-term adverse changes in financial and economic
conditions.
C(xxx)
Indicates
a highly uncertain capacity for timely payment of financial commitments relative
to other issuers or obligations in the same country. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D(xxx)
Indicates
actual or imminent payment default.
Notes
to Long-Term and Short-Term National Ratings:
The ISO
country code suffix is placed in parentheses immediately following the rating
letters to indicate the identity of the National market within which the rating
applies. For illustrative purposes, (xxx) has been used.
“+” or
“-” may be appended to a National Rating to denote relative status within a
major rating category. Such suffixes are not added to the ‘AAA(xxx)’ Long-Term
National Rating category, to categories below ‘CCC(xxx)’, or to Short-Term
National Ratings other than ‘F1(xxx)’.
LONG-TERM
RATINGS
Standard & Poor’s
Long-Term Issue Credit Ratings
Issue
credit ratings are based, in varying degrees, on Standard & Poor’s analysis
of the following considerations:
— |
Likelihood
of payment—capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the
obligation; |
|
|
— |
Nature
of and provisions of the obligation; |
|
|
— |
Protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors’
rights. |
Issue
ratings are an assessment of default risk, but may incorporate an assessment of
relative seniority or ultimate recovery in the event of
default. Junior obligations are typically rated lower than senior
obligations, to reflect the lower priority in bankruptcy, as noted
above. (Such differentiation may apply when an entity has both senior
and subordinated obligations, secured and unsecured obligations, or operating
company and holding company obligations.)
AAA
An
obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s.
The obligor’s capacity to meet its financial commitment on the obligation is
extremely strong.
AA
An
obligation rated ‘AA’ differs from the highest-rated obligations only to a small
degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
A
An
obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its
financial commitment on the obligation is still strong.
BBB
An
obligation rated ‘BBB’ exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
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 exposures to adverse conditions.
BB
An
obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor’s inadequate capacity to meet its financial commitment on the
obligation.
B
An
obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated
‘BB’, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s capacity or willingness to
meet its financial commitment on the obligation.
CCC
An
obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the
obligation.
CC
An
obligation rated ‘CC’ is currently highly vulnerable to nonpayment.
C
A ‘C’
rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of the
documents, or obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment default. Among
others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or
other obligations on which cash payments have been suspended in accordance with
the instrument’s terms or when preferred stock is the subject of a distressed
exchange offer, whereby some or all of the issue is either repurchased for an
amount of cash or replaced by other instruments having a total value that is
less than par.
D
An
obligation rated ‘D’ is in payment default. The ‘D’ rating category
is used when payments on an obligation, including a regulatory capital
instrument, are not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor’s believes that such payments will be
made during such grace period. The ‘D’ rating also will be used upon
the filing of a bankruptcy petition or the taking of similar action if payments
on an obligation are jeopardized. An obligation’s rating is lowered to ‘D’ upon
completion of a distressed exchange offer, whereby some or all of the issue is
either repurchased for an amount of cash or replaced by other instruments having
a total value that is less than par.
Plus
(+) or minus (-)
The
ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating
categories.
NR
This
indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor’s does not
rate a particular obligation as a matter of policy.
See
active and inactive qualifiers following Standard & Poors Short-Term Issue
Credit Ratings beginning on page A-3.
Moody’s Long-Term Debt
Ratings
Long-Term
Obligation Ratings
Moody’s
long-term obligation ratings are opinions of the relative credit risk of
fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings reflect both the likelihood of default and any financial
loss suffered in the event of default.
Moody’s
Long-Term Rating Definitions:
Aaa
Obligations
rated Aaa are judged to be of the highest quality, with minimal credit
risk.
Aa
Obligations
rated Aa are judged to be of high quality and are subject to very low credit
risk.
A
Obligations
rated A are considered upper-medium grade and are subject to low credit
risk.
Baa
Obligations
rated Baa are subject to moderate credit risk. They are considered medium-grade
and as such may possess certain speculative characteristics.
Ba
Obligations
rated Ba are judged to have speculative elements and are subject to substantial
credit risk.
B
Obligations
rated B are considered speculative and are subject to high credit
risk.
Caa
Obligations
rated Caa are judged to be of poor standing and are subject to very high credit
risk.
Ca
Obligations
rated Ca are highly speculative and are likely in, or very near, default, with
some prospect of recovery of principal and interest.
C
Obligations
rated C are the lowest rated class of bonds and are typically in default, with
little prospect for recovery of principal or interest.
Note: Moody’s appends
numerical modifiers 1, 2, and 3 to each generic rating classification from Aa
through Caa. The modifier 1 indicates that the obligation ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of that generic
rating category.
Fitch’s National Long-Term
Credit Ratings
AAA(xxx)
‘AAA’
National Ratings denote the highest rating assigned by the agency in its
National Rating scale for that country. This rating is assigned to issuers or
obligations with the lowest expectation of default risk relative to all other
issuers or obligations in the same country.
AA(xxx)
‘AA’
National Ratings denote expectations of very low default risk relative to other
issuers or obligations in the same country. The default risk inherent differs
only slightly from that of the country’s highest rated issuers or
obligations.
A(xxx)
‘A’
National Ratings denote expectations of low default risk relative to other
issuers or obligations in the same country. However, changes in circumstances or
economic conditions may affect the capacity for timely repayment to a greater
degree than is the case for financial commitments denoted by a higher rated
category.
BBB(xxx)
‘BBB’
National Ratings denote a moderate default risk relative to other issuers or
obligations in the same country. However, changes in circumstances or economic
conditions are more likely to affect the capacity for timely repayment than is
the case for financial commitments denoted by a higher rated
category.
BB(xxx)
‘BB’
National Ratings denote an elevated default risk relative to other issuers or
obligations in the same country. Within the context of the country, payment is
uncertain to some degree and capacity for timely repayment remains more
vulnerable to adverse economic change over time.
B(xxx)
‘B’
National Ratings denote a significantly elevated default risk relative to other
issuers or obligations in the same country. Financial commitments are currently
being met but a limited margin of safety remains and capacity for continued
timely payments is contingent upon a sustained, favorable business and economic
environment. For individual obligations, may indicate distressed or defaulted
obligations with potential for extremely high recoveries.
CCC(xxx)
‘CCC’
National Ratings denote that default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic conditions.
CC(xxx)
‘CC’
National Ratings denote that default of some kind appears probable.
C(xxx)
‘C’
National Ratings denote that default is imminent.
D(xxx)
‘D’
National Ratings denote an issuer or instrument that is currently in
default.
Notes
to Long-Term and Short-Term National Ratings:
The ISO
country code suffix is placed in parentheses immediately following the rating
letters to indicate the identity of the National market within which the rating
applies. For illustrative purposes, (xxx) has been used.
“+” or
“-” may be appended to a National Rating to denote relative status within a
major rating category. Such suffixes are not added to the ‘AAA(xxx)’ Long-Term
National Rating category, to categories below ‘CCC(xxx)’, or to Short-Term
National Ratings other than ‘F1(xxx)’.
MUNICIPAL
NOTE RATINGS
Standard & Poor’s
Municipal
Short-Term Note Ratings Definitions
A
Standard & Poor’s U.S. municipal note rating reflects Standard & Poor’s
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, Standard & Poor’s 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. |
Note
rating symbols are as follows:
SP-1
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
Satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
SP-3
Speculative
capacity to pay principal and interest.
See
active and inactive qualifiers following Standard & Poors Short-Term Issue
Credit Ratings beginning on page A-3.
Moody’s US Municipal
Short-Term Debt And Demand Obligation
Ratings
Short-Term Debt
Ratings
There are
three rating categories for short-term municipal obligations that are considered
investment grade. These ratings are designated as Municipal Investment Grade
(MIG) and are divided into three levels -- MIG 1 through MIG 3. In addition,
those short-term obligations that are of speculative quality are designated SG,
or speculative grade. MIG ratings expire at the maturity of the
obligation.
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.
Demand Obligation
Ratings
In the
case of variable rate demand obligations (VRDOs), a two-component rating is
assigned; a long or short-term debt rating and a demand obligation rating. The
first element represents Moody’s evaluation of the degree of risk associated
with scheduled principal and interest payments. The second element represents
Moody’s evaluation of the degree of risk associated with the ability to receive
purchase price upon demand (“demand feature”), using a variation of the MIG
rating scale, the Variable Municipal Investment Grade or VMIG
rating.
When
either the long- or short-term aspect of a VRDO is not rated, that piece is
designated NR, e.g., Aaa/NR or NR/VMIG 1.
VMIG
rating expirations are a function of each issue’s specific structural or credit
features.
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 that ensure the timely payment of purchase price upon
demand.
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 that ensure the timely payment of purchase price upon
demand.
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 that ensure the timely payment of purchase
price upon demand.
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 an
investment grade short-term rating or may lack the structural and/or legal
protections necessary to ensure the timely payment of purchase price upon
demand.