Manning
& Napier Fund, Inc.
Statement
of Additional Information dated March 1, 2023
This
Statement of Additional Information (“SAI”) is not a prospectus, but expands
upon and supplements the information contained in the current Prospectuses for
each Series and Class listed below of Manning & Napier Fund, Inc. (the
“Fund”), each dated March 1, 2023, and should be read in conjunction with the
Prospectuses. You may obtain copies of the Fund’s current Prospectuses from
Manning & Napier Advisors, LLC, 290 Woodcliff Drive, Fairport, NY 14450
or by calling 1-800-466-3863. The Prospectuses are also available online at
www.manning-napier.com.
The audited
financial statements of each Series (as defined below) including the report of
PricewaterhouseCoopers LLP (“PwC”) thereon, from the Series’ Annual Reports for
the fiscal year ended December 31, 2022, are hereby incorporated by reference
into this SAI. These Reports may be obtained without charge by calling
1-800-466-3863.
SERIES |
CLASS
A |
CLASS
I |
CLASS
S |
CLASS
W |
CLASS
Z |
|
|
|
|
|
|
CORE
BOND SERIES |
|
EXCIX |
EXCRX |
MCBWX |
MCBZX |
|
|
|
|
|
|
CREDIT
SERIES |
|
|
|
MCDWX |
|
|
|
|
|
|
|
DIVERSIFIED
TAX EXEMPT SERIES |
EXDVX |
|
|
MNDWX |
|
|
|
|
|
|
|
HIGH
YIELD BOND SERIES |
|
MNHAX |
MNHYX |
MHYWX |
MHYZX |
|
|
|
|
|
|
REAL
ESTATE SERIES |
|
MNRIX |
MNREX |
MNRWX |
MNRZX |
|
|
|
|
|
|
UNCONSTRAINED
BOND SERIES |
|
MNCPX |
EXCPX |
MUBWX |
NO
TICKER SYMBOL |
The Fund
The Fund is
an open-end management investment company incorporated under the laws of the
State of Maryland on July 26, 1984. This SAI relates to the following series of
the Fund: Core Bond Series (Class I, S, W and Z), Credit Series (Class W),
Diversified Tax Exempt Series (Class A and W), High Yield Bond Series (Class I,
S, W and Z), Real Estate Series (Class I, S, W and Z), and Unconstrained Bond
Series (Class I, S, W and Z) (each a “Series”). Each Series is a separate mutual
fund with its own investment objective, strategies and risks. The Fund’s Board
of Directors (“Board” or “Board of Directors”) may, at its own discretion,
create additional series of shares (and classes of such series), each of which
would have separate assets and liabilities.
Currently,
the Fund has issued the following classes of shares of the Series: Class A, I,
S, W and Z.
Each share
of a Series represents an identical interest in the investment portfolio of that
Series and has the same rights, except that (i) each class of shares bears those
distribution fees, shareholder service fees and administrative expenses
applicable to the respective class of shares as a result of its distribution and
shareholder services arrangements, which will cause the different classes of
shares to have different expense ratios and to pay different rates of dividends,
and (ii) each class has exclusive voting rights with respect to any distribution
and/or shareholder service fees which relate only to such class. As a result of
each class’ differing amount of distribution and/or shareholder services fees,
shares of different classes of the same Series may have different NAVs per
share.
Shares of
the Fund may not be available for purchase in every state. If a Series’ shares
are not registered in a state, investments will not be accepted for the Series
from shareholders in that state, and requests to exchange from another Series
into that Series also will not be accepted. Please contact the Fund at
1-800-466-3863 for information about state availability.
Investment Goals
Each Series’
investment goal is described in its prospectus.
The
investment goals of the Core Bond Series, Credit Series, Real Estate Series, and
Unconstrained Bond Series are non-fundamental and may be changed by the Board of
Directors without shareholder approval. If there is a material change in the
investment objective of a Series, shareholders will be notified thirty (30) days
prior to any such change and will be advised to consider whether the Series
remains an appropriate investment in light of their then current financial
position and needs.
The
investment goals of the Diversified Tax Exempt Series and High Yield Bond Series
are fundamental, which means that the investment objective of a Series may not
be changed without the approval of a “majority of the outstanding voting
securities” of such Series, as such term is defined in the Investment Company
Act of 1940, as amended (the “1940 Act”).
The
Diversified Tax Exempt Series has a fundamental investment policy of investing
at least 80% of its assets in securities the income from which is exempt from
federal income tax, including the alternative minimum tax (the “Alternative
Minimum Tax”) imposed on non-corporate taxpayers by Section 55 of the Internal
Revenue Code of 1986, as amended (the “Code”). This fundamental investment
policy may not be changed without the approval of a “majority of the outstanding
voting securities” of the Series, as such term is defined in the 1940
Act.
The
investment strategy of the High Yield Bond Series is to invest, under normal
circumstances, at least 80% of its assets in bonds that are rated below
investment grade (junk bonds) and other financial instruments, principally
derivative instruments and exchange-traded funds (ETFs), with economic
characteristics similar to non-investment grade securities. The investment
strategy of the Core Bond Series is to invest, under normal circumstances, at
least 80% of its assets in investment grade bonds and other financial
instruments, principally derivative instruments and ETFs, with economic
characteristics similar to bonds. The investment strategy of the Unconstrained
Bond Series is to invest, under normal circumstances, at least 80% of its assets
in bonds and other financial instruments, principally derivative instruments and
ETFs, with economic characteristics similar to bonds. The investment strategy of
the Real Estate Series is to invest, under normal circumstances, at least 80% of
its assets in securities of companies that are primarily engaged in the real
estate industry. The investment strategy of the Credit Series is to invest,
under normal circumstances at least 80% of its assets in credit-related
instruments and other financial instruments, principally derivative instruments
and ETFs, with economic characteristics similar to credit-related instruments.
Each of these Series will notify its shareholders at least sixty (60) days prior
to any change in its respective 80% investment policy.
The Credit
Series is a non-diversified mutual fund. Each of the other Series is a
diversified mutual fund.
Investment Policies and Risks
Except as
explicitly stated otherwise, all investment policies of the Series are
non-fundamental and may be changed by the Board of Directors without shareholder
approval.
Each Series’
principal investment strategies and risks are described in its prospectus. The
following discussion provides additional information about those principal
investment strategies and related risks, as well as information about
non-principal investment strategies (and related risks) that a Series may
utilize. Accordingly, an investment strategy (and related risk) that is
described below, but which is not described in a Series’ prospectus, is
considered by the Series to be a non-principal strategy (or related
risk).
EQUITY
INVESTMENTS
Common Stocks. Each Series (with the
exception of the Diversified Tax Exempt Series, Core Bond Series, Credit Series,
High Yield Bond Series, and Unconstrained Bond Series) may purchase
exchange-traded and over the counter (“OTC”) common stocks. Common stock
represents an equity or ownership interest in an issuer. The Core Bond Series,
Credit Series, High Yield Bond Series, and Unconstrained Bond Series may acquire
and hold common stocks temporarily if such investments are acquired in
connection with the Series’ other investment activities. The Advisor expects to
divest the Core Bond Series, Credit Series, High Yield Bond Series, and
Unconstrained Bond Series of any common stocks they receive when the Adviser
determines it is the best interest of each Series to do so.
Common
stocks are shares of a corporation or other entity that entitle the holder to a
pro rata share of the profits of the corporation, if any, without preference
over any other shareholder or class of shareholders, including holders of the
entity’s preferred stock and other senior equity. Common stock usually carries
with it the right to vote and, frequently, an exclusive right to do so. In the
event an issuer is liquidated or declares bankruptcy, the claims of owners of
bonds and preferred stock take precedence over the claims of those who own
common stock.
Securities
traded on OTC markets are not listed and traded on an organized exchange such as
the New York Stock Exchange (“NYSE”). Generally, the volume of trading in an
unlisted or OTC common stock is less than the volume of trading in an
exchange-listed stock. As a result, the market liquidity of some stocks in which
the Series invest may not be as great as that of exchange-listed stocks and, if
the Series were to dispose of such stocks, the Series may have to offer the
shares at a discount from recent prices, or sell the shares in small lots over
an extended period of time.
Small- and mid-size company
securities. Each of the Series that may invest in equity securities may
invest in small and mid-size companies. Securities of small companies often have
only a small proportion of their outstanding securities held by the general
public. They may have limited trading markets that may be subject to wide price
fluctuations. Small and mid-size companies may have relatively small revenues
and lack depth of management. Investments in such companies tend to be volatile
and are therefore speculative. Small and mid-size companies may have a small
share of the market for their products or services and they may provide goods or
services to a regional or limited market. They may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms. In addition, they may be
developing or marketing new products or services for which markets are not yet
established and may never become established. Such companies may have or may
develop only a regional market for products or services and thus be affected by
local or regional market conditions. Moreover, small and mid-size companies may
have insignificant market share in their industries and may have difficulty
maintaining or increasing their market share in competition with larger
companies. Due to these and other factors, small and mid-size companies may
suffer significant losses.
Depositary Receipts. Each Series which
may purchase common stock may purchase Depositary Receipts. Depositary Receipts
represent an ownership interest in securities of foreign companies (an
“underlying issuer”) that are deposited with a depositary. Depositary Receipts
are not necessarily denominated in the same currency as the underlying
securities. American Depositary Receipts (“ADRs”) are dollar-denominated
Depositary Receipts typically issued by a U.S. financial institution which
evidence an ownership interest in a security or pool of securities issued by a
foreign issuer. Generally, ADRs are issued in registered form and are designed
for use in the U.S. securities markets. Other Depositary Receipts, such as
Global Depositary Receipts (“GDRs”) and International Depositary Receipts
(“IDRs”), may be issued in bearer form and denominated in foreign currencies,
and are generally designed for use in securities markets outside the United
States. Depositary Receipts are subject to many of the risks associated with
investing directly in foreign securities, which are described below.
The
Depositary Receipts in which the Series invest may be “sponsored” or
“unsponsored.” Sponsored Depositary Receipts are established jointly by a
depositary and the underlying issuer, whereas unsponsored Depositary Receipts
may be established by a depositary without participation by the underlying
issuer. Holders of unsponsored Depositary Receipts generally bear all the costs
associated with establishing unsponsored Depositary Receipts. In addition, the
issuers of the securities underlying unsponsored Depositary Receipts are not
obligated to disclose material information in the United States and, therefore,
there may be less information available regarding such issuers and there may not
be a correlation between such information and the market value of the Depositary
Receipts.
Initial Public Offerings (“IPOs”).
Each Series which may purchase common stock may purchase shares issued as part
of, or a short period after, a company’s IPO, and may at times dispose of those
shares shortly after their acquisition. A Series’ purchase of shares issued in
IPOs exposes it to the risks associated with companies that have little
operating history as public companies, as well as to the risks inherent in those
sectors of the market where these new issuers operate. The market for IPO
issuers tends to be volatile, and share prices of newly-public companies tend to
fluctuate significantly over short periods of time.
Preferred Stocks. Each Series (with
the exception of the Diversified Tax Exempt Series) may invest in preferred
stocks. Preferred stocks represent an equity or ownership interest in an issuer
but do not ordinarily carry voting rights, although they may carry limited
voting rights. Preferred stocks also normally have preference over the
corporation’s assets and earnings. For example, preferred stocks have preference
over common stock in the payment of dividends. Preferred stocks normally pay
dividends at a specified rate and may entitle the holder to acquire the issuer’s
stock by exchange or purchase for a predetermined rate. However, preferred stock
may be purchased where the issuer has omitted, or is in danger of omitting,
payment of its dividend. Such investments would be made primarily for their
capital appreciation potential. In the event an issuer is liquidated or declares
bankruptcy, the claims of bond owners take precedence over the claims of
preferred and common stock owners. Certain classes of preferred stock are
convertible into shares of common stock of the issuer. By holding convertible
preferred stock, a Series can receive a steady stream of dividends and still
have the option to convert the preferred stock to common stock. Preferred stock
is subject to many of the same risks as common stock and debt
securities.
Convertible Securities. Each Series
(with the exception of the Diversified Tax Exempt Series) may invest in
securities that are convertible at either a stated price or a stated rate into
underlying shares of common stock, thus enabling the investor to benefit from
increases in the market price of the common stock.
Convertible
securities are typically preferred stocks or bonds that are exchangeable for a
specific number of another form of security (usually the issuer’s common stock)
at a specified price or ratio. A convertible security generally entitles the
holder to receive interest paid or accrued on bonds or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. A corporation may issue a convertible security that is subject to
redemption after a specified date, and usually under certain circumstances. A
holder of a convertible security that is called for redemption would be required
to tender it for redemption to the issuer, convert it to the underlying common
stock or sell it to a third party. The convertible structure allows the holder
of the convertible bond to participate in share price movements in the company’s
common stock. The actual return on a convertible bond may exceed its stated
yield if the company’s common stock appreciates in value and the option to
convert to common stocks becomes more valuable.
Convertible
securities typically pay a lower interest rate than nonconvertible bonds of the
same quality and maturity because of the convertible feature. Convertible
securities may be rated below investment grade (“high yield”) or not rated, and
are subject to credit risk.
Prior to
conversion, convertible securities have characteristics and risks similar to
nonconvertible debt and equity securities. In addition, convertible securities
are often concentrated in economic sectors, which, like the stock market in
general, may experience unpredictable declines in value, as well as periods of
poor performance, which may last for several years. There may be a small trading
market for a particular convertible security at any given time, which may
adversely impact market price and a Series’ ability to liquidate a particular
security or respond to an economic event, including deterioration of an issuer’s
creditworthiness.
Convertible
preferred stocks are nonvoting equity securities that pay a fixed dividend.
These securities have a convertible feature similar to convertible bonds, but do
not have a maturity date. Due to their fixed income features, convertible
securities provide higher income potential than the issuer’s common stock, but
typically are more sensitive to interest rate changes than the underlying common
stock. In the event of a company’s liquidation, bondholders have claims on
company assets senior to those of shareholders; preferred shareholders have
claims senior to those of common shareholders.
Convertible
securities typically trade at prices above their conversion value, which is the
current market value of the common stock received upon conversion, because of
their higher yield potential than the underlying common stock. The difference
between the conversion value and the price of a convertible security will vary
depending on the value of the underlying common stock and interest rates. When
the underlying value of the common stock declines, the price of the issuer’s
convertible securities will tend not to fall as much because the convertible
security’s income potential will act as a price support. While the value of a
convertible security also tends to rise when the underlying common stock value
rises, it will not rise as much because its conversion value is more narrow. The
value of convertible securities also is affected by changes in interest rates.
For example, when interest rates fall, the value of convertible securities may
rise because of their fixed income component.
Contingent
Convertible Securities. A contingent convertible security, or “CoCo”, is a
type of convertible security typically issued by a non-U.S. bank that, upon the
occurrence of a specified trigger event, may be (i) convertible into equity
securities of the issuer at a predetermined share price; or (ii) written down in
liquidation value. Trigger events are identified in the documents that govern
the CoCo and may include a decline in the issuer’s capital below a specified
threshold level, an increase in the issuer’s risk weighted assets, the share
price of the issuer falling to a particular level for a certain period of time
and certain regulatory events, such as a change in regulatory capital
requirements. CoCos are designed to behave like bonds in times of economic
health yet absorb losses when the trigger event occurs. CoCos are generally
considered speculative and the prices of CoCos may be volatile.
With respect
to CoCos that provide for conversion of the CoCo into common shares of the
issuer in the event of a trigger event, the conversion would deepen the
subordination of the investor, creating a greater risk of loss in the event of
bankruptcy. In addition, because the common stock of the issuer may not pay a
dividend, investors in such instruments could experience reduced yields (or no
yields at all). With respect to CoCos that provide for the write down in
liquidation value of the CoCo in the event of a trigger event, it is possible
that the liquidation value of the CoCo may be adjusted downward to below the
original par value or written off entirely under certain circumstances. For
instance, if losses have eroded the issuer’s capital levels below a specified
threshold, the liquidation value of the CoCo may be reduced in whole or in part.
The write-down of the CoCo’s par value may occur automatically and would not
entitle holders to institute bankruptcy proceedings against the issuer. In
addition, an automatic write-down could result in a reduced income rate if the
dividend or interest payment associated with the CoCo is based on par value.
Coupon payments on CoCos may be discretionary and may be cancelled by the issuer
for any reason or may be subject to approval by the issuer’s regulator and may
be suspended in the event there are insufficient distributable
reserves.
Rights and Warrants. Each Series (with
the exception of the Core Bond Series, Diversified Tax Exempt Series, and
Unconstrained Bond Series) may purchase rights and warrants. A right is a
privilege granted to existing shareholders of a corporation to subscribe to
shares of a new issue of common stock before it is issued. Rights normally have
a short life, usually two to four weeks, are freely transferable and entitle the
holder to buy the new common stock at a lower price than the public offering
price. Warrants are securities that are usually issued together with a debt
security or preferred stock and that give the holder the right to buy a
proportionate amount of common stock at a specified price. Warrants are freely
transferable and are often traded on major exchanges. Unlike rights, warrants
normally have a life that is measured in years and entitle the holder to buy
common stock of a company at a price that is usually higher than the market
price at the time the warrant is issued. Corporations often issue warrants to
make the accompanying debt security more attractive.
Rights and
warrants may be considered more speculative than certain other types of
investments because they (1) do not carry rights to dividends or voting rights
with respect to the underlying securities, and (2) do not represent any rights
in the assets of the issuer. Warrants purchased by the Series may or may not be
listed on a national securities exchange. None of the Series (with the exception
of the Real Estate Series) may invest more than 5% of the value of its total net
assets in warrants. Included within that amount, but not to exceed 2% of the
value of the Series’ net assets, may be warrants which are not listed on either
the NYSE or the NYSE American. Warrants acquired in units or attached to
securities will be deemed without value for purposes of this
restriction.
Real Estate Investment Trusts
(“REITs”). Each Series (with the exception of the Core Bond Series,
Diversified Tax Exempt Series, and Unconstrained Bond Series) may invest in
shares of REITs, which are pooled investment vehicles that invest in real estate
or real estate loans or interests. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. These risks may include, but are not limited to, the
following: declines in the value of real estate; risks related to general and
local economic conditions; possible lack of availability of mortgage funds; lack
of ability to access the credit or capital markets; overbuilding; extended
vacancies of properties; defaults by borrowers or tenants, particularly during
an economic downturn; increasing competition; increases in property taxes and
operating expenses; changes in zoning laws; losses due to costs resulting from
the clean-up of environmental problems; liability to third parties for damages
resulting from environmental problems; casualty or condemnation losses;
limitations on rents; changes in market and sub-market values and the appeal of
properties to tenants; and changes in interest rates. Furthermore, REITs are
dependent on specialized management skills. Some REITs may have limited
diversification and may be subject to risks inherent in financing a limited
number of properties. REITs depend generally on their ability to generate cash
flow to make distributions to shareholders or unitholders, and may be subject to
defaults by borrowers and to self-liquidations. In addition, a U.S. REIT may be
affected by its failure to qualify for tax-free pass-through of income under the
Code or its failure to maintain exemption from registration under the 1940 Act).
By investing in REITs indirectly through a fund, shareholders will bear not only
the proportionate share of the expenses of the fund, but also, indirectly,
similar expenses of underlying REITs.
Generally,
REITs can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
their income primarily from rents and capital gains from appreciation realized
through property sales. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity and Mortgage
REITs.
Mortgage
REITs receive principal and interest payments from the owners of the mortgaged
properties. Accordingly, mortgage REITs are subject to the credit risk of the
borrowers to whom they extend credit. Credit risk refers to the possibility that
the borrower will be unable and/or unwilling to make timely interest payments
and/or repay the principal on the loan to a mortgage REIT when due. Mortgage
REITs are subject to significant interest rate risk. When the general level of
interest rates goes up, the value of a mortgage REIT’s investment in fixed rate
obligations goes down. When the general level of interest rates goes down, the
value of a mortgage REIT’s investment in fixed rate obligations goes up.
Mortgage REITs typically use leverage and many are highly leveraged, which
exposes them to leverage risk. Leverage risk refers to the risk that leverage
created from borrowing may impair a mortgage REIT’s liquidity, cause it to
liquidate positions at an unfavorable time and increase the volatility of the
values of securities issued by the mortgage REIT. Mortgage REITs are subject to
prepayment risk, which is the risk that borrowers may prepay their mortgage
loans at faster than expected rates. Prepayment rates generally increase when
interest rates fall and decrease when interest rates rise. These faster than
expected payments may adversely affect a mortgage REIT’s profitability because
the mortgage REIT may be forced to replace investments that have been redeemed
or repaid early with other investments having a lower yield. Additionally,
rising interest rates may cause the duration of a mortgage REIT’s investments to
be longer than anticipated and increase such investments’ interest rate
sensitivity.
Ultimately,
a REIT’s performance depends on the types of properties it owns and how well the
REIT manages its properties. Investing in REITs involves risks similar to those
associated with investing in equity securities of small capitalization
companies.
Trust Certificates, Partnership Interests and
Equity Participations. Each Series (with the exception of the Core Bond
Series, Diversified Tax Exempt Series, and Unconstrained Bond Series) may invest
in equity securities that are interests in non-corporate entities. These
securities, which include trust certificates, partnership interests and equity
participations, have different liability and tax characteristics than equity
securities issued by a corporation, and thus may present additional risks to the
Series. However, the investment characteristics of these securities are similar
to those of traditional corporate equity securities.
Business Development Companies
(“BDCs”). BDCs are a type of closed-end investment company regulated
under the 1940 Act. BDCs generally invest in less mature private companies or
thinly traded U.S. public companies which involve greater risk than
well-established publicly-traded companies. While BDCs are expected to generate
income in the form of dividends, certain BDCs during certain periods of time may
not generate such income. A Series that invests in BDCs will indirectly bear its
proportionate share of any management and other operating expenses and of any
performance-based or incentive fees charged by the BDCs in which it invests, in
addition to the expenses paid by the Series. The 1940 Act imposes certain
constraints upon the operations of a BDC. For example, BDCs are required to
invest at least 70% of their total assets primarily in securities of private
companies or thinly traded U.S. public companies, cash, cash equivalents, U.S.
government securities and high quality debt investments that mature in one year
or less. Generally, little public information exists for private and thinly
traded companies and there is a risk that investors may not be able to make a
fully informed evaluation of a BDC and its portfolio of investments. With
respect to investments in debt instruments, there is a risk that the issuers of
such instruments may default on their payments or declare bankruptcy.
Additionally, a BDC may only incur indebtedness in amounts such that the BDC’s
coverage ratio of total assets to total senior securities equals at least 200%
after such incurrence. These limitations on asset mix and leverage may affect
the way that the BDC raises capital. BDCs compete with other entities for the
types of investments they make, and such entities are not necessarily subject to
the same investment constraints as BDCs.
Investments
made by BDCs are generally subject to legal and other restrictions on resale and
are otherwise less liquid than publicly-traded securities. The illiquidity of
these investments may make it difficult to sell such investments if the need
arises, and if there is a need for a BDC in which a Series invests to liquidate
its portfolio quickly, it may realize a loss on its investments. BDCs may have
relatively concentrated investment portfolios, consisting of a relatively small
number of holdings. A consequence of this limited number of investments is that
the aggregate returns realized may be disproportionately impacted by the poor
performance of a small number of investments, or even a single investment,
particularly if a company experiences the need to write down the value of an
investment. Since BDCs rely on access to short-term money markets, longer-term
capital markets and the bank markets as significant sources of liquidity, if
BDCs are not able to access capital at competitive rates, their ability to
implement certain financial strategies will be negatively impacted. Market
disruptions, including a downturn in capital markets in general or a downgrade
of the credit rating of a BDC held by a Series, may increase the cost of
borrowing to that company, thereby increasing its cost of borrowing and
adversely impacting the Series’ returns. Credit downgrades may also result in
requirements for a BDC to provide additional support in the form of letters of
credit or cash or other collateral to various counterparties.
Since many
of the assets of BDCs do not have readily ascertainable market values, such
assets are most often recorded at fair value, in good faith, in accordance with
valuation procedures adopted by such companies. A fair value determination
requires that judgment be applied to the specific facts and circumstances. Due
to the absence of a readily ascertainable market value, and because of the
inherent uncertainty of fair valuation, the fair value assigned to a BDC’s
investments may differ significantly from the values that would be reflected if
the assets were traded in an established market, potentially resulting in
material differences between a BDC’s net asset value (“NAV”) per share and its
market value.
Many BDCs
invest in mezzanine and other debt securities of privately held companies,
including senior secured loans. Mezzanine investments typically are structured
as subordinated loans (with or without warrants) that carry a fixed rate of
interest. Many debt investments in which a BDC may invest will not be rated by a
credit rating agency and will be below investment grade quality. These
investments are commonly referred to as “junk bonds” and have predominantly
speculative characteristics with respect to an issuer’s capacity to make
payments of interest and principal. Although lower grade securities are higher
yielding, they are also characterized by high risk. In addition, the secondary
market for lower grade securities may be less liquid than that of higher rated
securities. Issuers of lower rated securities have a currently identifiable
vulnerability to default or may currently be in default. Lower-rated securities
may react more strongly to real or perceived adverse economic and competitive
industry conditions than higher grade securities. If the issuer of lower-rated
securities defaults, a BDC may incur additional expenses to seek
recovery.
Section 12(d)(1)(A) of the 1940 Act limits
the extent to which a Series may invest in securities of BDCs, but the 1940 Act
provides certain exceptions to these limitations that the Series may rely on
from time to time.
Master Limited Partnerships (“MLPs”).
MLPs are limited partnerships or limited liability companies whose partnership
units or limited liability interests are listed and traded on a U.S. securities
exchange, and which are treated as publicly traded partnerships for federal
income tax purposes. To qualify to be treated as a partnership for tax purposes,
an MLP must receive at least 90% of its income from qualifying sources as set
forth in Section 7704(d) of the Code. These qualifying sources include
activities such as the exploration, development, mining, production, processing,
refining, transportation, storage and marketing of mineral or natural resources.
MLPs generally have two classes of owners, the general partner and limited
partners. MLPs that are formed as limited liability companies generally have two
analogous classes of owners, the managing member and the members. For purposes
of this section, references to general partners also apply to managing members
and references to limited partners also apply to members. The general partner is
typically owned by a major energy company, an investment fund, the direct
management of the MLP or is an entity owned by one or more of such parties. The
general partner may be structured as a private or publicly traded corporation or
other entity. The general partner typically controls the operations and
management of the MLP through an equity interest of as much as 2% in the MLP
plus, in many cases, ownership of common units and subordinated units. Limited
partners own the remainder of the MLP through ownership of common units and have
a limited role in the MLP’s operations and management.
MLPs are
typically structured such that common units and general partner interests have
first priority to receive quarterly cash distributions up to an established
minimum amount (“minimum quarterly distributions” or “MQD”). Common and general
partner interests also accrue arrearages in distributions to the extent the MQD
is not paid. Once common and general partner interests have been paid,
subordinated units receive distributions of up to the MQD; however, subordinated
units do not accrue arrearages. Distributable cash in excess of the MQD paid to
both common and subordinated units is distributed to both common and
subordinated units generally on a pro rata basis. The general partner is also
eligible to receive incentive distributions if the general partner operates the
business in a manner which results in distributions paid per common unit
surpassing specified target levels. As the general partner increases cash
distributions to the limited partners, the general partner receives an
increasingly higher percentage of the incremental cash distributions. A common
arrangement provides that the general partner can reach a tier where it receives
50% of every incremental dollar paid to common and subordinated unit holders.
These incentive distributions encourage the general partner to streamline costs,
increase capital expenditures and acquire assets in order to increase the
partnership’s cash flow and raise the quarterly cash distribution in order to
reach higher tiers.
General
partner interests of MLPs are typically retained by an MLP’s original sponsors,
such as its founders, corporate partners, entities that sell assets to the MLP
and investors such as the Series. A holder of general partner interests can be
liable under certain circumstances for amounts greater than the amount of the
holder’s investment in the general partner interest. General partner interests
often confer direct board participation rights, and in many cases, operating
control, over the MLP. These interests themselves are not publicly traded,
although they may be owned by publicly traded entities. General partner
interests receive cash distributions, typically 2% of the MLP’s aggregate cash
distributions, which are contractually defined in the partnership agreement. In
addition, holders of general partner interests typically hold incentive
distribution rights, which provide them with a larger share of the aggregate MLP
cash distributions as the distributions to limited partner unit holders are
increased to prescribed levels. General partner interests generally cannot be
converted into common units. The general partner interest can be redeemed by the
MLP if the MLP unitholders choose to remove the general partner, typically with
a supermajority vote by limited partner unitholders.
Tracking Stocks. A tracking stock is a
separate class of common stock whose value is linked to a specific business unit
or operating division within a larger company and which is designed to “track”
the performance of such business unit or division. The tracking stock may pay
dividends to shareholders independent of the parent company. The parent company,
rather than the business unit or division, generally is the issuer of tracking
stock. However, holders of the tracking stock may not have the same rights as
holders of the company’s common stock.
FIXED
INCOME INVESTMENTS
Corporate Debt Obligations. Each
Series may invest in corporate debt obligations issued by financial institutions
and corporations. Corporate debt obligations are subject to the risk of an
issuer’s inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
U.S. Government Securities. Each
Series may invest in debt obligations of varying maturities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities. Direct obligations of
the U.S. Treasury, which are backed by the full faith and credit of the U.S.
Government, include a variety of Treasury securities that differ only in their
interest rates, maturities and dates of issuance. U.S. Government agencies or
instrumentalities which issue or guarantee securities include, but are not
limited to, the Federal Housing Administration, Federal National Mortgage
Association (“Fannie Mae”), Farmers Home Administration, Export-Import Bank of
the United States, Small Business Administration, Government National Mortgage
Association (“GNMA”), General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks (“FHLB”), Federal Home Loan Mortgage
Corporation (“FHLMC” or “Freddie Mac”), Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, the Tennessee Valley Authority,
District of Columbia Armory Board and the Student Loan Marketing Association
(“Sallie Mae”).
Obligations
of U.S. Government agencies and instrumentalities such as Fannie Mae, FHLB,
FHLMC and Sallie Mae are not supported by the full faith and credit of the
United States. Some are backed by the right of the issuer to borrow from the
U.S. Treasury; others by discretionary authority of the U.S. Government to
purchase the agencies’ obligations; while still others, such as Sallie Mae, are
supported only by the credit of the instrumentality. In the case of securities
not backed by the full faith and credit of the United States, the investor must
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
A Series
will invest in securities of such instrumentalities only when the Fund’s
investment advisor, Manning & Napier Advisors, LLC (“MNA” or the
“Advisor”), is satisfied that the credit risk with respect to any
instrumentality is consistent with the Series’ goal and strategies.
On September
7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and
Freddie Mac, placing the two federal instrumentalities in conservatorship. Under
the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred
stock of each instrumentality and obtained warrants for the purchase of common
stock of each instrumentality (the “Senior Preferred Stock Purchase Agreements”
or “SPAs”). Under the SPAs, the U.S. Treasury pledged to provide up to $200
billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury announced
that it was amending the SPAs to allow the $200 billion cap on the U.S.
Treasury’s funding commitment to increase as necessary to accommodate any
cumulative reduction in net worth through the end of 2012. The unlimited support
the U.S. Treasury extended to the two companies expired at the beginning of 2013
– Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit
of $149 billion.
On August
17, 2012, the U.S. Treasury announced that it was again amending the SPAs to
terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual
dividend. Instead, the companies will transfer to the U.S. Treasury on a
quarterly basis all profits earned during a quarter that exceed a capital
reserve amount. The capital reserve amount was $3 billion in 2013, and decreased
by $600 million in each subsequent year through 2017. It is believed that this
amendment put Fannie Mae and Freddie Mac in a better position to service their
debt because it eliminated the need for the companies to have to borrow from the
U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie
Mae and Freddie Mac also will be required to reduce their investment portfolios
over time. On December 21, 2017, the U.S. Treasury announced that it was again
amending the Agreement to reinstate the $3 billion capital reserve amount. On
September 30, 2019, the U.S. Treasury announced that it was further amending the
Agreement, now permitting Fannie Mae and Freddie Mac to retain earnings beyond
the $3 billion capital reserves previously allowed through the 2017 amendment.
Fannie Mae and Freddie Mac are now permitted to maintain capital reserves of $25
billion and $20 billion, respectively.
Fannie Mae
and Freddie Mac are the subject of several continuing class action lawsuits and
investigations by federal regulators over certain accounting, disclosure or
corporate governance matters, which (along with any resulting financial
restatements) may adversely affect the guaranteeing entities. Importantly, the
future of the entities is in serious question as the U.S. Government reportedly
is considering multiple options, ranging from nationalization, privatization,
consolidation, or abolishment of the entities.
Mortgage-Backed Securities. Each
Series (except for the Diversified Tax Exempt Series) may invest in
mortgage-backed securities, which represent an interest in a pool of mortgage
loans. Some of these securities are issued or guaranteed by U.S. Government
agencies or instrumentalities such as GNMA, Fannie Mae, and FHLMC. Obligations
of GNMA are backed by the full faith and credit of the U.S. Government.
Obligations of Fannie Mae and FHLMC are not backed by the full faith and credit
of the U.S. Government, but are supported by the U.S. Treasury’s authority to
purchase the obligations and lend to the companies. The market value and
interest yield of these mortgage-backed securities can vary due to market
interest rate fluctuations and early prepayments of underlying mortgages. These
securities represent ownership in a pool of federally insured mortgage loans
with a maximum maturity of 30 years. However, due to scheduled and unscheduled
principal payments on the underlying loans, these securities have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to
accurately predict the average maturity of a particular mortgage-backed
security. The scheduled monthly interest and principal payments relating to
mortgages in the pool will be “passed through” to investors. Government
mortgage-backed securities differ from conventional bonds in that principal is
paid back to the certificate holders over the life of the loan rather than at
maturity. As a result, there will be monthly scheduled payments of principal and
interest. In addition, there may be unscheduled principal payments representing
prepayments on the underlying mortgages. Although these securities may offer
yields higher than those available from other types of U.S. Government
securities, mortgage-backed securities may be less effective than other types of
securities as a means of “locking in” attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of
these securities likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
Each Series
(with the exception of the Real Estate Series and Diversified Tax Exempt Series)
may also invest in private pass-through securities issued by a non-governmental
entity, such as a trust. These securities include collateralized mortgage
obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”).
Each Series other than the Core Bond Series and Credit Series may invest in CMOs
and REMICs without restriction as to any specific ratings agency security
rating. The Core Bond Series and Credit Series may invest in CMOs and REMICs
that are rated as investment grade by Standard & Poor’s Corporation
(“S&P”) or Moody’s Investors Service (“Moody’s”) (or determined to be of
equivalent quality by the Advisor). CMOs are securities collateralized by
mortgages, mortgage pass-throughs, mortgage pay-through bonds (bonds
representing an interest in a pool of mortgages where the cash flow generated
from the mortgage collateral pool is dedicated to bond repayment), and
mortgage-backed bonds (general obligations of the issuers payable out of the
issuer’s general funds and additionally secured by a first lien on a pool of
single family detached properties). Many CMOs are issued with a number of
classes or series which have different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, CMOs in the longer maturity series are less
likely than other mortgage pass-throughs to be prepaid prior to their stated
maturity. Although some of the mortgages underlying CMOs may be supported by
various types of insurance, and some CMOs may be backed by GNMA certificates of
other mortgage pass-throughs issued or guaranteed by U.S. Government agencies or
instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
The
privately issued mortgage-backed securities in which a Series invests are not
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
and may bear a greater risk of nonpayment than securities that are backed by the
U.S. Treasury.
For the
avoidance of doubt, the Diversified Tax Exempt Series’ investments in
mortgage-backed securities issued or guaranteed by U.S. Government agencies or
instrumentalities such as GNMA, Fannie Mae, and FHLMC, that represent an
interest in tax-exempt loans issued by state or local housing authorities and
other similarly structured tax-exempt securities are categorized by the
Diversified Tax Exempt Series as municipal securities for purposes of the
Series’ investment policies and restrictions.
Commercial Mortgage-Backed Securities.
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
Mortgage Dollar Rolls. Each Series
(with the exception of the Real Estate Series) may invest in mortgage dollar
rolls. Mortgage dollar rolls are transactions in which a Series sells securities
(usually mortgage-backed securities) and simultaneously contracts to repurchase
substantially similar, but not identical, securities on a specified future date.
A mortgage dollar roll program may be structured to simulate an investment in
mortgage-backed securities at a potentially lower cost, or with potential
reduced administrative burdens, than directly holding mortgage-backed
securities. A mortgage dollar roll can be viewed as a collateralized borrowing
in which a Series pledges a mortgage-backed security to a counterparty to obtain
cash. The counterparty with which a Series enters into a mortgage dollar roll
transaction is not required to return the same securities as those originally
sold by the Series, but rather only securities which are “substantially
identical.” To be considered substantially identical, the securities returned to
the Series generally must be of the same type, coupon, and maturity and meet the
“good delivery guidelines” established by the Bond Market Association, which is
a private trade association of dealers in debt securities. Notwithstanding a
dealer’s compliance with the “good delivery guidelines,” a Series may assume
some risk because the characteristics of the mortgage-backed securities
delivered to the Series may be less favorable than the mortgage-backed
securities the Series delivered to the dealer. If the broker-dealer to whom a
Series sells the securities becomes insolvent, the Series’ right to repurchase
the securities may be restricted. Other risks involved in entering into mortgage
dollar rolls include the risk that the value of the securities may change
adversely over the term of the mortgage dollar roll and that the securities a
Series is required to repurchase may be worth less than the securities that the
Series originally held. To avoid senior security concerns, a Series will “cover”
any mortgage dollar roll as required by the 1940 Act.
Asset-Backed Securities. Each Series
(with the exception of the Real Estate Series and Diversified Tax Exempt Series)
may invest in asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
Asset-backed
securities present certain risks. For instance, in the case of credit card
receivables, these securities may not have the benefit of any security interest
in the related collateral. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors to
make payments on underlying assets, the securities may contain elements of
credit support which fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default ensures payment
through insurance policies or letters of credit obtained by the issuer or
sponsor from third parties. The degree of credit support provided for each issue
is generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an instrument in such a security.
The
estimated life of an asset-backed security varies with the prepayment experience
with respect to the underlying debt instruments. The rate of such prepayments,
and hence the life of an asset-backed security, will be primarily a function of
current market interest rates, although other economic and demographic factors
may be involved. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. Consequently, asset-backed
securities are subject to call risk and extension risk (described
below).
Collateralized Debt Obligations
(“CDOs”). Each Series (with the exception of the Real Estate Series) may
invest in CDOs, which include collateralized bond obligations (“CBOs”),
collateralized loan obligations (“CLOs”) and other similarly structured
securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust
which is backed by a diversified pool of high risk, below investment grade fixed
income securities. A CLO is a trust typically collateralized by a pool of loans,
which may include, among others, domestic and foreign senior secured loans,
senior unsecured loans, and subordinate corporate loans, including loans that
may be rated below investment grade or equivalent unrated loans.
For both
CBOs and CLOs, the cashflows from the trust are split into two or more portions,
called tranches, varying in risk and yield. The riskiest portion is the “equity”
tranche which bears the bulk of defaults from the bonds or loans in the trust
and serves to protect the other, more senior tranches from default in all but
the most severe circumstances. Since it is partially protected from defaults, a
senior tranche from a CBO trust or CLO trust typically has higher ratings and
lower yields than its underlying securities, and can be rated investment grade.
Despite the protection from the equity tranche, CBO or CLO tranches can
experience substantial losses due to actual defaults, increased sensitivity to
defaults due to collateral default and disappearance of protecting tranches,
market anticipation of defaults, as well as aversion to CBO or CLO securities as
a class.
The risks of
an investment in a CDO depend largely on the type of the collateral securities
and the class of the CDO in which the fund invests. Normally, CBOs, CLOs and
other CDOs are privately offered and sold, and thus, are not registered under
the securities laws. As a result, investments in CDOs may be characterized by a
Series as illiquid securities; however, an active dealer market may exist for
CDOs allowing a CDO to qualify for Rule 144A transactions. In addition to the
normal risks associated with fixed income securities discussed elsewhere in this
SAI (e.g., interest rate risk and default risk), CDOs carry additional risks
including, but not limited to: (i) the possibility that distributions from
collateral securities will not be adequate to make interest or other payments;
(ii) the quality of the collateral may decline in value or default; (iii) a
Series may invest in CDOs that are subordinate to other classes; and (iv) the
complex structure of the security may not be fully understood at the time of
investment and may produce disputes with the issuer or unexpected investment
results.
High-Yield Securities. High-yield
securities are fixed income securities that are rated below BBB by S&P or
Baa by Moody’s and are considered to be “below investment grade” because they
are considered to have speculative characteristics and involve greater risk of
default or price changes due to changes in the issuer’s
creditworthiness.
The Real
Estate Series may invest up to 5% of its assets in debt securities rated below
investment grade. The Unconstrained Bond Series may invest up to 50% of its
assets in corporate debt securities rated below investment grade. Under normal
circumstances, the High Yield Bond Series will invest at least 80% of its net
assets in bonds rated below investment grade and similar investments. The High
Yield Bond Series may invest up to 100% of its assets in corporate or government
debt securities rated below investment grade. The Series may invest in
securities with any rating, including those that have defaulted, are not rated,
or have had their rating withdrawn.
Market
prices of these securities may fluctuate more than higher rated securities and
they are difficult to price at times because they are more thinly traded and
less liquid securities. Market prices may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
Securities in the lowest rating category may be in default. For these reasons,
it is the Series’ policy not to rely primarily on ratings issued by established
credit rating agencies, but to utilize such ratings in conjunction with the
Advisor’s own independent and ongoing review of credit quality.
In the event
that a Series purchases an investment grade fixed income security that is
subsequently downgraded to a high-yield security, as discussed in this section,
the Advisor will review and take appropriate action, including no action, with
regard to the security. Each Series will also seek to minimize risk by
diversifying its holdings of high-yield securities. For a description of the
above ratings, see Appendix A.
Bank Loans. Bank loans are generally
non-investment grade floating rate instruments. Usually, they are freely
callable at the issuer’s option. Certain Series may invest in fixed and floating
rate loans (“Loans”) arranged through private negotiations between a corporate
borrower or a foreign sovereign entity and one or more financial institutions
(“Lenders”). A Series may invest in such Loans in the form of participations in
Loans (“Participations”) and assignments of all or a portion of Loans from third
parties (“Assignments”). A Series considers these investments to be investments
in debt securities for purposes of its investment policies. Participations
typically will result in the Series having a contractual relationship only with
the Lender, not with the borrower. The Series will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Series generally will have no right to enforce compliance by the borrower with
the terms of the loan agreement relating to the Loans, nor any rights of set-off
against the borrower, and the Series may not benefit directly from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Series will assume the credit risk of both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of the
Lender selling the Participation, the Series may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. The Series will acquire Participations only if the Lender
interpositioned between the Series and the borrower is determined by the Advisor
to be creditworthy. When the Series purchases Assignments from Lenders, the
Series will acquire direct rights against the borrower on the Loan, and will not
have exposure to the Lender’s credit risk. The Series may enter into
Participations and Assignments on a forward commitment or “when-issued” basis,
whereby a Series would agree to purchase a Participation or Assignment at set
terms in the future.
A Series may
have difficulty disposing of Assignments and Participations. In certain cases,
the market for such instruments is not highly liquid, and therefore the Series
anticipate that in such cases such instruments could be sold only to a limited
number of institutional investors. The lack of a highly liquid secondary market
may make Assignments and Participations difficult to value and have an adverse
impact on the value of such instruments and on the Series’ ability to dispose of
particular Assignments or Participations in response to a specific economic
event, such as deterioration in the creditworthiness of the borrower.
Assignments and Participations will not be considered illiquid so long as it is
determined by the Advisor that an adequate trading market exists for these
securities. To the extent that liquid Assignments and Participations that a
Series holds become illiquid, due to the lack of sufficient buyers or market or
other conditions, the percentage of the Series’ assets invested in illiquid
assets would increase.
Leading
financial institutions often act as agent for a broader group of lenders,
generally referred to as a syndicate. The syndicate’s agent arranges the loans,
holds collateral and accepts payments of principal and interest. If the agent
develops financial problems, a Series may not recover its investment or recovery
may be delayed.
The Loans in
which the Series may invest are subject to the risk of loss of principal and
income. Although borrowers frequently provide collateral to secure repayment of
these obligations they do not always do so. If they do provide collateral, the
value of the collateral may not completely cover the borrower’s obligations at
the time of a default. If a borrower files for protection from its creditors
under the U.S. bankruptcy laws, these laws may limit a Series’ rights to its
collateral. In addition, the value of collateral may erode during a bankruptcy
case. In the event of a bankruptcy, the holder of a Loan may not recover its
principal, may experience a long delay in recovering its investment and may not
receive interest during the delay.
The Advisor
may from time to time have the opportunity to receive material non-public
information ("Confidential Information") about the borrower, including financial
information and related documentation regarding the borrower that is not
publicly available. Pursuant to applicable policies and procedures, the Advisor
may (but is not required to) seek to avoid receipt of Confidential Information
from the borrower so as to avoid possible restrictions on its ability to
purchase and sell investments on behalf of the Series and other clients to which
such Confidential Information relates (e.g., publicly traded securities issued
by the borrower). In such circumstances, the Series (and other clients of the
Advisor) may be disadvantaged in comparison to other investors, including with
respect to the price the Series pays or receives when it buys or sells a bank
loan. Further, the Advisor's abilities to assess the desirability of proposed
consents, waivers or amendments with respect to certain bank loans may be
compromised if it is not privy to available Confidential Information. The
Advisor may also determine to receive such Confidential Information in certain
circumstances under its applicable policies and procedures. If the Advisor
intentionally or unintentionally comes into possession of Confidential
Information, it may be unable, potentially for a substantial period of time, to
purchase or sell publicly traded securities to which such Confidential
Information relates.
Yankee Bonds. Each Series may invest
in U.S. dollar-denominated instruments of foreign issuers who either register
with the Securities and Exchange Commission (“SEC”) or issue securities under
Rule 144A of the 1933 Act (“Yankee bonds”). These consist of debt securities
(including preferred or preference stock of non-governmental issuers),
certificates of deposit, fixed time deposits and banker’s acceptances issued by
foreign banks, and debt obligations of foreign governments or their
subdivisions, agencies and instrumentalities, international agencies and
supranational entities. Some securities issued by foreign governments or their
subdivisions, agencies and instrumentalities may not be backed by the full faith
and credit of the foreign government. Yankee bonds, as obligations of foreign
issuers, are subject to the same types of risks discussed in “Risks of Foreign
Securities” below. The Yankee bonds selected for a Series will adhere to the
same quality standards as those utilized for the selection of domestic debt
obligations.
As compared
with bonds issued in the United States, such bond issues normally carry a higher
interest rate but are less actively traded.
Obligations of Supranational Agencies.
Each Series (with the exception of Diversified Tax Exempt Series) may purchase
securities issued or guaranteed by supranational agencies including, but not
limited to, the following: Asian Development Bank, Inter-American Development
Bank, International Bank for Reconstruction and Development (World Bank),
African Development Bank, European Coal and Steel Community, European Union, and
the European Investment Bank. For concentration purposes, supranational entities
are considered an industry. Investment in these entities is subject to the
Series’ other restrictions on investments in foreign securities, described
below.
Municipal Bonds and Other Municipal
Obligations. The Series invest principally in municipal bonds and other
municipal obligations. These bonds and other obligations are issued by the
states and by their local and special-purpose political subdivisions. The term
“municipal bond” includes short-term municipal notes issued by the states and
their political subdivisions, including, but not limited to, tax anticipation
notes (“TANs”), bond anticipation notes (“BANs”), revenue anticipation notes
(“RANs”), construction loan notes, tax free commercial paper, and tax free
participation certificates. In general, municipal obligations include debt
obligations issued by states, cities and local authorities to obtain funds for
various public purposes, including construction of a wide range of public
facilities such as airports, bridges, highways, hospitals, housing, mass
transportation, schools, streets and water and sewer works.
General obligation bonds are
backed by the issuer’s pledge of its faith, credit, and taxing power for the
payment of principal and interest. The taxes that can be levied for the payment
of debt service may be limited or unlimited as to rate and amount. For a limited
obligation or revenue bond, the only security is typically the net revenue
derived from payments by a particular facility or class of facilities financed
by the proceeds of the bonds or, in some cases, from the proceeds of a special
tax or other special revenues. Although the security behind these bonds varies
widely, many lower rated bonds provide additional security in the form of a debt
service reserve fund that may also be used to make principal and interest
payments on the issuer’s obligations. In addition, some revenue obligations(as
well as general obligations) are insured by a bond insurance company or backed
by a letter of credit issued by a banking institution. The credit quality of
revenue bonds is usually directly related to the credit standing of the user of
the facility being financed or of an institution which provides a guarantee,
letter of credit or other credit enhancement for the bond issue. Revenue bonds
do not generally constitute the pledge of the credit of the issuer of such bonds
and are generally not secured by the taxing power of the municipality. Revenue
bonds are included in the term municipal obligations if the interest paid
thereon is exempt from federal income tax. Revenue bonds may include, but are
not limited to, pollution control, health care, housing, education-related and
industrial development bonds.
Generally, the creditworthiness
of a local municipal obligation is unrelated to that of the municipal
obligations of the state itself if the state has no responsibility to guarantee
or otherwise make payments on those local municipal obligations.
Generally,
interest received on municipal obligations is exempt from federal income tax.
The tax-exempt nature of the interest on a municipal obligation is generally the
subject of a bond counsel opinion delivered in connection with the issuance of
the instrument. Tax opinions are generally provided at the time the municipal
security is initially issued and neither a fund or its portfolio manager(s) will
independently review the bases for those tax opinions or guarantee that the tax
opinions are correct. There is no assurance that the Internal Revenue Service
(the “IRS”) will agree with bond counsel’s opinion that such interest is
tax-exempt or that the interest payments on such municipal obligations will
continue to be tax exempt for the life of the municipal obligation. Issuers or
other parties generally enter into covenants requiring continuing compliance
with federal tax requirements to preserve the tax-free status of interest
payments over the life of the municipal obligation. If at any time the covenants
are not complied with, or if the IRS otherwise determines that the issuer did
not comply with relevant tax requirements, interest payments from a municipal
obligation could become federally taxable, possibly retroactively to the date
the municipal obligation was issued, and an investor may need to file an amended
income tax return.
Obligations
of issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors. The
application of state law to municipal obligation issuers could produce varying
results among the states or among municipal obligation issuers within a state.
These uncertainties could have a significant impact on the prices of the
municipal obligations in which a Fund invests. In addition, issuers of municipal
obligations may become subject to the laws enacted in the future by Congress,
state legislatures or referenda extending the time for payment of principal
and/or interest, or imposing other constraints upon enforcement of such
obligations or upon municipalities to levy taxes. There is also the possibility
that, as a result of legislation or other conditions, the power or ability of
any issuer to pay, when due, the principal of and interest on its municipal
obligations may be materially affected.
The two
general classifications of municipal bonds are “general obligation” bonds and
“revenue” bonds. General obligation bonds are secured by the governmental
issuer’s pledge of its faith, credit and taxing power for the payment of
principal and interest upon a default by the issuer of its principal and
interest payment obligations. They are usually paid from general revenues of the
issuing governmental entity. Revenue bonds, on the other hand, are usually
payable only out of a specific revenue source rather than from general revenues.
Revenue bonds ordinarily are not backed by the faith, credit or general taxing
power of the issuing governmental entity. The principal and interest on revenue
bonds for private facilities are typically paid out of rents or other specified
payments made to the issuing governmental entity by a private company which uses
or operates the facilities. Examples of these types of obligations are
industrial revenue bond and pollution control revenue bonds. Industrial revenue
bonds are issued by governmental entities to provide financing aid to community
facilities such as hospitals, hotels, business or residential complexes,
convention halls and sport complexes. Pollution control revenue bonds are issued
to finance air, water and solids pollution control systems for privately
operated industrial or commercial facilities.
Revenue
bonds for private facilities usually do not represent a pledge of the credit,
general revenues or taxing powers of issuing governmental entity. Instead, the
private company operating the facility is the sole source of payment of the
obligation. Sometimes, the funds for payment of revenue bonds come solely from
revenue generated by operation of the facility. Federal income tax laws place
substantial limitations on industrial revenue bonds, and particularly certain
specified private activity bonds issued after August 7, 1986. In the future,
legislation could be introduced in Congress which could further restrict or
eliminate the income tax exemption for interest on debt obligations in which the
Series may invest.
The Series
may invest in refunded bonds. Refunded bonds may have originally been issued as
general obligation or revenue bonds, but become refunded when they are secured
by an escrow fund, usually consisting entirely of direct U.S. government
obligations and/or U.S. government agency obligations sufficient for paying the
bondholders. There are two types of refunded bonds: pre-refunded bonds and
escrowed-to-maturity (“ETM”) bonds. The escrow fund for a pre-refunded municipal
bond may be structured so that the refunded bonds are to be called at the first
possible date or a subsequent call date established in the original bond
debenture. The call price usually includes a premium from 1% to 3% above par.
This type of structure usually is used for those refundings that either reduce
the issuer’s interest payment expenses or change the debt maturity schedule. In
escrow funds for ETM refunded municipal bonds, the maturity schedules of the
securities in the escrow funds match the regular debt-service requirements on
the bonds as originally stated in the bond indentures.
The Series
also may purchase municipal lease obligations, primarily through certificates of
participation. Certificates of participation in municipal leases are undivided
interests in a lease, installment purchase contract or conditional sale contract
entered into by a state or local governmental unit to acquire equipment or
facilities. Municipal leases frequently have special risks which generally are
not associated with general obligation bonds or revenue bonds. Municipal leases
and installment purchase or conditional sales contracts (which usually provide
for title to the leased asset to pass to the governmental issuer upon payment of
all amounts due under the contract) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of municipal debt.
Although
lease obligations do not constitute general obligations of the municipality for
which the municipality’s taxing power is pledged, a lease obligation is
ordinarily backed by the municipality’s covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain “non-appropriation” clauses, which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
evaluating securities for purchase, a Fund will take into account the incentive
of the issuer to appropriate under the lease, among other factors. Some lease
obligations may be illiquid under certain circumstances. Although
non-appropriation lease obligations are secured by the leased equipment or
facilities, disposition of the property in the event of foreclosure might prove
difficult and time consuming. In addition, disposition upon non-appropriation or
foreclosure might not result in recovery by a Fund of the full principal amount
represented by an obligation.
In light of
these concerns, the Series have adopted and follow procedures for determining
whether any municipal lease obligations purchased by the Series are liquid and
for monitoring the liquidity of municipal lease securities held in a Fund’s
portfolio. These procedures require that a number of factors be used in
evaluating the liquidity of a municipal lease security, including the frequency
of trades and quotes for the security, the number of dealers willing to purchase
or sell the security and the number of other potential purchasers, the
willingness of dealers to undertake to make a market in security, the nature of
the marketplace in which the security trades, and other factors which the
Sub-Adviser may deem relevant. As set forth in “Investment Restrictions” above,
each Fund is subject to limitations on the percentage of illiquid securities it
can hold.
The Series
may also acquire derivative municipal securities, which are custodial receipts
of certificates underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both on certain
municipal securities. The underwriter of these certificates or receipts
typically purchases municipal securities and deposits them in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligation.
The
principal and interest payments on the municipal securities underlying custodial
receipts may be allocated in a number of ways. For example, payments may be
allocated such that certain custodial receipts may have variable or floating
interest rates and others may be stripped securities which pay only the
principal or interest due on the underlying municipal securities. The Series may
invest in custodial receipts which have inverse floating interest rates and
other inverse floating rate municipal obligations, as described below under
“Inverse Floating Rate Municipal Securities.”
Variable
Rate Demand Notes (“VRDNs”) are long-term municipal obligations that have
variable or floating interest rates and provide a Fund with the right to tender
the security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is intended to
cause the securities to trade at par. The interest rate may float or be adjusted
at regular intervals (ranging from daily to annually), and is normally based on
an applicable interest index or another published interest rate or interest rate
index. Most VRDNs allow a Fund to demand the repurchase of the security on not
more than seven days prior notice. Other notes only permit a Fund to tender the
security at the time of each interest rate adjustment or at other fixed
intervals. Variable interest rates generally reduce changes in the market value
of municipal obligations from their original purchase prices. Accordingly, as
interest rates decrease, the potential for capital appreciation is less for
variable rate municipal obligations than for fixed income
obligations.
The Series
may invest in inverse floating rate municipal securities or “inverse floaters,”
whose rates vary inversely to interest rates on a specified short-term municipal
bond index or on another instrument. Such securities involve special risks as
compared to conventional fixed-rate bonds. Should short-term interest rates
rise, a Fund’s investment in inverse floaters likely would adversely affect the
Series’ earnings and distributions to shareholders. Also, because changes in the
interest rate on the other index or other instrument inversely affect the rate
of interest received on an inverse floater, and because inverse floaters
essentially represent a leveraged investment in a long-term bond, the value of
an inverse floater is generally more volatile than that of a conventional
fixed-rate bond having similar credit quality, redemption provisions and
maturity. Although volatile in value, inverse floaters typically offer the
potential for yields substantially exceeding the yields available on
conventional fixed-rate bonds with comparable credit quality, coupon, call
provisions and maturity. The markets for inverse floating rate securities may be
less developed and have less liquidity than the markets for conventional
securities. The Series will only invest in inverse floating rate securities
whose underlying bonds are rated A or higher.
Tax-exempt securities. The Diversified
Tax Exempt Series has a fundamental investment policy of investing at least 80%
of its net assets in securities the income from which is exempt from federal
income tax, including Alternative Minimum Tax, under normal
circumstances.
In general,
the secondary market for tax-exempt securities is less liquid than that for
taxable fixed-income securities. Accordingly, the ability of the Series to buy
and sell securities may, at any particular time and with respect to any
particular securities, be limited. The Diversified Tax Exempt Series will not
invest more than 25% of its total assets in any industry. Governmental issuers
of tax-exempt securities are not considered part of any “industry”. However,
tax-exempt securities backed only by the assets and revenues of nongovernmental
users may for this purpose (and for the diversification purposes discussed
above) be deemed to be issued by such nongovernmental users, and the 25%
limitation would apply to such obligations. It is nonetheless possible that the
Diversified Tax Exempt Series may invest more than 25% of its assets in a
broader segment of the market (but not in one industry) for tax-exempt
securities, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or transportation revenue
obligations. This would be the case only if the Advisor determined that the
yields available from obligations in a particular segment of the market
justified the additional risks associated with such concentration. Although such
obligations could be supported by the credit of governmental users or by the
credit of nongovernmental users engaged in a number of industries, economic,
business, political and other developments generally affecting the revenues of
issuers (for example, proposed legislation or pending court decisions affecting
the financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all tax-exempt
securities in such a market segment.
Housing
revenue bonds typically are issued by a state, county or local housing authority
and are secured only by the revenues of mortgages originated by the authority
using the proceeds of the bond issue. Because of the impossibility of precisely
predicting demand for mortgages from the proceeds of such an issue, there is a
risk that the proceeds of the issue will be in excess of demand, which would
result in early retirement of the bonds by the issuer. Moreover, such housing
revenue bonds depend for their repayment in part upon the cash flow from the
underlying mortgages, which cannot be precisely predicted when the bonds are
issued. The financing of multi-family housing projects is affected by a variety
of factors, including satisfactory completion of construction, a sufficient
level of occupancy, sound management, adequate rent to cover operating expenses,
changes in applicable laws and governmental regulations and social and economic
trends.
Health care
facilities include life care facilities, nursing homes and hospitals. Bonds to
finance these facilities are issued by various authorities. The bonds are
typically secured by the revenues of each facility and not by state or local
government tax payments. The projects must maintain adequate occupancy levels to
be able to provide revenues adequate to maintain debt service payments.
Moreover, in the case of life care facilities, since a portion of housing,
medical care and other services may be financed by an initial deposit, there may
be risk if the facility does not maintain adequate financial reserves to secure
future liabilities. Life care facilities and nursing homes may be affected by
regulatory cost restrictions applied to health care delivery in general,
restrictions imposed by medical insurance companies and competition from
alternative health care or conventional housing facilities. Hospital bond
ratings are often based on feasibility studies which contain projections of
expenses, revenues and occupancy levels. A hospital’s income available to
service its debt may be influenced by demand for hospital services, management
capabilities, the service area economy, efforts by insurers and government
agencies to limit rates and expenses, competition, availability and expense of
malpractice insurance, and Medicaid and Medicare funding.
In recent
years, nationally recognized rating organizations have reduced their ratings of
a substantial number of the obligations of issuers in the health care sector of
the tax-exempt securities market. A number of legislative proposals concerning
health care have been considered and/or enacted by the U.S. Congress in recent
years. These span a wide range of topics, including cost control, national
health insurance, incentives for compensation in the provision of health care
services, tax incentives and penalties related to health care insurance
premiums, and promotion of prepaid healthcare plans. Depending upon their terms,
certain reform proposals could have an adverse impact on certain health care
sector issuers of tax-exempt securities.
Hybrid Instruments. Hybrid
instruments, including index-linked notes, are a type of potentially high-risk
derivative that combines a traditional stock, bond, or commodity with an option
or forward contract. Generally, the principal amount, amount payable upon
maturity or redemption, or interest rate of a hybrid is tied (positively or
negatively) to the price of some commodity, currency or securities index or
another interest rate or some other economic factor (each a “benchmark”). The
interest rate or (unlike most fixed income securities) the principal amount
payable at maturity of a hybrid security may be increased or decreased depending
on changes in the value of the benchmark. An example of a hybrid could be a bond
issued by an oil company that pays a small base level of interest with
additional interest that accrues in correlation to the extent to which oil
prices exceed a certain predetermined level. Such a hybrid instrument would be a
combination of a bond and a call option on oil.
Hybrids can
be used as an efficient means of pursuing a variety of investment goals,
including currency hedging, duration management, and increased total return.
Hybrids may not bear interest or pay dividends. The value of a hybrid or its
interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events, such as
commodity shortages and currency devaluations, which cannot be readily foreseen
by the purchaser of a hybrid. Under certain conditions, the redemption value of
a hybrid could be zero.
Thus, an
investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S. dollar-denominated
bond that has a fixed principal amount and pays a fixed rate or floating rate of
interest. The purchase of hybrids also exposes a Series to the credit risk of
the issuer of the hybrids.
Certain
hybrid instruments may provide exposure to the commodities markets. These are
derivative securities with one or more commodity-linked components that have
payment features similar to commodity futures contracts, commodity options, or
similar instruments. Commodity-linked hybrid instruments may be either equity or
debt securities, and are considered hybrid instruments because they have both
security and commodity-like characteristics. A portion of the value of these
instruments may be derived from the value of a commodity, futures contract,
index or other economic variable. A commodity-linked note pays a return linked
to the performance of a commodity or basket of commodities over a defined
period. On the maturity date, the note pays the initial principal amount plus
return, if any, based on the percentage change in the underlying commodity (or
basket). Commodity linked investments may be more volatile and less liquid than
the underlying instruments or measures, are subject to the credit risks
associated with the issuer, and their values may decline substantially if the
issuer’s creditworthiness deteriorates. The Series will only invest in
commodity-linked hybrid instruments that qualify under applicable rules of the
Commodity Futures Trading Commission (“CFTC”) for an exemption from the
provisions of the CEA.
Certain
issuers of structured products such as hybrid instruments may be deemed to be
investment companies as defined in the 1940 Act. As a result, the Series’
investments in these products may be subject to limits applicable to investments
in investment companies and may be subject to restrictions contained in the 1940
Act.
Zero-Coupon Bonds. Each of the Series
may invest in so-called “zero-coupon” bonds. Zero-coupon bonds are issued at a
significant discount from face value and generally pay interest only at maturity
rather than at intervals during the life of the security. Each Series is
required to accrue and distribute income from zero-coupon bonds on a current
basis, even though it does not receive that income currently in cash. Thus, the
Series may have to sell investments to obtain cash needed to make income
distributions. The discount, in the absence of financial difficulties of the
issuer, decreases as the final maturity of the security approaches. Zero-coupon
bonds can be sold prior to their maturity date in the secondary market at the
then prevailing market value, which depends primarily on the time remaining to
maturity, prevailing level of interest rates and the perceived credit quality of
the issues. The market prices of zero-coupon securities are subject to greater
fluctuations in response to changes in market interest rates than bonds which
pay interest currently.
Inflation Protected Securities.
Inflation protected securities are fixed income securities for which the
principal and/or interest income paid is linked to inflation rates. They may be
issued by the U.S. Treasury, foreign governments, or U.S. or foreign companies.
The relationship between an inflation protected security and its associated
inflation index affects both the sum the Series is paid when the security
matures and the amount of interest that the security pays the Series. With
inflation (a rise in the index), the principal of the security increases. With
deflation (a drop in the index), the principal of the security decreases.
Inflation protected securities pay interest at a fixed rate. Because the rate is
applied to the adjusted principal, however, interest payments can vary in amount
from one period to the next. If inflation occurs, the interest payment
increases. In the event of deflation, the interest payment decreases. At the
maturity of a security, the Series receives the adjusted principal or the
original principal, whichever is greater.
Variable and Floating Rate
Instruments. Certain of the obligations that may be purchased by a Series
may carry variable or floating rates of interest. These obligations may involve
a conditional or unconditional demand feature and may include variable amount
master demand notes. Such instruments bear interest at rates which are not
fixed, but which vary with changes in specified market rates or indices. The
interest rate on these securities may be reset daily, weekly, quarterly, or at
some other reset period. There is a risk that the current interest rate on such
obligations may not accurately reflect existing market interest rates. A demand
instrument with a demand notice exceeding seven days may be considered illiquid
if there is no secondary market for such security.
Some
variable rate securities may be combined with a put or demand feature (variable
rate demand securities) that entitles the holder to the right to demand
repayment in full or to resell at a specific price and/or time. While the demand
feature is intended to reduce credit risks, it is not always unconditional and
may be subject to termination if the issuer’s credit rating falls below
investment grade or if the issuer fails to make payments on other debt. While
most variable-rate demand securities allow a fund to exercise its demand rights
at any time, some such securities may only allow a fund to exercise its demand
rights at certain times, which reduces the liquidity usually associated with
this type of security. A Series could suffer losses in the event that the demand
feature provider, usually a bank, fails to meet its obligation to pay the
demand.
Short-Term Investments/Temporary Defensive
Positions. For temporary defensive purposes during periods when the
Advisor determines that market conditions warrant, each Series may depart from
its investment goals and invest up to 100% of its assets in all types of money
market instruments (including securities guaranteed by the U.S. Government, its
agencies or instrumentalities, certificates of deposit, time or other
interest-bearing deposits and bankers’ acceptances issued by banks or savings
and loan institutions deemed creditworthy by the Advisor, commercial paper or
short-term notes rated A-1 by S&P or Prime-1 by Moody’s, repurchase
agreements involving such securities and shares of other investment companies as
permitted by applicable law) and may hold a portion of its assets in cash. For a
description of the above ratings, see Appendix A.
Risks of Fixed Income Securities.
Investments in fixed income securities may subject a Series to risks, including
the following:
Interest Rate Risk. When interest
rates decline, the market value of fixed income securities tends to increase.
Conversely, when interest rates increase, the market value of fixed income
securities tends to decline. The volatility of a security’s market value will
differ depending upon the security’s maturity and duration, the issuer and the
type of instrument.
Default Risk/Credit Risk. Investments
in fixed income securities are subject to the risk that the issuer of the
security could default on its obligations, causing a Series to sustain losses on
such investments. A default could impact both interest and principal
payments.
Call Risk and Extension Risk. Fixed
income securities may be subject to both call risk and extension risk. Call risk
exists when the issuer may exercise its right to pay principal on an obligation
earlier than scheduled, which would cause cash flows to be returned earlier than
expected. This typically results when interest rates have declined and a Series
will suffer from having to reinvest in lower yielding securities. Extension risk
exists when the issuer may exercise its right to pay principal on an obligation
later than scheduled, which would cause cash flows to be returned later than
expected. This typically results when interest rates have increased, and a
Series will suffer from the inability to invest in higher yield
securities.
DERIVATIVE
TRANSACTIONS
Foreign Currency Transactions. The
Series may enter into forward foreign currency exchange contracts and use
currency futures contracts, options on such futures contracts, and options on
foreign currencies. The Series may engage in foreign currency transactions for
hedging purposes, as well as to enhance the Series’ returns.
A forward
foreign currency contract involves a negotiated obligation to purchase or sell a
specific currency at a future date (with or without delivery required), which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers.
Forward
contracts generally may not be liquidated prior to the stated maturity date,
although the parties to a contract may agree to enter into a second offsetting
transaction with the same maturity, thereby fixing each party’s profit or loss
on the two transactions. Nevertheless, each position must still be maintained to
maturity unless the parties separately agree on an earlier settlement date. As a
result, a party to a forward contract must be prepared to perform its
obligations under each such contract in full. Parties to a forward contract may
also separately agree to extend the contract by “rolling” it over prior to the
originally scheduled settlement date. A Series may use forward contracts for
cash equitization purposes, which allows a Series to invest consistent with its
benchmark while managing daily cash flows, including significant client inflows
and outflows.
The Series
may use foreign currency transactions as part of a hedging strategy, as
described below:
Transaction Hedging. Transaction
Hedging is entering into a currency transaction with respect to specific assets
or liabilities of a Series, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
A Series may enter into Transaction Hedging out of a desire to preserve the U.S.
dollar price of a security when it enters into a contract for the purchase or
sale of a security denominated in a foreign currency. A Series may be able to
protect itself against possible losses resulting from changes in the
relationship between the U.S. dollar and foreign currencies during the period
between the date the security is purchased or sold and the date on which payment
is made or received by entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of the foreign currency
involved in the underlying security transactions.
Position Hedging. A Series may sell a
non-U.S. currency and purchase U.S. currency to reduce exposure to the non-U.S.
currency (“Position Hedging”). A Series may use Position Hedging when the
Advisor reasonably believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar. A Series may enter
into a forward foreign currency contract to sell, for a fixed amount of U.S.
dollars, the amount of foreign currency approximating the value of some or all
of its portfolio securities denominated in such foreign currency. The precise
matching of the forward foreign currency contract amount and the value of the
portfolio securities involved may not have a perfect correlation since the
future value of the securities hedged will change as a consequence of the market
between the date the forward contract is entered into and the date it matures.
The projection of short-term currency market movement is difficult, and the
successful execution of this short-term hedging strategy is
uncertain.
Cross Hedges. A Series may also
cross-hedge currencies by entering into transactions to purchase or sell one or
more currencies that are expected to decline in value relative to other
currencies to which the Series has or in which the Series expects to have
portfolio exposure.
Proxy Hedges. A Series may also engage
in proxy hedging. Proxy hedging is often used when the currency to which a
Series’ portfolio is exposed is difficult to hedge or to hedge against the U.S.
dollar.
Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of a Series’ portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Series’ securities denominated in linked
currencies.
In addition
to the hedging transactions described above, the Series may also engage in
foreign currency transactions in an attempt to take advantage of certain
inefficiencies in the currency exchange market, to increase their exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from one
currency to another. Active investment in currencies may subject a Series to
additional risks.
The Series
may engage in non-deliverable forward transactions. A non-deliverable forward
transaction is a transaction that represents an agreement between a Series and a
counterparty (usually a commercial bank) to buy or sell a specified (notional)
amount of a particular currency at an agreed upon foreign exchange rate on an
agreed upon future date. The nondeliverable forward transaction position is
closed using a fixing rate, as defined by the central bank in the country of the
currency being traded, that is generally publicly stated within one or two days
prior to the settlement date. Unlike other currency transactions, there is no
physical delivery of the currency on the settlement of a non-deliverable forward
transaction. Rather, a Series and the counterparty agree to net the settlement
by making a payment in U.S. dollars or another fully convertible currency that
represents any differential between the foreign exchange rate agreed upon at the
inception of the non-deliverable forward agreement and the actual exchange rate
on the agreed upon future date. Thus, the actual gain or loss of a given
non-deliverable forward transaction is calculated by multiplying the
transaction’s notional amount by the difference between the agreed upon forward
exchange rate and the actual exchange rate when the transaction is
completed.
The Series
may invest in foreign currency futures contracts. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally, which are described elsewhere in this SAI. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation, which may subject a Series to additional
risk.
The Series
may invest in options on foreign currencies and futures. Trading options on
currency futures contracts is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market, which may not always be available. An option on a currency provides the
purchaser, or “holder,” with the right, but not the obligation, to purchase, in
the case of a “call” option, or sell, in the case of a “put” option, a stated
quantity of the underlying currency at a fixed exchange rate up to a stated
expiration date (or, in the case of certain options, on such date). The holder
generally pays a nonrefundable fee for the option, referred to as the “premium,”
but cannot lose more than this amount, plus related transaction costs. Thus,
where a Series is a holder of option contracts, such losses will be limited in
absolute amount. In contrast to a forward contract, an option imposes a binding
obligation only on the seller, or “writer.” If the holder exercises the option,
the writer is obligated to complete the transaction in the underlying currency.
An option generally becomes worthless to the holder when it expires. In
addition, in the context of an exchange-traded option, the writer is often
required to deposit initial margin and may be required to increase the margin on
deposit if the market moves against the writer’s position. Options on currencies
may be purchased in the OTC market between commercial entities dealing directly
with each other as principals. In purchasing an OTC currency option, the holder
is subject to the risk of default by the writer and, for this reason, purchasers
of options on currencies may require writers to post collateral or other forms
of performance assurance.
Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Series
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Furthermore, there is risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a Series is engaging in proxy hedging. Suitable hedging
transactions may not be available in all circumstances. Hedging transactions may
also eliminate any chance for a Series to benefit from favorable fluctuations in
relevant foreign currencies. If a Series enters into a currency hedging
transaction, the Series will “cover” its position as required by the 1940
Act.
Currency
transactions are subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchase and sales of
currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments. These can result in losses to a Series if it is unable to
deliver or receive currency or funds in settlement of obligations and could also
cause hedges it has entered into to be rendered useless, resulting in full
currency exposure as well as incurring transaction costs.
Although
forward foreign currency contracts and currency futures tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain which might result should the value
of such currency increase.
Futures and Options on Futures.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security, interest rate,
index, currency or commodity at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. An index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of trading of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the securities comprising the index is made; generally contracts are
closed out prior to the expiration date of the contract.
A Series may
also invest in Treasury futures, interest rate futures, interest rate swaps, and
interest rate swap futures. A Treasury futures contract involves an obligation
to purchase or sell Treasury securities at a future date at a price set at the
time of the contract. The sale of a Treasury futures contract creates an
obligation by a Series to deliver the amount of certain types of Treasury
securities called for in the contract at a specified future time for a specified
price. A purchase of a Treasury futures contract creates an obligation by a
Series to take delivery of an amount of securities at a specified future time at
a specific price. Interest rate futures can be sold as an offset against the
effect of expected interest rate increases and purchased as an offset against
the effect of expected interest rate declines. Interest rate swaps are an
agreement between two parties where one stream of future interest rate payments
is exchanged for another based on a specified principal amount. Interest rate
swaps often exchange a fixed payment for a floating payment that is linked to a
particular interest rate. Interest rate swap futures are instruments that
provide a way to gain swap exposure and the structure features of a futures
contract in a single instrument. Interest rate swap futures are futures
contracts on interest rate swaps that enable purchasers to cash settle at a
future date at the price determined by the benchmark rate at the end of a fixed
period.
The Series
may use futures contracts and related options for either hedging purposes or
risk management purposes as well as to enhance the Series’ returns. Instances in
which a Series may use futures contracts and related options for risk management
or return enhancement purposes include: attempting to offset changes in the
value of securities held or expected to be acquired or be disposed of;
attempting to minimize fluctuations in foreign currencies; attempting to gain
exposure to a particular market, index or instrument; attempting to take
advantage of expected price changes of various futures; or other risk management
or return enhancement purposes. A Series may use futures for cash equitization
purposes, which allows a Series to invest consistent with its benchmark while
managing daily cash flows, including significant client inflows and
outflows.
There are
significant risks associated with a Series’ use of futures contracts and options
on futures, including the following: (i) the success of a hedging or trading
strategy may depend on the Advisor’s ability to predict movements in the prices
of individual securities, fluctuations in markets and movements in interest
rates; (ii) there may be an imperfect or no correlation between the changes in
market value of the securities held by a Series and the prices of futures and
options on futures; (iii) there may not be a liquid secondary market for a
futures contract or option; (iv) trading restrictions or limitations may be
imposed by an exchange; and (v) government regulations may restrict trading in
futures contracts and options on futures. In addition, some strategies reduce a
Series’ exposure to price fluctuations, while others tend to increase its market
exposure.
Options. The Series may purchase and
write (i.e., sell) put and call options on securities and indices. A put option
on a security gives the purchaser of the option the right to sell, and the
writer of the option the obligation to buy, the underlying security at any time
during the option period. A call option on a security gives the purchaser of the
option the right to buy, and the writer of the option the obligation to sell,
the underlying security at any time during the option period. The premium paid
to the writer is the consideration for undertaking the obligations under the
option contract.
Put and call
options on indices are similar to options on securities except that options on
an index give the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the underlying index is greater than (or
less than, in the case of puts) the exercise price of the option. This amount of
cash is equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars multiplied by a specified
number. Thus, unlike options on individual securities, all settlements are in
cash, and gain or loss depends on price movements in the particular market
represented by the index generally, rather than the price movements in
individual securities. All options written on indices or securities must be
“covered” as required by the 1940 Act.
A Series may
purchase put and call options on securities for any purpose, including to
protect against a decline in the market value of the securities in its portfolio
or to anticipate an increase in the market value of securities that the Series
may seek to purchase in the future. A Series purchasing put and call options
pays a premium for such options. If price movements in the underlying securities
are such that exercise of the options would not be profitable for the Series,
loss of the premium paid may be offset by an increase in the value of the
Series’ securities or by a decrease in the cost of acquisition of securities by
the Series.
When a
Series writes an option, if the underlying securities do not increase or
decrease, as applicable, to a price level that would make the exercise of the
option profitable to the holder thereof, the option generally will expire
without being exercised and the Series will realize as profit the premium
received for such option. When a call option of which a Series is the writer is
exercised, the Series will be required to sell the underlying securities to the
option holder at the strike price, and will not participate in any increase in
the price of such securities above the strike price. When a put option of which
a Series is the writer is exercised, the Series will be required to purchase the
underlying securities at a price in excess of the market value of such
securities.
When a
Series wishes to sell a security at a specified price, it may seek to generate
additional income by writing “covered” call options on the security. A call
option is “covered” if the Series either owns the underlying instrument or has
an absolute and immediate right (such as a call with the same or a later
expiration date) to acquire that instrument. The underlying instruments of such
covered call options may consist of individual equity securities, pools of
equity securities, ETFs or indices.
The writing
of covered call options is a more conservative investment technique than writing
of naked or uncovered options, but capable of enhancing the Series’ total
return. When a Series writes a covered call option, it profits from the premium
paid by the buyer but gives up the opportunity to profit from an increase in the
value of the underlying security above the exercise price. At the same time, the
Series retains the risk of loss from a decline in the value of the underlying
security during the option period.
Although the
Series may terminate its obligation by executing a closing purchase transaction,
which is the purchase of an option contract on the same security with the same
exercise price and expiration date as the option contract originally sold, the
cost of effecting such a transaction may be greater than the premium received
upon its sale, resulting in a loss to the Series. If such an option expires
unexercised, the Series realizes a gain equal to the premium received. Such a
gain may be offset or exceeded by a decline in the market value of the
underlying security during the option period. If an option is exercised, the
exercise price, the premium received and the market value of the underlying
security determine the gain or loss realized by the Series.
A Series may
seek to hedge against an increase in the value of a security that it would like
to acquire, or otherwise profit from an expected increase in the value of a
security by writing a “naked” put option on the security. The writer of a naked
put option has no position in the underlying security. If the security price
rises, the option would expire worthless and a Series would profit by the amount
of the premium it received, which may offset the increase in the market price of
the security the Series would like to acquire. If the security price falls,
however, a Series may lose an amount up to the difference between the value of
the security and the premium it received, and the Series may be deprived of the
opportunity to benefit from the full decrease in the market price of the
security it would like to acquire. A Series may seek to terminate its position
in a put option it writes before exercise by executing a closing purchase
transaction. If the market is not liquid for a put option a Series has written,
however, the Series must continue to be prepared to pay the exercise price while
the option is outstanding, regardless of price changes.
A Series may
purchase and write options on an exchange or over-the-counter (“OTC”). OTC
options differ from exchange-traded options in several respects. They are
transacted directly with dealers and not with a clearing corporation, and
therefore entail the risk of non-performance by the dealer. OTC options are
available for a greater variety of securities and for a wider range of
expiration dates and exercise prices than are available for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market maker. It is the SEC’s position
that OTC options are generally illiquid.
The market
value of an option generally reflects the market price of an underlying
security. Other principal factors affecting market value include supply and
demand, interest rates, the pricing volatility of the underlying security and
the time remaining until the expiration date.
Risks
associated with options transactions include: (i) the success of a hedging or
trading strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(ii) there may be an imperfect or no correlation between the movement in prices
of options and the securities underlying them; (iii) there may not be a liquid
secondary market for options; (iv) the buyer of an option assumes the risk of
losing the entire premium invested in the option; (v) while a Series will
receive a premium when it writes covered call options, it may not participate
fully in a rise in the market value of the underlying security; and (vi) while a
Series will receive a premium when it writes naked put options, it may lose
money if it must purchase the underlying security at a price above market
value.
Swaps, Caps, Floors, Collars and
Swaptions. Swaps are privately negotiated OTC derivative products in
which two parties agree to exchange payment streams calculated in relation to a
rate, index, instrument or certain securities (referred to as the “underlying”)
and a predetermined amount (referred to as the “notional amount”). The
underlying for a swap may be an interest rate (fixed or floating), a currency
exchange rate, a commodity price index, a security, group of securities or a
securities index, a combination of any of these, or various other rates,
securities, instruments, assets or indices. Swap agreements generally do not
involve the delivery of the underlying or principal, and a party’s obligations
generally are equal to only the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the swap agreement.
A great deal
of flexibility is possible in the way swaps may be structured. For example, in a
simple fixed-to-floating interest rate swap, one party makes payments equivalent
to a fixed interest rate, and the other party makes payments calculated with
reference to a specified floating interest rate, such as LIBOR or the prime
rate. An equity swap is an agreement between counterparties to exchange a set of
payments, determined by a stock or index return, with another set of payments
(usually an interest-bearing (fixed or floating rate) instrument, but they can
also be the return on another stock or index). In a total return swap, one party
agrees to make periodic payments to another party based on the change in market
value of the assets underlying the contract, which may include a specific
security, basket of securities or securities indices, during a specified period.
In a currency swap, the parties generally enter into an agreement to pay
interest streams in one currency based on a specified rate in exchange for
receiving interest streams denominated in another currency. Currency swaps may
involve initial and final exchanges of the currency that correspond to the
agreed upon notional amount.
A Series may
engage in simple or more complex swap transactions involving a wide variety of
underlyings for various reasons. For example, a Series may enter into a swap to
gain exposure to investments (such as an index of securities in a market) or
currencies without actually purchasing those stocks or currencies; to make an
investment without owning or taking physical custody of securities or currencies
in circumstances in which direct investment is restricted for legal reasons or
is otherwise impracticable; to hedge an existing position; to obtain a
particular desired return at a lower cost to the Series than if it had invested
directly in an instrument that yielded the desired return; or for various other
reasons.
The Series
may enter into credit default swaps, as a buyer or a seller. The buyer in a
credit default contract is obligated to pay the seller a periodic stream of
payments over the term of the contract provided no event of default has
occurred. If an event of default occurs, the seller must pay the buyer the full
notional value (“par value”) of the underlying in exchange for the underlying.
If a Series is a buyer and no event of default occurs, the Series will have made
a stream of payments to the seller without having benefited from the default
protection it purchased. However, if an event of default occurs, the Series, as
buyer, will receive the full notional value of the underlying that may have
little or no value following default. As a seller, a Series receives a fixed
rate of income throughout the term of the contract, provided there is no
default. If an event of default occurs, the Series would be obligated to pay the
notional value of the underlying in return for the receipt of the underlying.
The value of the underlying received by the Series, coupled with the periodic
payments previously received may be less than the full notional value it pays to
the buyer, resulting in a loss of value to the Series. Credit default swaps
involve different risks than if a Series invests in the underlying
directly.
Caps,
floors, collars and swaptions are privately-negotiated option-based derivative
products. Like a put or call option, the buyer of a cap or floor pays a premium
to the writer. In exchange for that premium, the buyer receives the right to a
payment equal to the differential if the specified index or rate rises above (in
the case of a cap) or falls below (in the case of a floor) a pre-determined
strike level. Like swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and, like most swaps (other than foreign
currency swaps), the entire notional amount is not exchanged. A collar is a
combination product in which one party buys a cap from and sells a floor to
another party, or vice versa. Swaptions give the holder the right to enter into
a swap. A Series may use one or more of these derivative products in addition to
or in lieu of a swap involving a similar rate or index.
Under
current market practice, swaps, caps, collars and floors between the same two
parties are generally documented under a “master agreement.” In some cases,
options and forwards between the parties may also be governed by the same master
agreement. In the event of a default, amounts owed under all transactions
entered into under, or covered by, the same master agreement would be netted,
and only a single payment would be made.
Generally, a
Series will calculate the obligations of the swap agreements’ counterparties on
a “net basis.” Consequently, a Series’ current obligation (or rights) under a
swap agreement will generally be equal only to the net amount to be paid or
received under the agreement based on the relative values of the positions held
by each counterparty to the swap agreement (the “net amount”). A Series’ current
obligation under a swap agreement will be accrued daily (offset against any
amounts owed to the Series) and any accrued but unpaid net amounts owed to a
swap counterparty will be “covered” as required by the 1940 Act.
The swap
market has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents using
standardized swap agreements. As a result, the use of swaps has become more
prevalent in comparison with the markets for other similar instruments that are
also traded in over-the-counter markets.
Swaps and
other derivatives involve risks. One significant risk in a swap, cap, floor,
collar or swaption is the volatility of the specific interest rate, currency or
other underlying that determines the amount of payments due to and from a
Series. This is true whether these derivative products are used to create
additional risk exposure for a Series or to hedge, or manage, existing risk
exposure. If under a swap, cap, floor, collar or swaption agreement a Series is
obligated to make a payment to the counterparty, the Series must be prepared to
make the payment when due. A Series could suffer losses with respect to such an
agreement if the Series is unable to terminate the agreement or reduce its
exposure through offsetting transactions. Further, the risks of caps, floors and
collars, like put and call options, may be unlimited for the seller if the cap
or floor is not hedged or covered, but is limited for the buyer.
Because
under swap, cap, floor, collar and swaption agreements a counterparty may be
obligated to make payments to a Series, these derivative products are subject to
risks related to the counterparty’s creditworthiness. If a counterparty
defaults, a Series’ risk of loss will consist of any payments that the Series is
entitled to receive from the counterparty under the agreement (this may not be
true for currency swaps that require the delivery of the entire notional amount
of one designated currency in exchange for the other). Upon default by a
counterparty, however, a Series may have contractual remedies under the swap
agreement.
A Series
will enter into swaps only with counterparties that the Advisor believes to be
creditworthy.
Participatory Notes (“P-notes”).
P-notes are participation interest notes that are issued by banks or
broker-dealers and are designed to offer a return linked to a particular
underlying equity, debt, currency or market. If the P-note were held to
maturity, the issuer would pay to, or receive from, the purchaser the difference
between the nominal value of the underlying instrument at the time of purchase
and that instrument’s value at maturity. The holder of a P-note that is linked
to a particular underlying security or instrument may be entitled to receive any
dividends paid in connection with that underlying security or instrument, but
typically does not receive voting rights as it would if it directly owned the
underlying security or instrument. P-notes involve transaction costs.
Investments in P-notes involve the same risks associated with a direct
investment in the underlying securities, instruments or markets that they seek
to replicate. In addition, there can be no assurance that there will be a
trading market for a P-note or that the trading price of a P-note will equal the
underlying value of the security, instrument or market that it seeks to
replicate. Due to liquidity and transfer restrictions, the secondary markets on
which a P-note is traded may be less liquid than the market for other
securities, or may be completely illiquid, which may also affect the ability of
the Series to accurately value a P-note. P-notes typically constitute general
unsecured contractual obligations of the banks or broker-dealers that issue
them, which subjects the Series to counterparty risk (and this risk may be
amplified if the Series purchases P-notes from only a small number of
issuers).
Government Regulation of Derivatives.
The CFTC regulates the trading of commodity interests, including commodity
futures contracts, options on commodity futures, and swaps (which includes
cash-settled currency forwards and swaps). Pursuant to rules adopted under the
Commodity Exchange Act (“CEA”) by the CFTC, the Series must either operate
within certain guidelines and restrictions with respect to the Series’ use of
commodity interests, or the Advisor will be subject to registration and
regulation under the CEA.
Consistent
with the CFTC’s regulations, the Advisor has claimed an exclusion from the
definition of the term “commodity pool operator” (“CPO”) under the CEA with
respect to the Series and, therefore, the Series are not subject to registration
or regulation under the CEA. As a result, the Series will operate within certain
guidelines and restrictions with respect to their use of commodity interests. If
a Series determines to no longer operate within such guidelines and
restrictions, the Advisor would be subject to registration and regulation as a
CPO under the CEA with respect to the Series. If a Series is subject to CFTC
regulation, it may incur additional expenses.
The
regulation of futures, options and swaps transactions in the U.S. is a rapidly
changing area of law and is subject to modification by government and judicial
action. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Dodd-Frank Act”), which was signed into law in July 2010, sets forth a
new legislative framework for OTC derivatives, such as swaps, in which the
Series may invest. Title VII of the Dodd-Frank Act makes broad changes to the
OTC derivatives market, grants significant new authority to the SEC and the CFTC
to regulate OTC derivatives and market participants, and requires clearing of
many OTC derivatives transactions.
In addition,
the SEC adopted Rule 18f-4 under the 1940 Act (the “Derivatives Rule”) on
October 28, 2020. Since its compliance date of August 19, 2022, the Derivatives
Rule has replaced prior SEC and staff guidance with an updated, comprehensive
framework for registered funds’ use of derivatives.
The
Derivatives Rule provides a comprehensive framework for the use of derivatives
by registered investment companies. The Derivatives Rule permits a registered
investment company, subject to various conditions described below, to enter into
derivatives transactions and certain other transactions notwithstanding the
restrictions on the issuance of “senior securities” under Section 18 of the 1940
Act. Section 18 of the 1940 Act, among other things, prohibits open-end funds,
including the Series, from issuing or selling any “senior security,” other than
borrowing from a bank (subject to a requirement to maintain 300% “asset
coverage”).=
Registered
investment companies that don’t qualify as “limited derivatives users” as
defined below, are required by the Derivatives Rule to, among other things, (i)
adopt and implement a derivatives risk management program (“DRMP”) and new
testing requirements; (ii) comply with a relative or absolute limit on fund
leverage risk calculated based on value-at-risk (“VaR”); and (iii) comply with
new requirements related to Board and SEC reporting. The DRMP is administered by
a “derivatives risk manager,” who is appointed by the Board and periodically
reviews the DRMP and reports to the Board.
The
Derivatives Rule provides an exception from the DRMP, VaR limit and certain
other requirements for a registered investment company that limits its
“derivatives exposure” to no more than 10% of its net assets (as calculated in
accordance with the Derivatives Rule) (a “limited derivatives user”), provided
that the registered investment company establishes appropriate policies and
procedures reasonably designed to manage derivatives risks, including the risk
of exceeding the 10% “derivatives exposure” threshold.
The
requirements of the Derivatives Rule may limit a Series’ ability to engage in
derivatives transactions as part of its investment strategies. These
requirements may also increase the cost of the Series’ investments and cost of
doing business, which could adversely affect the value of the Series’
investments and/or the performance of the Series. The rule also may not be
effective to limit the Series’ risk of loss. In particular, measurements of VaR
rely on historical data and may not accurately measure the degree of risk
reflected in the Series’ derivatives or other investments. There may be
additional regulation of the use of derivatives transactions by registered
investment companies, which could significantly affect their use. The ultimate
impact of the regulations remains unclear. Additional regulation of derivatives
transactions may make them more costly, limit their availability or utility,
otherwise adversely affect their performance or disrupt markets. Other
potentially adverse regulatory obligations can develop suddenly and without
notice.
OTHER
INVESTMENT POLICIES
Foreign Securities. Except as
noted, all of a Series’ policies regarding foreign securities discussed below
are non-fundamental.
The Real
Estate Series may not purchase foreign securities if as a result of the purchase
of such securities more than 50% of the Series’ assets would be invested in
foreign securities. The foregoing restrictions of the Real Estate Series shall
not apply to foreign securities that are listed on a domestic securities
exchange or represented by American Depositary Receipts (“ADRs”) that are traded
either on a domestic securities exchange or in the United States on the OTC
market. The Diversified Tax Exempt Series may not purchase foreign securities.
Foreign securities may be denominated either in U.S. dollars or foreign
currencies.
The Core
Bond Series and the Credit Series may not invest in non-dollar denominated
securities. The Unconstrained Bond Series may invest up to 50% of its assets in
non-dollar denominated securities, including securities issued by companies
located in emerging markets. Each of the Core Bond Series, Credit Series and
Unconstrained Bond Series will invest no more than 20% of its assets in
securities issued by any one foreign government.
The
restrictions set forth in this paragraph are fundamental policies that cannot be
changed without the approval of a majority of the outstanding voting securities
of the Series, as defined in the 1940 Act. The High Yield Bond Series will
invest no more than 25% of their assets in securities issued by any one foreign
government. The High Yield Bond Series may invest up to 50% of its assets in
foreign securities which are not publicly traded in the United States. Each
Series that may invest in equity securities may invest without limit in equity
securities of foreign issuers that are listed on a domestic securities exchange
or are represented by ADRs that are listed on a domestic securities exchange or
are traded in the United States on the OTC market. Foreign securities may be
denominated either in U.S. dollars or foreign currencies.
Risks of Foreign Securities. There are
risks in investing in foreign securities not typically involved in domestic
investing. An investment in foreign securities may be affected by changes in
currency rates and in exchange control regulations. Foreign companies are
frequently not subject to the accounting and financial reporting standards
applicable to domestic companies, and there may be less information available
about foreign issuers. There is frequently less government regulation of foreign
issuers than in the United States. In addition, investments in foreign countries
are subject to the possibility of expropriation or confiscatory taxation,
political or social instability or diplomatic developments that could adversely
affect the value of those investments. There may also be imposition of
withholding taxes. Foreign financial markets may have less volume and longer
settlement periods than U.S. markets, which may cause liquidity problems for a
Series. In addition, costs associated with transactions on foreign markets are
generally higher than for transactions in the U.S. A Series that has no limit on
the amount it may invest in any one country may involve a higher degree of risk
than a Series that must be more diversified among countries. The special risks
associated with investing in a small number of countries include a greater
effect on portfolio holdings of country-specific economic factors, currency
fluctuations, and country-specific social or political factors. These risks
generally are greater for investments in securities of companies in emerging
markets, which are usually in the initial stages of their industrialization
cycle.
Obligations
of foreign governmental entities are subject to various types of governmental
support and may or may not be supported by the full faith and credit of a
foreign government.
A Series’
investments in emerging markets can be considered speculative, and therefore may
offer greater potential for gains and losses than investments in developed
markets of the world. Investing in emerging market countries may entail
purchasing securities issued by or on behalf of entities that are insolvent,
bankrupt, in default or otherwise engaged in an attempt to reorganize or
reschedule their obligations, and in entities that have little or no proven
credit rating or credit history. With respect to any emerging country, there may
be a greater potential for nationalization, expropriation or confiscatory
taxation, political changes, government regulation, social instability or
diplomatic developments (including war) which could affect adversely the
economies of such countries or investments in such countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging market countries to prevent, among other concerns, violation of foreign
investment limitations. The economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be adversely affected by trade barriers, exchange or currency
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. These economies also may have been, and may continue to be, adversely
affected by economic conditions in the countries with which they
trade.
The
occurrence of events similar to those in recent years, such as the aftermath of
the war in Iraq; instability in Afghanistan, Pakistan, Egypt, Libya, Syria and
the Middle East; epidemics such as those caused by the Ebola or Zika viruses;
political and military actions undertaken by Russia and the resulting sanctions
imposed by the United States and European Union (“EU”); terrorist attacks in the
U.S. and around the world; social and political discord; debt crises (such as
the recent Greek crisis); sovereign debt downgrades; or the exit or potential
exit of one or more countries (such as the United Kingdom) from the EU, among
others, may result in market volatility, may have long term effects on the U.S.
and worldwide financial markets, and may cause further economic uncertainties in
the U.S. and worldwide. Any such event(s) could have a significant adverse
impact on the value and risk profile of a Series’ portfolio. The Fund does not
know how long the securities markets may be affected by similar events and
cannot predict the effects of similar events in the future on the U.S. and
global economies and securities markets. There can be no assurance that similar
events and other market disruptions will not have other material and adverse
implications.
On January
31, 2020, the United Kingdom (the “UK”) formally withdrew from the European
Union (the “EU”) (commonly referred to as “Brexit”). Following a transition
period during which the EU and the UK Government engaged in a series of
negotiations regarding the terms of the UK’s future relationship with the EU,
the EU and the UK Government signed an agreement on December 30, 2020 regarding
the economic relationship between the UK and the EU. This agreement became
effective on a provisional basis on January 1, 2021 and formally entered into
force on May 1, 2021. While the full impact of Brexit is unknown, Brexit has
already resulted in volatility in European and global markets and could have
negative long-term impacts on financial markets in the UK and throughout Europe.
There is considerable uncertainty about the potential consequences of Brexit,
how future negotiations of trade relations will proceed, and how the financial
markets will react to all of the preceding. As this process unfolds, markets may
be further disrupted. Brexit may also cause additional member states to
contemplate departing from the EU, which would likely perpetuate political and
economic instability in the region and cause additional market disruption in
global financial markets.
The effects
of Brexit on the UK and EU economies and the broader global economy could be
significant, resulting in negative impacts, such as business and trade
disruptions, increased volatility and illiquidity, and potentially lower
economic growth of markets in the UK, EU and globally, which could negatively
impact the value of the Series’ investments. Brexit could also lead to legal
uncertainty and politically divergent national laws and regulations while the
new relationship between the UK and EU is further defined and the UK determines
which EU laws to replace or replicate. Additionally, depreciation of the British
pound sterling and/or the euro in relation to the U.S. dollar following Brexit
could adversely affect Series investments denominated in the British pound
sterling and/or the euro, regardless of the performance of the
investment.
On February
24, 2022, Russian military forces invaded Ukraine, significantly amplifying
already existing geopolitical tensions among Russia, Ukraine, Europe, NATO, and
the West. Following Russia’s actions, various countries, including the U.S.,
Canada, the United Kingdom, Germany, and France, as well as the European Union,
issued broad-ranging economic sanctions against Russia. The sanctions consist of
the prohibition of trading in certain Russian securities and engaging in certain
private transactions, the prohibition of doing business with certain Russian
corporate entities, large financial institutions, officials and oligarchs, and
the freezing of Russian assets. A number of large corporations and U.S. states
have also announced plans to divest interests or otherwise curtail business
dealings with certain Russian businesses. These sanctions, any future sanctions
or other actions, or even the threat of further sanctions or other actions, may
negatively affect the value and liquidity of a Series’ investments.
The extent
and duration of the war in Ukraine and the longevity and severity of sanctions
remain unknown, but they could have a significant adverse impact on the European
economy as well as the price and availability of certain commodities, including
oil and natural gas, throughout the world. These sanctions, and the resulting
disruption of the Russian economy, may cause volatility in other regional and
global markets and may negatively impact the performance of various sectors and
industries, as well as companies in other countries, which could have a negative
effect on the performance of a Series, even if the Series does not have direct
exposure to securities of Russian issuers.
Whether or
not a Series invests in securities of issuers located in Europe or with
significant exposure to European issuers or countries, these events could
negatively affect the value and liquidity of a Series’ investments due to the
interconnected nature of the global economy and capital markets.
Currency Risks. The U.S. dollar value
of securities denominated in a foreign currency will vary with changes in
currency exchange rates, which can be volatile. Accordingly, changes in the
value of the currency in which a Series’ investments are denominated relative to
the U.S. dollar will affect the Series’ NAV. Exchange rates are generally
affected by the forces of supply and demand in the international currency
markets, the relative merits of investing in different countries and the
intervention or failure to intervene of U.S. or foreign governments and central
banks. However, currency exchange rates may fluctuate based on factors intrinsic
to a country’s economy. Some emerging market countries also may have managed
currencies, which are not free floating against the U.S. dollar. In addition,
emerging markets are subject to the risk of restrictions upon the free
conversion of their currencies into other currencies. Any devaluations relative
to the U.S. dollar in the currencies in which a Series’ securities are quoted
would reduce the Series’ NAV per share.
Real estate securities. The Real
Estate Series concentrates its investments in the securities of companies in the
real estate industry. Under normal circumstances, the Real Estate Series will
invest at least 80% of its assets in securities of companies that are primarily
engaged in the real estate industry. These companies include those directly
engaged in the real estate industry as well as in industries serving and/or
related to the real estate industry. Examples of companies in which the Real
Estate Series may invest include those in the following areas: REITs, real
estate operating companies (“REOCs”), real estate developers and brokers,
building suppliers, and mortgage lenders.
REOCs are
corporations that engage in the development, management or financing of real
estate. REOCs are publicly traded real estate companies that are taxed at the
corporate level, unlike REITs. Because REOCs reinvest earnings rather than
distribute dividends to unit holders, they do not get the same benefits of lower
corporate taxation that are a common characteristic of REITs. The value of the
Series’ REOC securities generally will be affected by the same factors that
adversely affect a REIT. For more information about REITs, see “Real Estate
Investment Trusts.”
Although the
Real Estate Series may not invest directly in real estate, concentration in
securities of companies that are primarily engaged in the United States real
estate industry exposes the Series to special risks associated with the direct
ownership of real estate, and an investment in the Series will be closely linked
to the performance of the real estate markets. These risks may include, but are
not limited to, the following: declines in the value of real estate; risks
related to general and local economic conditions; possible lack of availability
of mortgage funds; lack of ability to access the credit or capital markets;
overbuilding; extended vacancies of properties; defaults by borrowers or
tenants, particularly during an economic downturn; increasing competition;
increases in property taxes and operating expenses; changes in zoning laws;
losses due to costs resulting from the clean-up of environmental problems;
liability to third parties for damages resulting from environmental problems;
casualty or condemnation losses; limitations on rents; changes in market and
sub-market values and the appeal of properties to tenants; and changes in
interest rates.
Repurchase Agreements. Each Series may
enter into repurchase agreements with respect to portfolio securities. Under the
terms of a repurchase agreement, the Series purchases securities (“collateral”)
from various financial institutions such as a bank or broker-dealer (a “seller”)
which the Advisor deems to be creditworthy, subject to the seller’s agreement to
repurchase them at a mutually agreed upon date and price. The repurchase price
generally equals the price paid by the Series plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio securities).
The seller
under a repurchase agreement is required to maintain the value of the collateral
held pursuant to the agreement at not less than 100% of the repurchase price,
and securities subject to repurchase agreements are held by the Series’
custodian either directly or through a securities depositary. Default by the
seller would, however, expose the Series to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
securities.
Investment Companies. Investment
company securities are securities of other open-end or closed-end investment
companies or unit investment trusts (“UITs”). Each Series may invest in
securities issued by other investment companies to the extent permitted by the
1940 Act, the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
The 1940 Act
generally prohibits, subject to certain exceptions, an investment company from
acquiring more than 3% of the outstanding voting shares of an investment company
and limits such investments to no more than 5% of a Series’ total assets in any
one investment company and no more than 10% in any combination of investment
companies. These limitations do not apply to a Series’ investments in money
market funds. A Series may invest in an investment company in excess of these
limitations, provided the Series otherwise complies with the conditions of any
exception provided by the 1940 Act or any rule or regulation of the SEC
thereunder. A Series may invest in investment companies managed by the Advisor
or its affiliates to the extent permitted under the 1940 Act or as otherwise
authorized by rule, regulation or order of the SEC.
In October
2020, the SEC adopted certain regulatory changes and took other actions related
to the ability of an investment company to invest in the securities of another
investment company. These changes include, among other things, the rescission of
certain SEC exemptive orders permitting investments in excess of the statutory
limits and the withdrawal of certain related SEC staff no-action letters, and
the adoption of Rule 12d1-4 under the 1940 Act. Rule 12d1-4, which became
effective on January 19, 2021, permits the Fund to invest in other investment
companies beyond the statutory limits, subject to certain conditions. The
rescission of the applicable exemptive orders and the withdrawal of the
applicable no-action letters became effective on January 19, 2022.
To the
extent a Series invests a portion of its assets in investment companies, those
assets will be subject to the risks of the purchased investment company’s
portfolio securities. The Series also will bear its proportionate share of the
expenses of the purchased investment company in addition to its own expenses.
Because of restrictions on direct investment by U.S. entities in certain
countries, investment in other investment companies may be the most practical or
the only manner in which an international, emerging markets or global fund can
invest in the securities markets of those countries. The Series do not intend to
invest in other investment companies, except money market funds, unless, in the
judgment of the Advisor, the potential benefits of such investments exceed the
associated costs (which include any investment advisory fees charged by the
investment companies) relative to the benefits and costs associated with direct
investments in the underlying securities.
Investments
in closed-end investment companies may involve the payment of substantial
premiums above the NAV of such issuer’s portfolio securities and are subject to
limitations under the 1940 Act. A Series also may incur tax liability to the
extent it invests in the stock of a foreign issuer that constitutes a “passive
foreign investment company.”
Exchange-Traded Funds (“ETFs”). ETFs
are investment companies that are registered under the 1940 Act as open-end
funds or UITs. ETFs are actively traded on national securities exchanges and are
generally based on specific domestic and foreign market indices. An “index based
ETF” seeks to track the performance of an index by holding in its portfolio
either the contents of the index or a representative sample of the securities in
the index. Because ETFs are based on an underlying basket of stocks or an index,
they are subject to the same market fluctuations as these types of securities in
volatile market swings.
Exchange-Traded Products (“ETPs”).
Certain Series may purchase shares of or interests in ETPs, which may or may not
be investment companies registered under the 1940 Act. The risks of owning
interests of an ETP, such as an exchange-traded note (ETN) or exchange-traded
commodity pool, generally reflect the same risks as owning the underlying
securities or other instruments that the ETP is designed to track. The shares of
certain ETPs may trade at a premium or discount to their intrinsic value (i.e.,
the market value may differ from the NAV of an ETP’s shares). For example,
supply and demand for shares of an ETP or market disruptions may cause the
market price of the ETP to deviate from the value of the ETP’s investments,
which may be emphasized in less liquid markets. The value of an ETN may also
differ from the valuation of its reference market or instrument due to changes
in the issuer’s credit rating. By investing in an ETP, a Series indirectly bears
the proportionate share of any fees and expenses of the ETP in addition to the
fees and expenses that the Series and its shareholders directly bear in
connection with the Series’ operations. Because certain ETPs may have a
significant portion of their assets exposed directly or indirectly to
commodities or commodity-linked securities, developments affecting commodities
may have a disproportionate impact on such ETPs and may subject the ETPs to
greater volatility than investments in traditional securities.
Generally,
ETNs are structured as senior, unsecured notes in which an issuer, such as a
bank, agrees to pay a return based on the target commodity index less any fees.
ETNs allow individual investors to have access to derivatives linked to
commodities and assets such as oil, currencies and foreign stock indexes. ETNs
combine certain aspects of bonds and ETFs. Similar to ETFs, ETNs are traded on a
major exchange (e.g., the NYSE) during normal trading hours. However, investors
can also hold an ETN until maturity. At maturity, the issuer pays to the
investor a cash amount equal to principal amount, subject to the day’s index
factor. ETN returns are based upon the performance of a market index minus
applicable fees. The value of an ETN may be influenced by time to maturity,
level of supply and demand for the ETN, volatility and lack of liquidity in
underlying commodities markets, changes in the applicable interest rates,
changes in the issuer’s credit rating, and economic, legal, political or
geographic events that affect the referenced commodity. The value of an ETN may
drop due to a downgrade in the issuer’s credit rating, even if the underlying
index remains unchanged. Investments in ETNs are subject to the risks facing
fixed income securities in general, including the risk that a counterparty will
fail to make payments when due or default.
Securities Lending. Each Series may
lend portfolio securities to brokers, dealers and other financial organizations
that meet capital and other credit requirements or other criteria established by
the Fund’s Board of Directors. These loans, if and when made, may not exceed
331/3% of a Series’ total assets taken at value (including
the loan collateral). A Series will not lend portfolio securities to its
investment advisor or its affiliates unless it has applied for and received
specific authority to do so from the SEC. Loans of portfolio securities will be
fully collateralized by cash, letters of credit or U.S. Government Securities,
and the collateral will be maintained in an amount equal to at least 100% of the
current market value of the loaned securities by marking to market daily. Any
gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Series.
A Series may
pay a part of the income earned to a third party (such as the Fund’s custodian)
for acting as the Series’ securities lending agent, but will bear all of any
losses from the investment of collateral.
By lending
its securities, a Series may increase its income by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. Government Securities or letters of credit are
used as collateral. Investing the cash collateral subjects a Series to market
risk. A Series remains obligated to return all collateral to the borrower under
the terms of its securities lending arrangements, even if the value of the
investments made with the collateral has declined. Accordingly, if the value of
a security in which the cash collateral has been invested declines, the loss
would be borne by a Series, and the Series may be required to liquidate other
investments in order to return collateral to the borrower at the end of a loan.
A Series will adhere to the following conditions whenever its portfolio
securities are loaned: (i) the Series must receive at least 100% cash collateral
or equivalent securities of the type discussed in the preceding paragraph from
the borrower; (ii) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral; (iii)
the Series must be able to terminate the loan on demand; (iv) the Series must
receive reasonable interest on the loan, in addition to payments reflecting the
amount of any dividends, interest or other distributions on the loaned
securities; (v) the Series may pay only reasonable fees in connection with the
loan; and, (vi) voting rights on the loaned securities may pass to the borrower,
provided, however, that if a material event adversely affecting the investment
occurs, the Series must terminate the loan and regain the right to vote the
securities. Loans may involve certain risks in the event of default or
insolvency of the borrower, including possible delays or restrictions upon the
Series’ ability to recover the loaned securities or dispose of the collateral
for the loan, which could give rise to loss because of adverse market action,
expenses and/or delays.
Short Sales. Short sales may be used
by a Series as part of its overall portfolio management strategies or to offset
(hedge) a potential decline in the value of a security. The Series may engage in
short sales that are either “against the box” or “uncovered.” A short sale is
“against the box” if, at all times during which the short position is open, the
Series owns at least an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same
issue as the securities that are sold short. A short sale against the box is a
taxable transaction to the Series with respect to the securities that are sold
short. “Uncovered” short sales are transactions under which a Series sells a
security it does not own. To complete such a transaction, the Series must borrow
the security to make delivery to the buyer. The Series is then obligated to
replace the security borrowed by purchasing the security at the market price at
the time of the replacement. The price at such time may be more or less than the
price at which the security was sold by the Series. Until the security is
replaced, the Series is required to pay the lender amounts equal to any
dividends or interest that accrue during the period of the loan. To borrow the
security, the Series also may be required to pay a premium, which would increase
the cost of the security sold. The proceeds of the short sale may be retained by
the broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
A Series may
engage in short sales in an attempt to capitalize on equity securities that it
believes will underperform the market or their peers. When a Series sells
securities short, it may use the proceeds from the sales to purchase long
positions in additional securities that it believes will outperform the market
or their peers. This strategy may effectively result in the Series having a
leveraged investment portfolio, which results in greater potential for loss.
Leverage can amplify the effects of market volatility on a Series’ share price
and make the Series’ returns more volatile. This is because leverage tends to
exaggerate the effect of any increase or decrease in the value of a Series’
portfolio securities. The use of leverage may also cause a Series to liquidate
portfolio positions when it would not be advantageous to do so or in order to
satisfy its obligations.
Forward Commitments or Purchases on a
When-Issued Basis. Each Series (with the exception of the Real Estate
Series) may enter into forward commitments or purchase securities on a
when-issued basis. These securities normally are subject to settlement within 45
days of the purchase date. The interest rate realized on these securities is
fixed as of the purchase date and no interest accrues to the Series before
settlement. These securities are subject to market fluctuation due to changes in
market interest rates. Each Series will enter into these arrangements with the
intention of acquiring the securities in question and not for speculative
purposes and will earmark on the books of the Series or maintain a separate
account consisting of liquid assets in an amount at least equal to the purchase
price.
Investment in Illiquid and Restricted
Securities. A Series may not purchase any illiquid investment, i.e., an
investment that the Fund reasonably expects cannot be sold or disposed of in
current market conditions in seven calendar days or less without the sale or
disposition significantly changing the market value of the investment (which
term includes repurchase agreements and time deposits maturing in more than
seven days) if, immediately after the acquisition, the Series would have
invested more than 15% of its net assets in illiquid investments that are
assets.
Restricted
securities are securities which were originally sold in private placements and
which have not been registered under the Securities Act of 1933, as amended (the
“1933 Act”). Such securities generally have been considered illiquid because
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. The SEC adopted Rule 144A to provide for a safe
harbor exemption from the registration requirements of the 1933 Act for resales
of restricted securities to “qualified institutional buyers.” The result has
been the development of a more liquid and efficient institutional resale market
for restricted securities. Rule 144A securities may be liquid if properly
determined by the Advisor pursuant to procedures adopted by the Board of
Directors. The Series’ ability to invest in restricted securities includes
investments in unregistered equity securities offered at a discount in a private
placement that are issued by companies that have outstanding publicly traded
equity securities of the same class (a “private investment in public equity,” or
a “PIPE”).
Liquidity Risk Management. In October
2016, the SEC adopted Rule 22e-4 under the 1940 Act (the “Liquidity Rule”),
which requires the Fund to establish a liquidity risk management program. Prior
to June 1, 2019, the final effective date, the Board of Directors of the Fund,
including a majority of the Independent Directors, approved the Fund’s Liquidity
Risk Management Program (the “Liquidity Program”) and the appointment of the
Liquidity Risk Committee to administer the Liquidity Program (the “Liquidity
Program Administrator”). Under the Liquidity Program, the Liquidity Program
Administrator assesses, manages, and periodically reviews each Series’ liquidity
risk and classifies each investment as “Highly Liquid,” “Moderately Liquid,”
“Less Liquid” or “Illiquid” based on the time it will take to convert the
investment to cash. The Liquidity Rule defines “liquidity risk” as the risk that
a Series could not meet requests to redeem shares issued by the Series without
significant dilution of the remaining investors’ interests in the Series. The
liquidity of a Series’ portfolio investments is determined based on relevant
market, trading and investment-specific considerations under the Liquidity
Program. The adoption of the Liquidity Program is not a guarantee that a Series
will have sufficient liquidity to satisfy its redemption requests in all market
conditions or that redemptions can be effected without diluting remaining
investors in the Series. The effect that the Liquidity Rule will have on the
Series, and on the open-end fund industry in general, is not yet fully known,
but the Liquidity Rule may impact a Series’ performance and its ability to
achieve its investment objective.
LIBOR Replacement Risk. The London
Inter-Bank Offered Rate (“LIBOR”), which is used extensively in the U.S. and
globally as a benchmark or reference rate for various commercial and financial
contracts, is expected to be discontinued. The elimination of LIBOR may
adversely affect the interest rates on, and value of, certain Fund investments
for which the value is tied to LIBOR. Such investments may include bank loans,
derivatives, floating rate securities, and other assets or liabilities tied to
LIBOR. The U.K. Financial Conduct Authority stopped compelling or inducing banks
to submit certain LIBOR rates and expects to do so for the remaining LIBOR rates
immediate after June 30, 2023. Actions by regulators have resulted in the
establishment of alternative reference rates to LIBOR in most major currencies.
The U.S. Federal Reserve, based on the recommendations of the New York Federal
Reserve’s Alternative Reference Rate Committee (comprised of major derivative
market participants and their regulators), has begun publishing a Secured
Overnight Financing Rate (“SOFR”), which is intended to replace U.S. dollar
LIBOR. Alternative reference rates for other currencies have also been announced
or have already begun publication. Markets are slowly developing in response to
these new rates. Questions around liquidity impacted by these rates, and how to
appropriately adjust these rates at the time of transition, remain a concern for
the Series. The effect of any changes to, or discontinuation of, LIBOR on the
Series will vary depending on, among other things, (1) existing fallback or
termination provisions in individual contracts and (2) whether, how, and when
industry participants develop and adopt new reference rates and fallbacks for
both legacy and new products and instruments. The expected discontinuation of
LIBOR could have a significant impact on the financial markets in general and
may also present heightened risk to market participants, including public
companies, investment advisers, other investment companies, and broker-dealers.
The risks associated with this discontinuation and transition will be
exacerbated if the work necessary to effect an orderly transition to an
alternative reference rate is not completed in a timely manner. Accordingly, it
is difficult to predict the full impact of the transition away from LIBOR on the
Series until new reference rates and fallbacks for both legacy and new products,
instruments and contracts are commercially accepted.
Diversification. The Credit Series is
non-diversified under the 1940 Act. Non-diversified funds may invest a higher
percentage of their assets in the securities of a single issuer than a fund that
is diversified. The value of a non-diversified Series may be more susceptible to
risks associated with a single adverse economic, political or regulatory
occurrence than a diversified fund would be. Each Series, other than the Credit
Series, is diversified under the 1940 Act.
Each Series
intends to satisfy the diversification requirements necessary to qualify as a
regulated investment company (“RIC”) under the Code. For more information, see
“Taxes” below.
Diversification
does not guarantee against a loss.
Borrowings. Each Series may borrow
money subject to its fundamental and non-fundamental investment policies.
Borrowing money will subject a Series to interest costs. The Series generally
borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. The Series may borrow money from banks
and make other investments or engage in other transactions permissible under the
1940 Act which may be considered a borrowing (such as mortgage dollar rolls and
reverse repurchase agreements).
The Fund
renewed its 364-day, $50 million credit agreement with Bank of New York Mellon
(the “Credit Agreement”) in September 2022, which will terminate in September
2023, unless extended or renewed. Each series of the Fund may borrow under the
Credit Agreement for temporary or emergency purposes, including funding
shareholder redemptions and other short-term liquidity purposes. A series may
borrow up to the maximum amount allowable under its current Prospectus and SAI,
subject to various other legal, regulatory or contractual limits. Borrowing
results in interest expense and other fees and expenses for a series that may
impact the series’ net expenses and return. Each series of the Fund is charged
its pro rata share of upfront fees and commitment fees on the aggregate
commitment amount based on its net assets. If a series borrows pursuant to the
Credit Agreement, the series is charged interest at a variable rate. The
availability of assets under the Credit Agreement can be affected by other
series’ borrowings under the agreement. As such, a series may be unable to
borrow (or borrow further) under the Credit Agreement if the commitment limit
has been reached.
Special Risks of Cyber Attacks.
As with any entity that conducts business through electronic means in the modern
marketplace, the Fund, and its service providers, may be susceptible to
operational and information security risks resulting from cyber attacks. Cyber
attacks include, among other behaviors, stealing or corrupting data maintained
online or digitally, denial of service attacks on websites, the unauthorized
monitoring, release, misuse, loss, destruction or corruption of confidential
information, unauthorized access to relevant systems, compromises to networks or
devices that the Fund and its service providers use to service the Fund’s
operations, ransomware, operational disruption or failures in the physical
infrastructure or operating systems that support the Fund and its service
providers, or various other forms of cyber security breaches. Cyber attacks
affecting the Fund, the Advisor, or the Fund’s distributor, custodian, or any
other of the Fund’s intermediaries or service providers may adversely impact the
Fund and its shareholders, potentially resulting in, among other things,
financial losses or the inability of Fund shareholders to transact business. For
instance, cyber attacks may interfere with the processing of shareholder
transactions, impact the Series’ ability to calculate their NAVs, cause the
release of private shareholder information or confidential business information,
impede trading, subject the Fund to regulatory fines or financial losses and/or
cause reputational damage. The Fund may also incur additional costs for cyber
security risk management purposes designed to mitigate or prevent the risk of
cyber attacks. Such costs may be ongoing because threats of cyber attacks are
constantly evolving as cyber attackers become more sophisticated and their
techniques become more complex. Similar types of cyber security risks are also
present for issuers of securities in which the Series may invest, which could
result in material adverse consequences for such issuers and may cause the
Series’ investments in such companies to lose value. There can be no assurance
that the Fund, the Fund’s service providers, or the issuers of the securities in
which the Series invest will not suffer losses relating to cyber attacks or
other information security breaches in the future.
Recent Market Events. An outbreak of
respiratory disease caused by a novel coronavirus designated as COVID-19 was
first detected in China in December 2019 and subsequently spread
internationally. The transmission of COVID-19 and efforts to contain its spread
have resulted in international, national and local border closings and other
significant travel restrictions and disruptions, significant disruptions to
business operations, supply chains and customer activity, event cancellations
and restrictions, service cancellations, reductions and other changes,
significant challenges in healthcare service preparation and delivery, and
quarantines, as well as general concern and uncertainty that has negatively
affected the economic environment. These impacts also have caused significant
volatility and declines in global financial markets, which have caused losses
for investors. Liquidity for many instruments has been greatly reduced, and some
interest rates are very low and in some cases yields are
negative.
In general,
the impact of this COVID-19 outbreak, and other epidemics and pandemics that may
arise in the future, could negatively affect the global economy, as well as the
economies of individual countries, the financial performance of individual
companies and sectors, and the markets in general in significant and unforeseen
ways. Any such impact could adversely affect the prices and liquidity of the
securities and other instruments in which a Series invests, which in turn could
negatively impact the Series’ performance and cause losses on your investment
in the Series.
In addition,
inflation has increased to highs that markets have not seen in decades. The U.S.
Federal Reserve has increased interest rates in an effort to control rising
inflation, however uncertainty regarding the speed and magnitude of the interest
rate increases, as well as the U.S. Federal Reserve’s general ability to
successfully control inflation without causing a recession, may negatively
impact asset prices and increase market volatility.
Investment Restrictions
Each Series
has adopted certain restrictions set forth below as fundamental policies, which
may not be changed without the favorable vote of the holders of a “majority” of
the Series’ outstanding voting securities, which means a vote of the holders of
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares.
The
following fundamental restrictions apply to the Diversified Tax Exempt
Series.
The
Diversified Tax Exempt Series may not:
| 1. |
Borrow
money, except to the extent permitted under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended from time to
time. |
| 2. |
Purchase
securities of an issuer, except as consistent with the maintenance of its
status as an open-end diversified company under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to
time. |
| 3. |
Purchase
any securities which would cause more than 25% of the total assets of the
Series, based on current value at the time of such purchase, to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that this
limitation does not apply to investments in (a) obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities,
or (b) tax-exempt obligations of state or municipal governments and their
political subdivisions. |
| 4. |
Make
loans, except that each Series may (a) purchase or hold debt instruments
in accordance with its investment objective and policies, (b) enter into
repurchase agreements, and (c) loan its portfolio securities, to the
fullest extent permitted under the 1940 Act, and any rules, regulation or
order thereunder. |
| 5. |
Issue
senior securities (as defined in the 1940 Act) except in connection with
permitted borrowings as described in the Series’ SAI or as permitted by
the 1940 Act, and any rule, regulation, or order of the SEC
thereunder. |
| 6. |
Purchase
or sell real estate, commodities or commodities contracts including
futures contracts. However, subject to its permitted investments, each
Series may: (a) invest in securities of issuers engaged in the real estate
business or the business of investing in real estate (including interests
in limited partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and securities which
are secured by real estate or interests therein; (b) hold or sell real
estate received in connection with securities it holds or held; or (c)
trade in futures contracts (including forward foreign currency contracts)
and options on futures contracts (including options on currencies) to the
extent consistent with the Series’ investment objective and
policies. |
| 7. |
Act as
an underwriter of securities of other issuers except as it may be deemed
an underwriter in selling a portfolio security. |
The
following are non-fundamental investment policies and restrictions of the
Diversified Tax Exempt Series and may be changed by the Fund’s Board of
Directors.
| 1. |
None
of the Series may invest in illiquid securities, i.e., securities that
cannot be disposed of at approximately the amount at which the Series has
valued them in seven days or less (which term includes repurchase
agreements and time deposits maturing in more than seven days) if, in the
aggregate, more than 15% of its net assets would be invested in illiquid
securities. |
| 2. |
None
of the Series may purchase securities on margin, except that the Series
may obtain short-term credits that are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute purchasing
securities on margin. |
| 3. |
Each
Series will invest in securities issued by other investment companies only
to the extent permitted by the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended from time to time. |
| 4. |
None
of the Series may invest more than 5% of the value of its total net assets
in warrants. Included within that amount, but not to exceed 2% of the
value of the Series’ net assets, may be warrants which are not listed on
the NYSE or the NYSE MKT LLC. This limitation does not apply to the
Tax-Exempt Series. |
| 5. |
The
Series’ investment policies with respect to options on securities and with
respect to stock index and currency futures and related options are
subject to the following non-fundamental limitations: (1) with respect to
any Series, the aggregate value of the securities underlying calls or
obligations underlying puts determined as of the date options are sold
shall not exceed 25% of the assets of the Series; (2) a Series will not
enter into any option transaction if immediately thereafter, the aggregate
premiums paid on all such options which are held at any time would exceed
20% of the total net assets of the Series; (3) the aggregate margin
deposits required on all futures or options thereon held at any time by a
Series will not exceed 5% of the total assets of the Series; (4) the
security underlying the put or call is within the investment policies of
each Series and the option is issued by the Options Clearing Corporation;
and (5) the Series may buy and sell puts and calls on securities and
options on financial futures if such options are listed on a national
securities or commodities exchange. |
The
following fundamental restrictions apply to the Real Estate Series. The Series
may not:
| 1. |
Borrow
money, except to the extent permitted under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended from time to
time. |
| 2. |
Except
as discussed below, purchase any securities which would cause more than
25% of the total assets of the Series, based on current value at the time
of such purchase, to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry,
provided that this limitation does not apply to investments in (a)
obligations issued or guaranteed by the U.S. Government or its agencies
and instrumentalities, or (b) tax-exempt obligations of state or municipal
governments and their political subdivisions. The Series has adopted a
fundamental policy to invest more than 25% of its total assets in
securities of companies that are directly engaged in the real estate
industry as well as in industries serving and/or related to the real
estate industry. |
| 3. |
Make
loans, except that the Series may (a) purchase or hold debt instruments in
accordance with its investment objective and policies, (b) enter into
repurchase agreements, and (c) loan its portfolio securities, to the
fullest extent permitted under the 1940 Act, and any rules, regulation or
order thereunder. |
| 4. |
Issue
senior securities (as defined in the 1940 Act) except in connection with
permitted borrowings as described in the Series’ SAI or as permitted by
the 1940 Act, and any rule, regulation, or order of the SEC
thereunder. |
| 5. |
Purchase
or sell real estate, commodities or commodities contracts including
futures contracts. However, subject to its permitted investments, the
Series may: (a) invest in securities of issuers engaged in the real estate
business or the business of investing in real estate (including interests
in limited partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and securities which
are secured by real estate or interests therein; (b) hold or sell real
estate received in connection with securities it holds or held; or (c)
trade in futures contracts (including forward foreign currency contracts)
and options on futures contracts (including options on currencies) to the
extent consistent with the Series’ investment objective and
policies. |
| 6. |
Act as
an underwriter of securities of other issuers except as it may be deemed
an underwriter in selling a portfolio security. |
| 7. |
Purchase
securities of an issuer, except as consistent with the maintenance of its
status as an open-end diversified company under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to
time. |
The
following fundamental restrictions apply to the High Yield Bond Series. The High
Yield Bond Series may not:
| 1. |
Purchase
any securities which would cause more than 25% of the total assets of the
Series, based on current value at the time of such purchase, to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that this
limitation does not apply to investments in (a) obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities,
or (b) obligations of state or municipal governments and their political
subdivisions. |
| 2. |
Borrow
money, except to the extent permitted under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended from time to
time. |
| 3. |
Purchase
securities of an issuer, except as consistent with the maintenance of its
status as an open-end diversified company under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to
time. |
| 4. |
Make
loans, except that the Series may (a) purchase or hold debt instruments in
accordance with its investment objective and policies, (b) enter into
repurchase agreements, and (c) loan its portfolio securities, to the
fullest extent permitted under the 1940 Act, and any rules, regulation or
order thereunder. |
| 5. |
Purchase
or sell real estate, commodities or commodities contracts including
futures contracts. However, subject to its permitted investments, the
Series may: (a) invest in securities of issuers engaged in the real estate
business or the business of investing in real estate (including interests
in limited partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and securities which
are secured by real estate or interests therein; (b) hold or sell real
estate received in connection with securities it holds or held; or (c)
trade in futures contracts (including forward foreign currency contracts)
and options on futures contracts (including options on currencies) to the
extent consistent with the Series’ investment objective and
policies. |
| 6. |
Act as
an underwriter of securities of other issuers except as it may be deemed
an underwriter in selling a portfolio security. |
| 7. |
Issue
senior securities (as defined in the 1940 Act) except in connection with
permitted borrowings as described in this SAI or as permitted by the 1940
Act, and any rule, regulation or order of the SEC
thereunder. |
The
following non-fundamental policies apply to the High Yield Bond Series. These
non-fundamental policies may be changed by the Board of Directors without
shareholder approval.
The High
Yield Bond Series may not:
| 1. |
Purchase
illiquid securities, i.e., securities that cannot be disposed at
approximately the amount at which the Series has valued them in seven days
or less (which term includes repurchase agreements and time deposits
maturing in more than seven days) if, in the aggregate, more than 15% of
its net assets would be invested in illiquid
securities. |
| 2. |
Purchase
securities on margin, except that the Series may obtain short-term credits
that are necessary for the clearance of transactions, and provided that
margin payments in connection with futures contracts and options on
futures contracts shall not constitute purchasing securities on
margin. |
| 3. |
The
Series will not purchase any securities which would cause more than 25% of
the total assets of the Series, based on current value at the time of such
purchase, to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry,
provided that this limitation does not apply to investments in
(a) obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities, or (b) tax-exempt obligations of
state or municipal governments and their political
subdivisions. |
The
following fundamental restrictions apply to the Core Bond Series and
Unconstrained Bond Series. The Core Bond Series and Unconstrained Bond Series
may not:
| 1. |
Purchase
securities of an issuer, except as consistent with the maintenance of its
status as an open-end diversified company under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to
time. |
| 2. |
Purchase
any securities which would cause more than 25% of the total assets of the
Series, based on current value at the time of such purchase, to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that this
limitation does not apply to investments in (a) obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities,
or (b) obligations of state or municipal governments and their political
subdivisions. |
| 3. |
Borrow
money, except to the extent permitted under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended from time to
time. |
| 4. |
Make
loans, except that each Series may (a) purchase or hold debt instruments
in accordance with its investment objective and policies, (b) enter into
repurchase agreements, and (c) loan its portfolio securities, to the
fullest extent permitted under the 1940 Act, and any rules, regulation or
order thereunder. |
| 5. |
Purchase
or sell real estate, commodities or commodities contracts including
futures contracts. However, subject to its permitted investments, each
Series may: (a) invest in securities of issuers engaged in the real estate
business or the business of investing in real estate (including interests
in limited partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and securities which
are secured by real estate or interests therein; (b) hold or sell real
estate received in connection with securities it holds or held; or (c)
trade in futures contracts (including forward foreign currency contracts)
and options on futures contracts (including options on currencies) to the
extent consistent with the Series’ investment objective and
policies. |
| 6. |
Act as
an underwriter of securities of other issuers except as it may be deemed
an underwriter in selling a portfolio security. |
| 7. |
Issue
senior securities (as defined in the 1940 Act) except in connection with
permitted borrowings as described in this SAI or as permitted by the 1940
Act, and any rule, regulation or order of the SEC
thereunder. |
The
following non-fundamental policies apply to the Core Bond Series, Real Estate
Series and Unconstrained Bond Series. These non-fundamental policies may be
changed by the Board of Directors without shareholder approval.
The Series
may not:
| 1. |
Purchase
illiquid securities, i.e., securities that cannot be disposed at
approximately the amount at which the Series has valued them in seven days
or less (which term includes repurchase agreements and time deposits
maturing in more than seven days) if, in the aggregate, more than 15% of
its net assets would be invested in illiquid
securities. |
| 2. |
Purchase
securities on margin, except that the Series may obtain short-term credits
that are necessary for the clearance of transactions, and provided that
margin payments in connection with futures contracts and options on
futures contracts shall not constitute purchasing securities on
margin. |
The
following non-fundamental policy applies to the Unconstrained Bond Series. This
non-fundamental policy may be changed by the Board of Directors without
shareholder approval.
The Series
may not:
| 1. |
Purchase
any securities which would cause more than 25% of the total assets of the
Series, based on current value at the time of such purchase, to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that this
limitation does not apply to investments in (a) obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities,
or (b) tax-exempt obligations of state or municipal governments and their
political subdivisions. |
The
following fundamental restrictions apply to the Credit Series.
| 1. |
The
Series may not purchase any securities which would cause more than 25% of
the total assets of the Series, based on current value at the time of such
purchase, to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry,
provided that this limitation does not apply to investments in (a)
obligations issued or guaranteed by the U.S. Government or its agencies
and instrumentalities, or (b) tax-exempt obligations of state or municipal
governments and their political subdivisions. |
| 2. |
The
Series may borrow money, except as prohibited under the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time to
time. |
| 3. |
The
Series may make loans, except as prohibited under the 1940 Act, the rules
or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended or interpreted from time to
time. |
| 4. |
The
Series may purchase or sell commodities and real estate, except as
prohibited under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time. |
| 5. |
The
Series may act as an underwriter of securities of other issuers, except as
prohibited under the 1940 Act, the rules or regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time. |
| 6. |
The
Series may not issue senior securities (as defined in the 1940 Act) except
in connection with permitted borrowings as described in this SAI or as
permitted by the 1940 Act, and any rule, regulation or order of the SEC
thereunder. |
The
following non-fundamental investment policies and restrictions apply to the
Credit Series. They may be changed by the Fund’s Board of Directors.
| 1. |
The
Series may not purchase an investment if, as a result, more than 15% of
its net assets would be invested in illiquid
securities. |
| 2. |
The
Series may invest in securities issued by other investment companies,
except as prohibited under the 1940 Act, the rules and regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to
time. |
| 3. |
The
Series may not invest in unmarketable interests in real estate limited
partnerships. The Series may not purchase or sell or invest directly in
real estate unless acquired as a result of its ownership in securities or
other investments and except pursuant to the exercise of its rights under
loan agreements related to its investments or to the extent that its
investments in senior loans or bank loans may be considered to be
investments in real estate. For the avoidance of doubt, the foregoing
policy does not prevent the Series from, among other things, purchasing
marketable securities of companies that deal in real estate or interests
therein (including REITs). |
| 4. |
The
Series may purchase or sell financial and physical commodities, commodity
contracts based on (or relating to) physical commodities or financial
commodities, and securities and derivative instruments whose values are
derived from (in whole or in part) physical commodities or financial
commodities. |
Except for
the limitations on borrowings, or as may be specifically provided to the
contrary, each of the above percentage limitations are applicable at the time of
a purchase. With respect to warrants, rights, and convertible securities, a
determination of compliance with the above limitations shall be made as though
such warrant, right, or conversion privilege had been exercised. With respect to
the limitation on illiquid securities, in the event that a subsequent change in
net assets or other circumstances cause a Series to exceed its limitation, the
Series will take steps to bring the aggregate amount of illiquid instruments
back within the limitations as soon as reasonably practicable. With respect to
the limitation on borrowing, in the event that a subsequent change in net assets
or other circumstances causes a Series to exceed its limitation, the Series will
take steps to bring the aggregate amount of borrowing back within the limitation
within three days thereafter (not including Sundays and holidays).
The
following descriptions of the 1940 Act may assist investors in understanding the
above policies and restrictions.
Borrowing.
The 1940 Act presently allows an investment company to borrow from any bank
in an amount up to 331/3% of its total assets (including
the amount borrowed) and to borrow for temporary purposes in an amount not
exceeding 5% of its total assets. Transactions that are fully collateralized in
a manner that does not involve the prohibited issuance of a “senior security”
within the meaning of Section 18(f) of the 1940 Act, shall not be regarded as
borrowings for the purposes of a Series’ investment restriction.
Concentration.
The SEC staff has defined concentration as investing 25% or more of an
investment company’s total assets in an industry or group of industries, with
certain exceptions.
Diversification.
Under the 1940 Act and the rules, regulations and interpretations
thereunder, a “diversified company,” as to 75% of its total assets, may not
purchase securities of any issuer (other than obligations of, or guaranteed by,
the U.S. Government or its agencies, or instrumentalities or securities of other
investment companies) if, as a result, more than 5% of its total assets would be
invested in the securities of such issuer, or more than 10% of the issuer’s
voting securities would be held by the investment company.
Lending.
Under the 1940 Act, an investment company may only make loans if expressly
permitted by its investment policies.
Senior
Securities. Senior securities may include any obligation or instrument
issued by an investment company evidencing indebtedness. The 1940 Act generally
prohibits each Series from issuing senior securities, although it provides
allowances for certain derivatives and certain other investments, such as short
sales, reverse repurchase agreements, firm commitment agreements and standby
commitments, in compliance with applicable law and guidance.
Underwriting.
Under the 1940 Act, underwriting securities involves an investment company
purchasing securities directly from an issuer for the purpose of selling
(distributing) them or participating in any such activity either directly or
indirectly. Under the 1940 Act, a diversified fund may not make any commitment
as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, exceeds 25% of the value of its total assets. The
foregoing restrictions do not apply to non-diversified funds.
Portfolio Turnover
An annual
portfolio turnover rate is, in general, the percentage computed by taking the
lesser of purchases or sales of portfolio securities (excluding securities with
a maturity of one year or less at the time of acquisition) for a year and
dividing that amount by the monthly average of the market value of such
securities during the year. Higher portfolio turnover (e.g., over 100%)
necessarily will cause the Series to pay correspondingly increased brokerage and
trading costs. In addition to the transaction costs, higher portfolio turnover
may result in the realization of capital gains. To the extent net short-term
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
The
portfolio turnover rate for the Core Bond Series increased compared to the prior
year as market volatility throughout the year led to sector allocation and
duration changes within the portfolio as compared to a relatively stable
2021.
Disclosure of Portfolio Holdings
The Fund’s
Board of Directors has approved a portfolio holdings disclosure policy that
governs the timing and circumstances of disclosure to shareholders and third
parties of information regarding the portfolio investments held by the
Series.
Disclosure
of the Series’ complete portfolio holdings is required to be made quarterly
within 60 days of the end of each fiscal quarter (currently, each March 31, June
30, September 30, and December 31), in the Annual Report and Semi-Annual Report
to shareholders and in the quarterly holdings reports filed with the SEC as
exhibits to Form N-PORT. Each Series’ Annual and Semi-Annual Reports are
distributed to shareholders and the most recent Reports are available on the
Fund’s website (see address below). The Series’ holdings reports on exhibits to
Form N-PORT are available, free of charge, on the EDGAR database on the SEC’s
website at www.sec.gov. In addition, each Series’ month-end and quarter-end
complete portfolio holdings are available on the Fund’s website at
www.manning-napier.com. This information is provided with a lag of at least
eight days. The information provided will include the following for each
security in the portfolio: security name, CUSIP or Sedol symbol, ticker (for
equities only), country, number of shares or units held (for equities), par
value (for bonds), and market value as of the date of the portfolio. For futures
contracts, the information provided will include the underlying instrument, the
notional value of the contracts, and the amount of unrealized appreciation or
depreciation. Portfolio holdings information will be available on the website at
least until it is superseded by a quarterly portfolio holdings report
distributed to shareholders (with respect to Annual and Semi- Annual Reports) or
filed with the SEC (with respect to exhibits to Form N-PORT). This information
is publicly available to all categories of persons.
The Fund
provides portfolio holdings and information derived from the portfolio holdings
to rating and ranking organizations such as Lipper and Morningstar, Inc. in
connection with rating the Series and mutual fund database services such as
Thomson Financial Research in connection with their collection of fund data for
their subscribers. The Fund will only disclose such information as of the end of
the most recent calendar month, and this information will be provided to these
organizations no sooner than the next day after it is posted on the Fund’s
website, unless the conditions described below relating to the disclosure of
non-public portfolio holdings information are satisfied. The Fund believes that
these organizations have legitimate objectives in requesting such portfolio
holdings information.
The Fund’s
policies and procedures provide that the Fund’s Chief Compliance Officer (or her
designee) (“CCO”) may authorize disclosure of non-public portfolio holdings to
rating and ranking organizations, mutual fund databases, consultants, and other
organizations that will use the data for due diligence, rating, or ranking the
Series, or similar uses at differing times and/or with different lag times than
those described above. Prior to making any disclosure of non-public portfolio
holdings to a third party, the CCO must determine that such disclosure serves a
reasonable business purpose, is in the best interests of the Fund’s shareholders
and that conflicts between the interests of the Fund’s shareholders and those of
the Fund’s Advisor, principal underwriter, or any affiliated person of the Fund
are addressed.
The Fund’s
policies and procedures also permit the Fund to disclose certain commentary and
analytical, statistical, performance or similar information relating to a Series
of the Fund or its portfolio holdings if certain conditions are met. The
information must be for legitimate business purposes and must be deemed to be
non-material non-public information based on a good faith review of the
particular facts and circumstances. Examples of such non-material non-public
information may include, but are not limited to, the following types of
information: allocation of a Series’ portfolio securities and other investments
among various asset classes, sectors, industries, market capitalizations,
countries and regions; the characteristics of the stock components and other
investments of a Series; the attribution of a Series’ returns by asset class,
sector, industry, market capitalization, country and region; certain volatility
characteristics of a Series; certain valuation metrics of a Series (such as
average price to earnings ratio and average earnings growth); and maturity and
credit quality statistics for a Series’ fixed income holdings.
The Fund
requires any third party receiving non-public portfolio holdings or information
which is derived from portfolio holdings that is deemed material (together,
“portfolio holdings data”) to enter into a confidentiality agreement with the
Fund which provides, among other things, that non-public portfolio holdings data
will be kept confidential and that the recipient has a duty not to trade on the
portfolio holdings data and will use such information solely to analyze and rank
a Series, or to perform due diligence and asset allocation, depending on the
recipient of the information. The agreement will require that the recipient
provide, upon request, evidence reasonably satisfactory to the Fund to
demonstrate its adherence to the provisions of the agreement.
The Fund
does not receive any compensation or other consideration for disclosure of
portfolio holdings information.
In addition,
the Fund’s service providers, such as the Advisor, Custodian, Morgan, Lewis
& Bockius LLP, PricewaterhouseCoopers LLP (“PwC”), Distributor, and BNY
Mellon Investment Servicing (US) Inc. (“BNY Mellon”), all as defined herein, and
any pricing service used by the Advisor may possess or receive daily portfolio
holdings information with no lag time in connection with their services to the
Fund. In addition, Broadridge Financial Solutions, Inc. may receive portfolio
holdings information with no lag time, as necessary, in connection with the
proxy voting support services it provides to the Fund (see “Proxy Voting
Policy”). Service providers will be subject to a duty of confidentiality with
respect to any portfolio holdings information, whether imposed by the provisions
of the service provider’s contract with the Fund or by the nature of its
relationship with the Fund.
The Board
exercises ongoing oversight of the portfolio holdings disclosure policy by
overseeing the implementation and enforcement of the Fund’s policies and
procedures by the CCO and by considering reports and recommendations by the CCO
concerning any material compliance matters. The Board will be informed of any
disclosures of non-public portfolio holdings data pursuant to a confidentiality
agreement at its next regularly scheduled meeting or as soon as is reasonably
practicable, and will periodically review agreements that the Fund has entered
into to selectively disclose portfolio holdings data.
Management
The overall
business and affairs of the Fund are managed by the Fund’s Board of Directors.
The Board approves all significant agreements between the Fund and persons or
companies furnishing services to the Fund, including the Fund’s agreements with
its investment advisor, custodian and distributor. The day-to-day operations of
the Fund are delegated to the Fund’s officers and to the Advisor and other
service providers.
The
following chart shows certain information about the Fund’s officers and
directors, including their principal occupations during the last five years.
Unless specific dates are provided, the individuals have held the listed
positions for longer than five years.
Manning
& Napier Advisors, LLC is the successor entity to Manning & Napier
Advisors, Inc. Accordingly, for purposes of the charts below, an individual’s
employment history at Manning & Napier Advisors, LLC includes his/her
employment history at Manning & Napier Advisors, Inc., except as otherwise
stated.
Interested Director and
Officer1 |
|
Name: |
Paul
Battaglia* |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1978 |
Current
Position(s) Held with Fund: |
Principal
Executive Officer, President, Chairman and Director |
Term
of Office2 & Length of Time Served: |
Indefinite
– Chairman and Director since November 2018 |
Principal
Occupation(s) During Past 5 Years: |
Chief
Financial Officer since 2018; Vice President of Finance (2016 – 2018);
Director of Finance (2011 – 2016); Financial Analyst/Internal Auditor
(2004-2006) – Manning & Napier Advisors, LLC and
affiliates |
|
Holds
one or more of the following titles for various subsidiaries and
affiliates: Chief Financial Officer |
Number
of Portfolios Overseen within Fund Complex: |
14 |
Other
Directorships Held Outside Fund Complex During Past 5 Years: |
N/A |
Independent Directors |
|
Name: |
Stephen
B. Ashley |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1940 |
Current
Position(s) Held with Fund: |
Director,
Audit Committee Member, Governance & Nominating Committee
Member |
Term
of Office & Length of Time Served: |
Indefinite
– Since 1996 |
Principal
Occupation(s) During Past 5 Years: |
Chairman
and Director since 1997; Chief Executive Officer (1997-2019) - Ashley
Companies (property management and investment) |
Number
of Portfolios Overseen within Fund Complex: |
14 |
Other
Directorships Held Outside Fund Complex During Past 5 Years: |
Ashley
Companies since 1997 |
Name: |
Paul
A. Brooke |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1945 |
Current
Position(s) Held with Fund: |
Lead
Independent Director, Audit Committee Member, Governance & Nominating
Committee Member |
Term
of Office & Length of Time Served: |
Indefinite
– Director, Audit Committee Member, Governance & Nominating Committee
Member since 2007; Lead Independent Director since 2017 |
Principal
Occupation(s) During Past 5 Years: |
Managing
Member since 1991 - PMSV Holdings LLC (investments); Managing Member
(2010-2016) - VenBio (investments). |
Number
of Portfolios Overseen within Fund Complex: |
14 |
Other
Directorships Held Outside Fund Complex During Past 5 Years: |
Incyte
Corp. (biotech) (2000-2020); PureEarth (non-profit) since 2012; Cerus
(biomedical) since 2016; Caelum BioSciences (biomedical) since 2018;
Cheyne Capital International (investment)(2000-2017); |
Name: |
John
Glazer |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1965 |
Current
Position(s) Held with Fund: |
Director,
Audit Committee Member, Governance & Nominating Committee
Member |
Term
of Office & Length of Time Served: |
Indefinite
– Director, Audit Committee Member, Governance & Nominating Committee
Member since February 2021 |
Principal
Occupation(s) During Past 5 Years: |
Chief
Executive Officer since 2020 – Oikos Holdings LLC (Single-Family Office);
Head of Corporate Development (2019-2020) – Caelum Biosciences
(pharmaceutical development); Head of Private Investments (2015-2018) – AC
Limited (Single-Family Office) |
Number
of Portfolios Overseen within Fund Complex: |
14 |
Other
Directorships Held Outside Fund Complex During Past 5 Years: |
N/A |
Name: |
Russell
O. Vernon |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1957 |
Current
Position(s) Held with Fund: |
Director,
Audit Committee Member, Governance & Nominating Committee
Chairman |
Term
of Office & Length of Time Served: |
Indefinite
– Director, Audit Committee Member, Governance & Nominating Committee
Member since April 2020; Governance & Nominating Committee Chairman
since November 2020 |
Principal
Occupation(s) During Past 5 Years: |
Founder
and General Partner (2009-2019) – BVM Capital Management (economic
development) |
Number
of Portfolios Overseen within Fund Complex: |
14 |
Other
Directorships Held Outside Fund Complex During Past 5 Years: |
Board
Member, Vice Chairman and President since 2010 – Newburgh Armory Unity
Center (military); Board Member and Executive Director since 2020 –
National Purple Heart Honor Mission, Inc. (military); Board Member, Vice
Chairman (2015-2020) – National Purple Heart Hall of Honor, Inc.
(military) |
Name: |
Chester
N. Watson |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1950 |
Current
Position(s) Held with Fund: |
Director,
Audit Committee Chairman, Governance & Nominating Committee
Member |
Term
of Office & Length of Time Served: |
Indefinite
– Director, Audit Committee Member, Governance & Nominating Committee
Member Since 2012; Audit Committee Chairman since 2013 |
Principal
Occupation(s) During Past 5 Years: |
General
Auditor (2003-2011) - General Motors Company (auto
manufacturer) |
Number
of Portfolios Overseen within Fund Complex: |
14 |
Other
Directorships Held Outside Fund Complex During Past 5 Years: |
Rochester
Institute of Technology (University) since 2005; Hudson Valley Center for
Innovation, Inc. (New Business and Economic Development) since 2019; Town
of Greenburgh, NY Planning Board (Municipal Government) (2015-2019);
|
|
|
Officers: |
|
Name: |
Elizabeth
Craig |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450 |
|
|
Born: |
1987 |
Current
Position(s) Held with Fund: |
Corporate
Secretary |
Term
of Office2 & Length of Time Served: |
Since
2016 |
Principal
Occupation(s) During Past 5 Years: |
Director
of Fund Administration since 2021; Fund Regulatory Administration Manager
(2018-2021); Fund Administration Manager (2015-2018) - Manning &
Napier Advisors, LLC; Corporate Secretary, Director since 2019 –
Manning & Napier Investor Services, Inc.
|
Name: |
Samantha
Larew |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1980 |
Current
Position(s) Held with Fund: |
Chief
Compliance Officer and Anti-Money Laundering Compliance
Officer |
Term
of Office2 & Length of Time Served: |
Chief
Compliance Officer since 2019; Anti-Money Laundering Compliance Officer
since 2018 |
Principal
Occupation(s) During Past 5 Years: |
Co-Director
of Compliance since 2018; Compliance Communications Supervisor (2014-2018)
- Manning & Napier Advisors, LLC & Affiliates; Broker-Dealer
Chief Compliance Officer since 2013; Broker-Dealer Assistant Corporate
Secretary since 2011 – Manning & Napier Investor Services, Inc.;
|
Name: |
Scott
Morabito |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1987 |
Current
Position(s) Held with Fund: |
Vice
President |
Term
of Office2 & Length of Time Served: |
Vice
President since 2019; Assistant Vice President (2017-2019) |
Principal
Occupation(s) During Past 5 Years: |
Managing
Director, Client Service and Business Operations since 2021; Managing
Director of Operations (2019-2021); Director of Funds Group (2017-2019) -
Manning & Napier Advisors, LLC; President, Director since 2018 –
Manning & Napier Investor Services, Inc.; President, Exeter Trust
Company since 2021;
|
Name: |
Jill
Peeper |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1982 |
Current
Position(s) Held with Fund: |
Assistant
Treasurer |
Term
of Office1 & Length of Time Served: |
Assistant
Treasurer since 2023 |
Principal
Occupation(s) During Past 5 Years: |
Mutual
Fund Financial Reporting Manager since 2022 - Manning & Napier
Advisors, LLC; Fund Accounting Manager (2007 – 2022) – State Street
Bank |
Name: |
Troy
Statczar |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1971 |
Current
Position(s) Held with Fund: |
Principal
Financial Officer, Treasurer |
Term
of Office2 & Length of Time Served: |
Principal
Financial Officer and Treasurer since 2020 |
Principal
Occupation(s) During Past 5 Years: |
Senior
Principal Consultant, Fund Officers, since 2020 – ACA Group (formerly
Foreside Financial Group); Director of Fund Administration (2017-2019) -
Thornburg Investment Management, Inc. |
Name: |
Sarah
Turner |
Address: |
290
Woodcliff Drive
Fairport,
NY 14450
|
Born: |
1982 |
Current
Position(s) Held with Fund: |
Chief
Legal Officer; Assistant Corporate Secretary |
Term
of Office2 & Length of Time Served: |
Since
2018 |
Principal
Occupation(s) During Past 5 Years: |
General
Counsel since 2018 - Manning & Napier Advisors, LLC and
affiliates; Counsel (2017-2018) – Harter Secrest and Emery LLP
|
|
Holds
one or more of the following titles for various affiliates: General
Counsel |
| 1 |
Interested
Director, within the meaning of the 1940 Act by reason of his positions
with the Fund’s Advisor, Manning & Napier Advisors, LLC, and
Distributor, Manning & Napier Investor Services,
Inc. |
| 2 |
The
term of office of all officers shall be one year and until their
respective successors are chosen and qualified, or his or her earlier
resignation or removal as provided in the Fund’s
By-Laws. |
Equity
Ownership of Directors as of 12/31/22
Name
of Directors |
|
Dollar
Ranges of Equity Securities in the Series covered by this
SAI |
|
Aggregate
Dollar Range of Equity Securities in All Registered Investment Companies
Overseen by Director in Family of Investment Companies |
Independent
Directors |
|
|
|
|
Stephen
B. Ashley |
|
None |
|
None |
Paul
A. Brooke |
|
None |
|
None |
John
M. Glazer |
|
None |
|
None |
Russell
O. Vernon |
|
None |
|
None
|
Chester
N. Watson |
|
None |
|
None |
|
|
|
|
|
Interested
Director |
|
|
|
|
Paul
J. Battaglia |
|
High
Yield Bond Series – Between $50,001 and $100,000
Real
Estate Series – Between $50,001 and $100,000 |
|
Between
$100,001 and $500,000 |
None of the
Independent Directors have any beneficial ownership interest in the Fund’s
Advisor, Manning & Napier Advisors, LLC or its Distributor,
Manning & Napier Investor Services, Inc.
Board
Responsibilities
The
management and affairs of the Fund and the Series are supervised by the
Directors under the laws of the State of Maryland. The Board of Directors is
responsible for overseeing the Series and each of the Fund’s additional other
series, which include Series not described in this SAI. The Board has approved
contracts, as described herein, under which certain companies provide essential
management services to the Fund.
As with most
mutual funds, the day-to-day business of the Fund, including the management of
risk, is performed by third party service providers, such as the Advisor and
Distributor. The Directors are responsible for overseeing the Fund’s service
providers and, thus, have oversight responsibility with respect to risk
management performed by those service providers. Each service provider is
responsible for one or more discrete aspects of the Fund’s business (e.g., the
Advisor is responsible for the day-to-day management of the Fund’s portfolio
investments) and, consequently, for managing the risks associated with that
business.
The
Directors’ role in risk oversight begins before the inception of a Series, at
which time the Advisor presents the Board with information concerning the
investment objectives, strategies and risks of the Series as well as proposed
investment limitations for the Series. Additionally, the Advisor provides the
Board with an overview of, among other things, its investment philosophy,
brokerage practices and compliance infrastructure. Thereafter, the Board
continues its oversight function with respect to the Fund by monitoring risks
identified during regular and special reports made to the Board, as well as
regular and special reports made to the Audit Committee. In addition to
monitoring such risks, the Board and the Audit Committee oversee efforts by
management and service providers to manage risks to which the Fund may be
exposed.
The Board is
responsible for overseeing the nature, extent and quality of the services
provided to the Fund by the Advisor and receives information about those
services at its regular meetings. In addition, on an annual basis, in connection
with its consideration of whether to renew the Advisory Agreement with the
Advisor, the Board meets with the Advisor to review such services. Among other
things, the Board regularly considers the Advisor’s adherence to the Series’
investment restrictions and compliance with various Fund policies and procedures
and with applicable securities regulations. The Board also reviews information
about the Series’ investments, including, for example, portfolio holdings
schedules and reports on the Advisor’s use of derivatives and illiquid
securities in managing the Series.
The Board
meets regularly with the Fund’s CCO to review and discuss compliance issues and
Fund and Advisor risk assessments. At least annually, the Fund’s CCO provides
the Board with an assessment of the Fund’s Compliance Program reviewing the
adequacy and effectiveness of the Fund’s policies and procedures and those of
its service providers, including the Advisor. The assessment addresses the
operation of the policies and procedures of the Fund and each service provider
since the date of the last report; any material changes to the policies and
procedures since the date of the last report; any recommendations for material
changes to the policies and procedures; and any material compliance matters
since the date of the last report.
The Board
directly, or through one or more of its Committees, receives reports from the
Fund’s service providers that assist the Board in identifying and understanding
operational risks and risks related to the valuation and liquidity of portfolio
securities. The Advisor makes regular reports to the Board concerning
investments for which market quotations are not readily available. Annually, the
independent registered public accounting firm reviews with the Audit Committee
its audit of the Fund’s financial statements, focusing on major areas of risk
encountered by the Fund and noting any significant deficiencies or material
weaknesses in the Fund’s internal controls. Additionally, in connection with its
oversight function, the Board (through its Audit Committee) oversees Fund
management’s implementation of disclosure controls and procedures, which are
designed to ensure that information required to be disclosed by the Fund in its
periodic reports with the SEC is recorded, processed, summarized, and reported
within the required time periods, and the Fund’s internal controls over
financial reporting, which comprise policies and procedures designed to provide
reasonable assurance regarding the reliability of the Fund’s financial reporting
and the preparation of the Fund’s financial statements.
From their
review of these reports and discussions with the Advisor, the CCO, the
independent registered public accounting firm and other service providers, the
Board and the Audit Committee learn in detail about the material risks of the
Fund and the Series, thereby facilitating a dialogue about how management and
service providers identify and mitigate those risks.
The Chair of
the Board, Paul J. Battaglia, is an interested person of the Fund as that term
is defined in the 1940 Act. Paul A. Brooke serves as the Lead Independent
Director. In his role as Lead Independent Director, Mr. Brooke, among other
things: (i) presides over Board meetings in the absence of the Chair of the
Board; (ii) presides over executive sessions of the Independent Directors;
(iii) along with the Chair of the Board, oversees the development of
agendas for Board meetings; (iv) facilitates communication between the
Independent Directors and Fund management, and among the Independent Directors;
(v) serves as a key point person for dealings between the Independent
Directors and Fund management; and (vi) has such other responsibilities as
the Board or Independent Directors determine from time to time.
The Fund has
determined its leadership structure is appropriate given the specific
characteristics and circumstances of the Fund. The Fund made this determination
in consideration of, among other things, the fact that the Directors who are not
interested persons of the Fund (i.e., “Independent Directors”) constitute a
super-majority (at least 75%) of the Board, the fact that the members of each
Committee of the Board are Independent Directors, the amount of assets under
management in the Fund, the number of Series (and classes of shares) overseen by
the Board, and the total number of Directors on the Board. The Board also
believes that its leadership structure facilitates the orderly and efficient
flow of information to the Independent Directors from Fund
management.
However, a
Director must retire from the Board by the end of the calendar year in which the
Director turns 82 provided that the Board may, if it deems doing so to be
consistent with the best interest of the Fund, and with the consent of any
Director that is eligible for retirement, by unanimous vote of the Governance
Committee and majority vote of the full Board, extend the term of such Director
for successive periods of one year.
Individual
Director Qualifications
The Fund has
concluded that each of the Directors should serve on the Board because of their
ability to review and understand information about the Series provided to them
by management, to identify and request other information they may deem relevant
to the performance of their duties, to question management and other service
providers regarding material factors bearing on the management and
administration of the Series, and to exercise their business judgment in a
manner that serves the best interests of the Fund’s shareholders. The Fund has
concluded that each of the Directors should serve as a Director based on their
own experience, qualifications, attributes and skills as described
below.
The Fund has
concluded that Paul J. Battaglia should serve as Director because of his
knowledge of and experience in the financial services industry, and the
knowledge and experience he has gained from serving in various executive and
management positions with the Advisor since 2004. Mr. Battaglia has over 15
years of experience in strategic and fiscal planning and budgeting, financial
reporting, and investor relations.
The Fund has
concluded that Stephen B. Ashley should serve as Director because of the
experience he has gained in his various roles with the Ashley Group, a property
management company, his experience as Chairman and Director of a publicly traded
company, his knowledge of and experience in the financial services industry, and
the experience he has gained serving as Director of the Fund since
1996.
The Fund has
concluded that Paul A. Brooke should serve as Director because of the business
experience he has gained in a variety of roles with different financial and
health care related businesses. Mr. Brooke has served as Chairman and CEO
of Ithaka Acquisition Corp., and following its merger with a medical device
company, the Alsius Corporation, Mr. Brooke served as Chairman. As a
Partner of Morgan Stanley, Mr. Brooke was responsible for global research
and health care strategy. Mr. Brooke was also responsible for health care
investments at Tiger Management, LLC and serves as the Managing Member for a
private investment firm, PMSV Holdings, LLC. In addition, Mr. Brooke was a
Founder and Managing Partner of VenBio, an investment firm focused on
biotechnology. The Fund has also concluded that Mr. Brooke should serve as
a Director because of his knowledge of the financial services industry, and the
experience he has gained serving as Director of the Fund since 2007.
The Fund has
concluded that John M. Glazer should serve as Director because of the experience
he has gained in his more than 25 years of professional experience with asset
allocation, investment strategy, financial strategy and corporate transactions.
Mr. Glazer currently serves as the Chief Executive Officer of a New York based
single-family office that manages well over $1 billion in assets. He is
responsible for oversight of functions that range from investment management to
estate planning and other services. Prior to this, Mr. Glazer served as the Head
of Private Investments for an international family office and oversaw a team
responsible for sourcing, evaluation, execution and management of a
multi-billion dollar global portfolio of illiquid investments. Mr. Glazer also
previously served as the Chief Financial Officer and Executive Vice President of
Corporate Development at Physicians Interactive Holdings, Inc., a digital
marketing firm, where he was responsible for oversight of financial affairs and
corporate transactions. Mr. Glazer has served on many Boards of Directors and
has extensive experience working closely with management teams on strategy,
acquisitions and financing.
The Fund has
concluded that Russell O. Vernon should serve as Director because of the
experience he has gained in his forty years of helping financial companies grow
and adjust to changing conditions. Mr. Vernon formerly served as the founder and
General Partner of BVM Capital and President of Commerce Capital Markets, Inc.
Mr. Vernon also previously served as the Chief Operating Officer at Barrett
Associates, Inc., a money management firm, and as the Director of Investment
Operations at Warburg Pincus Asset Management and Chancellor Capital Management.
In those roles, Mr. Vernon was directly responsible for building a
state-of-the-art infrastructure to support all client, business, product
development and growth needs. He also served on numerous management and
operating committees. Additionally, Mr. Vernon served as a Senior Manager at
Deloitte & Touche, where his consulting practice focused on management,
M&A, financial service and due diligence engagements and issues.
The Fund has
concluded that Chester N. Watson should serve as Director because of the
business experience he has gained as the Chief Audit Executive of General Motors
Company, Lucent Technologies, and Verizon Communications (formerly Bell Atlantic
Corporation) and as an Audit Partner in two major accounting firms, as well as
his experience as a member of the Board of Trustees of Rochester Institute of
Technology, where he serves on the Audit Committee. The Fund has also concluded
that Mr. Watson should serve as a Director because of his knowledge of the
financial services industry, and the experience he has gained serving as
Director of the Fund since 2012.
In its
periodic assessment of the effectiveness of the Board, the Board considers the
complementary individual skills and experience of the individual Directors
primarily in the broader context of the Board’s overall composition so that the
Board, as a body, possesses the appropriate (and appropriately diverse) skills
and experience to oversee the business of the Fund. Moreover, references to the
qualifications, attributes and skills of Directors are pursuant to requirements
of the SEC, do not constitute holding out of the Board or any Director as having
any special expertise or experience, and shall not be deemed to impose any
greater responsibility or liability on any such person or on the Board by reason
thereof.
Board
Committees
There are
two Committees of the Fund’s Board of Directors: the Audit Committee and the
Governance and Nominating Committee.
The Audit
Committee is comprised of the following Independent Directors: Stephen B.
Ashley, Paul A. Brooke, John M. Glazer, Russell O. Vernon and Chester N. Watson
(Chairman). The Audit Committee meets twice annually, and, if necessary, more
frequently. The Audit Committee met twice during the last fiscal year. The Audit
Committee reviews the financial reporting process, the system of internal
control, the audit process, and the Fund’s process for monitoring compliance
with investment restrictions and applicable laws and regulations. All of the
members of the Audit Committee have been determined by the Board to be audit
committee financial experts, as defined by the SEC. The designation of a person
as an audit committee financial expert does not impose on such person any
duties, obligations, or liability that are greater than the duties, obligations,
and liability imposed on such person as a member of the Audit Committee and
Board in the absence of such designation.
The
Governance and Nominating Committee is comprised of the following Independent
Directors: Stephen B. Ashley, Paul A. Brooke, John M. Glazer, Russell O. Vernon
(Chairman) and Chester N. Watson. The Governance and Nominating Committee meets
on an annual basis, and, if necessary, more frequently. The Governance and
Nominating Committee met three times during the last fiscal year. The Governance
and Nominating Committee evaluates candidates’ qualifications for Board
membership and the independence of such candidates from the Advisor and other
principal service providers for the Fund; makes recommendations to the full
Board for nomination for membership on any committees of the Board; reviews as
necessary the responsibilities of any committees of the Board and whether there
is a continuing need for each committee; evaluates whether there is a need for
additional committees of the Board; evaluates whether committees should be
combined or reorganized; and reviews the performance of all Board members. The
Governance and Nominating Committee’s procedures for the consideration of
candidates for Board membership submitted by shareholders are attached as
Appendix B.
The
Interested Director and the officers of the Fund do not receive compensation
from the Fund, except that a portion of the Fund’s CCO’s salary is paid by the
Fund. Each Independent Director receives an annual fee of $70,000. Annual fees
will be calculated quarterly. Each Independent Director receives $10,000 per
regular Board meeting attended, and $3,000 per special or other Board meeting
attended. In addition, the Independent Directors who are members of the Audit
Committee receive $3,000 per Committee meeting attended, and the Independent
Directors who are members of the Governance and Nominating Committee receive
$2,000 per Committee meeting attended. Mr. Watson receives an additional
fee of $2,500 per Audit Committee meeting for serving as Audit Committee
Chairman. Mr. Brooke receives an additional fee of $25,000 for serving as
Lead Independent Director. Mr. Vernon receives an additional fee of $1,500 per
Governance and Nominating Committee meeting for serving as Governance and
Nominating Committee Chairman.
Compensation
Table for Fiscal Year Ended December 31, 2022
Name |
Position with Registrant |
|
Aggregate Compensation from
Fund |
|
Pension |
|
Estimated Benefits upon Retirement |
|
Total
Compensation from Fund and Fund
Complex* |
Samantha
Larew |
CCO |
|
$123,750 |
|
N/A |
|
N/A |
|
$123,750 |
Stephen
B. Ashley |
Director |
|
$135,000 |
|
N/A |
|
N/A |
|
$135,000 |
Paul
A. Brooke |
Lead
Independent Director |
|
$160,000 |
|
N/A |
|
N/A |
|
$160,000 |
John
M. Glazer |
Director |
|
$122,000 |
|
N/A |
|
N/A |
|
$122,000 |
Russell
O. Vernon |
Director,
Governance and Nominating Committee Chair |
|
$139,500 |
|
N/A |
|
N/A |
|
$139,500 |
Chester
N. Watson |
Director,
Audit Committee Chair |
|
$140,000 |
|
N/A |
|
N/A |
|
$140,000 |
* |
As of
December 31, 2022, the Fund Complex consisted of 15
Series. |
As of
January 31, 2023, the directors and officers of the Fund, as a group, owned less
than 1% of the Fund.
Code of Ethics
The Fund,
the Advisor, and the Fund’s principal underwriter have adopted a Code of Ethics
(the “Code of Ethics”) pursuant to Rule 17j-1 under the 1940 Act. The Code of
Ethics is designed to detect and prevent improper personal trading. The Code of
Ethics permits personnel subject to the Code of Ethics to invest in securities,
including securities that may be purchased or held by the Fund, subject to a
number of restrictions and controls. A copy of the Code of Ethics is on file
with the SEC, and is available to the public.
Proxy Voting Policy
The Board of
Directors has delegated proxy voting responsibilities with respect to securities
held by the Series to the Advisor, subject to the Board’s general oversight.
Proxies will be voted in accordance with the proxy voting policies and
procedures attached to this SAI as Appendix C. The proxy voting policies and
procedures may be changed as necessary to remain current with regulatory
requirements and internal policies and procedures.
The Fund is
required to disclose annually the Fund’s complete proxy voting record on Form
N-PX. The Fund’s proxy voting record for the most recent 12 month period ended
June 30th is available upon request by calling 1-800-466-3863 or by writing to
the Fund at Manning & Napier Fund, Inc., P.O. Box 805, Fairport, NY
14450. The Fund’s Form N-PX is also available on the SEC’s website at
www.sec.gov.
Principal Owners and Control Persons
As of
January 31, 2023, the following persons were the only persons who were record
owners (or to the knowledge of the Fund, beneficial owners) of 5% or more of the
shares of a class of a Series. Persons who beneficially own more than 25% of a
Series’ outstanding shares may be deemed to control the Series within the
meaning of the 1940 Act. Shareholders controlling a Series may have a
significant impact on any shareholder vote of the Series. The Fund believes that
most of the shares referred to below were held by the below persons in accounts
for their fiduciary, agency, or custodial customers.
Core
Bond Series - Class I |
NAME
AND ADDRESS |
%
OF CLASS |
|
PERSHING
LLC
1
PERSHING PLZ
JERSEY
CITY, NJ 07399-0002 |
69.81% |
|
ETC AS
TTEE OF SUSAN T BIGGER IRA TRUST – CB
HILTON HEAD, SC 29926 |
9.32% |
|
RAYMOND
JAMES
OMNIBUS
FOR MUTUAL FUNDS HOUSE
ATTN
COURTNEY WALLER
880
CARILLON PKWY
SAINT
PETERSBURG FL 33716-1102 |
6.29% |
|
|
Core
Bond Series - Class S |
NAME
AND ADDRESS |
%
OF CLASS |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMERS
ATTN
MUTUAL FUNDS
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
21.97% |
|
BLAKE
THOMPSON TTEE
2019
BWTC PENSION PLAN
PO BOX
7598
SAINT
PETERSBURG FL 33734 |
11.75% |
|
BNYM I
S TRUST CO CUST IRA
MARGARET
E FALSETTI POA
FBO
DOMONIC FALSETTI MD
LEWISTON,
NY 14092-1912 |
9.02% |
|
BNYM I
S TRUST CO CUST IRA FBO
ROBERT
ANTHONY RASCHKE
PHOENIX
AZ 85032-8611 |
8.10% |
|
BNYM I
S TRUST CO CUST IRA FBO
CAROLYN
JEAN RASCHKE
PHOENIX
AZ 85032-8611 |
8.02% |
|
BNYM I
S TRUST CO CUST IRA FBO
SARA R
BOWDEN
BROOKHEAVEN
GA 30319-1643 |
6.45% |
|
MAHONING
VALLEY CHAPTER NECA
755
BOARDMAN CANFIELD RD STE J7
YOUNGSTOWN
OH 44512-7322 |
5.18% |
|
|
Core
Bond Series - Class W |
NAME
AND ADDRESS |
%
OF CLASS |
|
STATE
STREET BANK & TRUST CO
AS
CUST FBO USIS CLIENTS
ATTN
FUND TRADING TEAM
PO BOX
5082
BOSTON
MA 02206-5082 |
60.08% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMER
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
14.48% |
|
|
Core
Bond Series - Class Z |
NAME
AND ADDRESS |
%
OF CLASS |
|
NORTHWEST
LABORERS
EMPLOYER
TRAINING TRUST
11724
NE 195TH ST STE 300
BOTHELL,
WA 98011-3145 |
78.24% |
|
|
Credit
Series – Class W |
NAME
AND ADDRESS |
%
OF CLASS |
|
STATE
STREET BANK & TRUST CO
AS
CUST FBO USIS CLIENTS
ATTN
FUND TRADING TEAM
PO BOX
5082
BOSTON
MA 02206-5082 |
71.39% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMERS
ATTN
MUTUAL FUNDS
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94101-4151 |
13.67% |
|
|
Diversified
Tax Exempt Series - Class A |
NAME
AND ADDRESS |
%
OF CLASS |
|
TD
AMERITRADE INC
FEBO
OUR CLIENTS
PO BOX
2226
OMAHA
NE 68103-2226 |
26.92% |
|
YAMUNA
EKAMBARAM
TOD
BENEFICIARIES ON FILE
SUBJECT
TO FUND TOD RULES
82
LAKE FOREST BLVD SW
HUTSVILLE,
AL 35824-4011 |
13.98% |
|
PACIFIC
RIM REINSURANCE COMPANY INC
234 N
SHERMAN AVE
CORONA,
CA 92882-1843 |
10.53% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMERS
ATTN
MUTUAL FUNDS
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94101-4151 |
7.72% |
|
LW
MILLER REINSURANCE COMPANY INC
PO BOX
512
LOGAN,
UT 84323-0512 |
6.84% |
|
|
Diversified
Tax Exempt Series - Class W |
NAME
AND ADDRESS |
%
OF CLASS |
|
STATE
STREET BANK & TRUST CO
AS
CUST FBO USIS CLIENTS
ATTN
FUND TRADING TEAM
PO BOX
5082
BOSTON
MA 02206-5082 |
59.34% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMER
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
17.09% |
|
STATE
STREET BANK & TRUST CO
AS
CUST FBO USIS CLIENTS
ATTN
FUND TRADING TEAM
PO BOX
5082
BOSTON
MA 02206-5082 |
7.21% |
|
|
High
Yield Bond Series - Class I |
NAME
AND ADDRESS |
%
OF CLASS |
|
LPL
FINANCIAL
4707
EXECUTIVE DR
SAN
DIEGO, CA 92121-3091 |
18.64% |
|
RAYMOND
JAMES
OMNIBUS
FOR MUTUAL FUNDS HOUSE
ATTN
COURTNEY WALLER
880
CARILLON PKWY
SAINT
PETERSBURG, FL 33716-1102 |
6.48% |
|
PERSHING
LLC
1
PERSHING PLZ
JERSEY
CITY, NJ 07399-0002 |
5.71% |
|
|
High
Yield Bond Series - Class S |
NAME
AND ADDRESS |
%
OF CLASS |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMERS
ATTN
MUTUAL FUNDS
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94101-4151 |
19.10% |
|
MERRILL
LYNCH PIERCE FENNER & SMITH INC
4800
DEAR LAKE DRIVE EAST
JACKSONVILLE,
FL 32246 |
9.25% |
|
TD
AMERITRADE INC
FEBO
OUR CLIENTS
PO BOX
2226
OMAHA,
NE 68103-2226 |
8.76% |
|
MORGAN
STANLEY SMITH BARNEY LLC
FEBO
ITS CUSTOMERS
1 NEW
YORK PLAZA 39TH FLOOR
NEW
YORK NY 10004 |
6.22% |
|
|
High
Yield Bond Series - Class W |
NAME
AND ADDRESS |
%
OF CLASS |
|
STATE
STREET BANK & TRUST CO
AS
CUST FBO USIS CLIENTS
ATTN
FUND TRADING TEAM
PO BOX
5082
BOSTON
MA 02206-5082 |
55.13% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMER
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
16.83% |
|
|
High
Yield Bond Series - Class Z |
NAME
AND ADDRESS |
%
OF CLASS |
|
SEI
PRIVATE TRUST COMPANY
ATTN:
MUTUAL FUNDS
ONE
FREEDOM VALLEY DRIVE
OAKS,
PA 19456 |
37.64% |
|
JOHN
HANCOCK TRUST COMPANY LLC
200
BERKELEY ST
BOSTON,
MA 02116 |
30.07% |
|
VOYA
INSTITUTIONAL TRUST COMPANY
1
ORANGE WAY
WINDSOR
CT 06095-4773 |
6.21% |
|
|
Real
Estate Series - Class I |
NAME
AND ADDRESS |
%
OF CLASS |
|
NATIONAL
FINANCIAL SERVICES LLC
499
WASHINGTON BLVD
JERSEY
CITY, NJ 07310-1995 |
18.52% |
|
PERSHING
LLC
1
PERSHING PLZ
JERSEY
CITY, NJ 07399-0002 |
13.18% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY A/C FBO CUSTOMERS
ATTN
MUTUAL FUNDS
211
MAIN ST
SAN
FRANCISCO, CA 94105-1905 |
12.59% |
|
OLD
NORTH STATE TRUST, LLC
1250
REVOLUTION MILL DR STE 152
GREENSBORO,
NC 27405-5066 |
8.47% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMER
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
8.00% |
|
EMPOWER
TRUST FBO
EMPLOYEE
BENEFITS CLIENTS 401K
8515 E
ORCHARD RD 2T2
GREENWOOD
VILLAGE CO 80111 |
5.52% |
|
|
Real
Estate Series - Class S |
NAME
AND ADDRESS |
%
OF CLASS |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMER
ATTN
MUTUAL FUNDS
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
47.90% |
|
|
Real
Estate Series - Class W |
NAME
AND ADDRESS |
%
OF CLASS |
|
STATE
STREET BANK & TRUST CO
AS
CUST FBO USIS CLIENTS
ATTN
FUND TRADING TEAM
PO BOX
5082
BOSTON
MA 02206-5082 |
49.65% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMER
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
17.23% |
|
|
Real
Estate Series - Class Z |
NAME
AND ADDRESS |
%
OF CLASS |
|
EMPOWER
TRUST FBO
VARIOUS
SUNTRUST OMNIBUS ACCOUNTS
8515 E
ORCHARD RD 2T2
GREENWOOD
VILLAGE CO 80111 |
32.13% |
|
TIAA,
FSB CUST/TTEE FBO:
RETIREMENT
PLANS FOR WHICH
TIAA
ACTS AS RECORDKEEPER
ATTN:
TRUST OPERATIONS
211 N
BROADWAY STE 1000
SAINT
LOUIS MO 63102-2748 |
21.52% |
|
EMPOWER
TRUST FBO
RECORDKEEPING
FOR VARIOUS BENEFIT PLANS
8515 E
ORCHARD RD
GREENWOOD
VILLAGE CO 80111 |
17.17% |
|
FOUNDATION
FOR JEWISH
PHILANTHROPIES
BETH TZEDEK
ENDOWMENT
FUND
2640 N
FOREST RD
GETZVILLE,
NY 14068-1573 |
5.59% |
|
|
Unconstrained
Bond Series - Class I |
NAME
AND ADDRESS |
%
OF CLASS |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO OUR CUSTOMER
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
57.58% |
|
TD
AMERITRADE INC
FEBO
OUR CUSTOMERS
PO BOX
2226
OMAHA
NE 68103-2226 |
26.90% |
|
|
Unconstrained
Bond Series - Class S |
NAME
AND ADDRESS |
%
OF CLASS |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCT FBO CUSTOMERS
ATTN
MUTUAL FUNDS
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
66.25% |
|
TD
AMERITRADE INC
FEBO
OUR CUSTOMERS
PO BOX
2226
OMAHA
NE 68103-2226 |
8.37% |
|
|
Unconstrained
Bond Series - Class W |
NAME
AND ADDRESS |
%
OF CLASS |
|
STATE
STREET BANK & TRUST CO
AS
CUST FBO USIS CLIENTS
ATTN
FUND TRADING TEAM
PO BOX
5082
BOSTON
MA 02206-5082 |
58.58% |
|
CHARLES
SCHWAB & CO INC
SPECIAL
CUSTODY ACCOUNT FBO CUSTOMER
101
MONTGOMERY ST
SAN
FRANCISCO, CA 94104-4151 |
14.92% |
|
The Advisor
Manning
& Napier Advisors, LLC (“MNA” or the “Advisor”), acts as the Fund’s
investment advisor. MNA is indirectly owned and controlled by Callodine MN
Holdings, Inc., which, in turn, is controlled by Callodine Group, LLC and its
founder James Morrow. East Asset Management, LLC, and its owners Terrence and
Kim Pegula, also indirectly hold a substantial interest in Callodine MN
Holdings, Inc. Under the Investment Advisory Agreements (the “Advisory
Agreements”) between the Fund and the Advisor, the Advisor is generally
responsible for supervision of the overall business affairs of the Fund
including supervision of service providers to the Fund and direction of the
Advisor’s directors, officers or employees who may be elected as officers of the
Fund to serve as such.
The Fund
pays the Advisor for the services performed a fee at the annual rate of: 0.25%
of the average daily net assets of each of the Core Bond Series and Credit
Series; 0.30% of the average daily net assets of the Unconstrained Bond Series;
0.50% of the average daily net assets of the Diversified Tax Exempt Series;
0.40% of the average daily net assets of the High Yield Bond Series; and 0.60%
of the average daily net assets of the Real Estate Series. Prior to February 22,
2016, the Advisor received an annual management fee (as a percentage of the
Series’ average daily net assets) of 0.75% for the High Yield Bond Series. Prior
to March 1, 2019, the Advisor received an annual management fee (as a percentage
of the Series’ average daily net assets) of 0.40% for the Core Bond Series,
0.45% for the Unconstrained Bond Series, 0.55% for the High Yield Bond Series,
and 0.75% for the Real Estate Series. As described below, the Advisor is
separately compensated for acting as the Fund’s accounting services agent and
providing administration services to the Series. Prior to March 1, 2017, the
Advisor was also separately compensated for acting as transfer agent and
dividend disbursing agent for the Series.
After its
initial two year term, the continuance of the Advisory Agreement must be
specifically approved at least annually: (i) by the vote of a majority of the
outstanding shares of the Fund or by the Directors; and (ii) by the vote of a
majority of the Directors who are not parties to such Agreement or “interested
persons” (as defined under the 1940 Act) of any party thereto, cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement will terminate automatically in the event of its “assignment” (as
defined under the 1940 Act) and is terminable at any time without penalty by the
Directors or by a majority of the outstanding shares of the Fund on 60 days’
written notice to the Advisor, or by the Advisor on 60 days’ written notice to
the Fund.
The Advisor
has contractually agreed to waive the management fee for the Class W shares. In
addition, pursuant to a separate expense limitation agreement, the Advisor has
contractually agreed to limit each class’s total direct annual operating
expenses (exclusive of Rule 12b-1 Fees (as defined below) and waived Class W
management fees, as applicable (collectively, “excluded expenses”)), as shown
below. The agreements are expected to remain in effect indefinitely, and may not
be amended or terminated by the Advisor without the approval of the
Board.
The Advisor
may receive from a class the difference between the class’s total direct annual
operating expenses (not including excluded expenses) and the class’s contractual
expense limit to recoup all or a portion of its prior fee waivers (other than
Class W management fee waivers) or expense reimbursements made during the
rolling three-year period preceding the recoupment if at any point the total
direct annual operating expenses (not including excluded expenses), are below
the contractual expense limit (i) at the time of the fee waiver and/or expense
reimbursement and (ii) at the time of the recoupment.
Series |
|
Contractual Expense Limitation |
|
Core
Bond Series Class I |
|
|
0.45 |
% |
Core
Bond Series Class S |
|
|
0.45 |
% |
Core
Bond Series Class Z |
|
|
0.30 |
% |
Core
Bond Series Class W |
|
|
0.05 |
% |
Credit
Series Class W |
|
|
0.10 |
% |
Diversified
Tax Exempt Series Class A |
|
|
0.85 |
% |
Series |
|
Contractual Expense Limitation |
|
Diversified
Tax Exempt Series Class W |
|
|
0.35 |
% |
High
Yield Bond Series Class I |
|
|
0.65 |
% |
High
Yield Bond Series Class S |
|
|
0.65 |
% |
High
Yield Bond Series Class Z |
|
|
0.50 |
% |
High
Yield Bond Series Class W |
|
|
0.10 |
% |
Real
Estate Series Class I |
|
|
0.85 |
% |
Real
Estate Series Class S |
|
|
0.85 |
% |
Real
Estate Series Class Z |
|
|
0.70 |
% |
Real
Estate Series Class W |
|
|
0.10 |
% |
Unconstrained
Bond Series Class I |
|
|
0.50 |
% |
Unconstrained
Bond Series Class S |
|
|
0.50 |
% |
Unconstrained
Bond Series Class Z |
|
|
0.35 |
% |
Unconstrained
Bond Series Class W |
|
|
0.05 |
% |
Fees earned,
waived and reimbursed by the Advisor for the periods ending December 31, are as
follows:
|
|
2020 |
|
2021* |
|
2022 |
|
|
Advisory
Fees Paid |
|
Fees
Waived or Expenses Reimbursed |
|
Advisory
Fees Paid |
|
Fees
Waived or Expenses Reimbursed |
|
Advisory
Fees Paid |
|
Fees
Waived or Expenses Reimbursed |
Core
Bond Series |
|
$707,080 |
|
$823,605 |
|
$939,499 |
|
$1,038,707 |
|
$815,416 |
|
$945,551 |
Credit
Series |
|
$308,850 |
|
$402,659 |
|
$498,920 |
|
$532,933 |
|
$619,031 |
|
$637,101 |
Diversified
Tax Exempt Series |
|
$1,202,949 |
|
$1,186,244 |
|
$654,179 |
|
$641,517 |
|
$978,907 |
|
$968,019 |
High
Yield Bond Series |
|
$490,017 |
|
$528,409 |
|
$822,734 |
|
$635,996 |
|
$1,178,109 |
|
$573,382 |
Real
Estate Series |
|
$1,563,337 |
|
$1,162,038 |
|
$1,959,967 |
|
$1,505,089 |
|
$1,879,518 |
|
$1,425,445 |
Unconstrained
Bond Series |
|
$2,112,451 |
|
$2,143,965 |
|
$2,115,194 |
|
$2,117,263 |
|
$2,356,139 |
|
$2,011,749 |
*The Real
Estate Series recouped fees totaling $2,357 during the period ended December 31,
2021.
The Advisor
serves as the Fund’s accounting services agent and provides administration
services to the Fund and its series. The Advisor has contracted with BNY Mellon
Investment Servicing (US) Inc. (“BNY Mellon”), 4400 Computer Drive, Westborough,
MA 01581, to provide sub-accounting and sub-administration services to each
series of the Fund.
Pursuant to
a Master Services Agreement, the Fund pays the Advisor an annual fee related to
fund accounting and administration services in the following amounts: 0.0085% on
the first $25 billion of average daily net assets; 0.0075% on the next $15
billion of average daily net assets; and 0.0065% of average daily net assets in
excess of $40 billion; plus a base fee of $30,400 per Series. For purposes of
calculating the foregoing fees, the assets of the Series are aggregated with the
assets of the Fund’s other series that are not fund-of-fund series.
Additionally, certain transaction and out-of-pocket expenses, including charges
for reporting relating to the Fund’s compliance program, are charged to the
Fund.
For the
fiscal years ended December 31, 2020, 2021 and 2022 the Advisor received
$595,906, $612,379, and $593,666 respectively, from the Series collectively.
These figures include amounts received from certain series no longer included in
this SAI because they have or are scheduled to terminate operations.
The Advisor
and its affiliates may use the Series within discretionary investment accounts.
From time to time, these discretionary accounts may hold a substantial portion
of the outstanding shares of the Series, and transactions in shares of the
Series for such accounts may have an impact upon the size and operations of the
Series. For instance, transactions in shares of the Series for these accounts
may cause the Series’ portfolio turnover rate and transaction costs to rise,
which may negatively affect fund performance and increase the likelihood of
capital gain distributions. In addition, the Series’ assets may be significantly
less during times when these discretionary accounts are not invested in the
Series, which would cause the Series’ remaining shareholders to bear greater
portions of the Series’ fixed operating expenses, subject to any fee waiver then
in effect.
The Distributor
Manning
& Napier Investor Services, Inc. (the “Distributor”), an affiliate of the
Advisor, acts as Distributor of Fund shares and is located at the same address
as the Advisor and the Fund. The Distributor and the Fund are parties to a
distribution agreement (the “Distribution Agreement”) which applies to each
class of shares of the Fund.
The
Distribution Agreement is renewable annually. The continuation of the
Distribution Agreement must be specifically approved by the Board of Directors
and separately by the Directors who are not parties to the Distribution
Agreement or “interested persons” (as defined under the 1940 Act) of any party
to the Distribution Agreement.
The
Distributor will not receive compensation for distribution of Class A, I, W, or
Z shares of each Series.
Payments to Broker-Dealers and Other Financial
Intermediaries
Rule 12b-1 Plan
The Fund’s
Board of Directors has adopted a Distribution and Shareholder Services Plan
pursuant to Rule 12b-1 under the 1940 Act (the “Rule 12b-1 Plan”) whereby Class
S shares of the Core Bond Series, High Yield Bond Series, Real Estate Series and
Unconstrained Bond Series (each a “Rule 12b-1 Plan Class”) are subject to an
annual distribution and shareholder services fee (a “Rule 12b-1 Fee”) of up to
0.25% of the average daily net assets of the applicable Rule 12b-1 Plan
Class.
The Rule
12b-1 Fee is intended to compensate the Distributor for services and expenses
primarily intended to result in the sale of a Rule 12b-1 Plan Class and/or in
connection with the provision of direct client service, personal services,
maintenance of shareholder accounts and reporting services to holders of a Rule
12b-1 Plan Class.
The Rule
12b-1 Plan has been adopted in accordance with the provisions of Rule 12b-1
under the 1940 Act, which regulates circumstances under which an investment
company may directly or indirectly bear expenses relating to the distribution of
its shares. The Rule 12b-1 Plan shall continue in effect for each Rule 12b-1
Plan Class for so long as its continuance is specifically approved at least
annually by votes of the majority of both (i) the Directors of the Fund and
(ii) those Directors of the Fund who are not “interested persons” (as
defined under the 1940 Act) of the Fund, and have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan or any agreements
related to it (referred to as the “Qualified Directors”), cast in person at a
Board of Directors meeting called for the purpose of voting on the Rule 12b-1
Plan. The Rule 12b-1 Plan requires that quarterly written reports of amounts
spent under the Rule 12b-1 Plan and the purposes of such expenditures be
furnished to and reviewed by the Directors. With respect to each Rule 12b-1 Plan
Class, the Rule 12b-1 Plan may not be amended to increase materially the amount
of distribution expenses permitted to be paid under the Rule 12b-1 Plan for such
Rule 12b-1 Plan Class without the approval of shareholders holding a majority of
the outstanding voting securities of such Rule 12b-1 Plan Class. All material
amendments to the Rule 12b-1 Plan must be approved by votes of the majority of
both (i) the Directors of the Fund and (ii) the Qualified
Directors.
With respect
to amounts paid under the Rule 12b-1 Plan for distribution services, the
Distributor may use this fee on any activities or expenses primarily intended to
result in the sale of shares of the Rule 12b-1 Plan Classes, including, but not
limited to, (i) as compensation for the Distributor’s services in
connection with distribution assistance; or (ii) as a source of payments to
financial institutions and intermediaries such as banks, savings and loan
associations, insurance companies and investment counselors, broker-dealers,
mutual fund supermarkets and the Distributor’s affiliates and subsidiaries as
compensation for services or reimbursement of expenses incurred in connection
with distribution assistance.
With respect
to shareholder services, the Distributor may use payments under this aspect of
the Rule 12b-1 Plan to provide or enter into agreements with organizations,
including affiliates of the Distributor (referred to as “Service
Organizations”), who will provide certain shareholder, administrative and
non-distribution services for shareholders of the Rule 12b-1 Plan Classes,
including, but not limited to: (i) maintaining accounts relating to
shareholders that invest in shares of a Rule 12b-1 Plan Class;
(ii) responding to shareholder inquiries relating to the services performed
by Distributor and/or Service Organizations; (iii) responding to inquiries
from shareholders concerning their investment in shares of the Rule 12b-1 Plan
Classes; (iv) assisting shareholders in changing dividend options, account
designations and addresses; (v) providing information periodically to
shareholders showing their position in shares of the Rule 12b-1 Plan Classes;
(vi) forwarding shareholder communications from the Fund such as proxies,
shareholder reports, annual reports, and dividend distribution and tax notices
to shareholders; (vii) processing purchase, exchange and redemption
requests from shareholders and placing orders with the Fund or its service
providers; (viii) arranging for bank wires; (ix) processing dividend
payments from the Fund on behalf of shareholders; (x) preparing tax reports;
(xi) providing sub-accounting services; and (xii) providing such other similar
non-distribution services as the Fund or Distributor may reasonably request to
the extent that the Service Organization is permitted to do so under applicable
laws or regulations. The Distributor may also use this fee for payments to
financial institutions and intermediaries such as banks, savings and loan
associations, insurance companies and investment counselors, broker-dealers,
mutual fund supermarkets and the Distributor and/or Service Organizations’
affiliates and subsidiaries as compensation for such services.
Generally,
the Rule 12b-1 Fee paid under the Rule 12b-1 Plan will not be retained by the
Distributor but will instead be reallowed to various financial intermediaries
and Service Organizations that enter into distribution and/or shareholder
servicing agreements with the Distributor. The Rule 12b-1 Plan and class
structure of the Fund permit the Fund to allocate an amount of fees to a
financial intermediary or Service Organization based on the level of
distribution and/or shareholder services it agrees to provide. The Distributor
is free to make additional payments out of its own assets to promote the sale of
Fund shares.
Payments
under the Rule 12b-1 Plan are made as described above regardless of the
Distributor’s actual cost of providing the services and may be used to pay the
Distributor’s overhead expenses. If the cost of providing the services under the
Rule 12b-1 Plan is less than the payments received, the unexpended portion of
the fees may be retained as profit by the Distributor.
The tables
below shows the fees paid under the Rule 12b-1 Plan for the Series for the
fiscal year ended December 31, 2022.
Series |
|
Class |
| Fees Paid
in 2022 |
| Fees Retained by Distributor
in 2022 |
Core
Bond Series |
|
S |
|
$7,520
|
|
$3,510 |
High
Yield Bond Series |
|
S |
|
$112,620
|
|
$1,948 |
Real
Estate Series |
|
S |
|
$98,483
|
|
$1,304 |
Unconstrained
Bond Series |
|
S |
|
$63,406
|
|
$9,469 |
Other
Payments by the Fund
The Fund may
enter into agreements with financial intermediaries pursuant to which the Fund
may pay financial intermediaries for non-distribution related sub-transfer
agency, administrative, sub-accounting, and other shareholder services in an
annual amount not to exceed 0.15% of the average daily net assets of the Class I
and Class S shares of the Core Bond Series, High Yield Bond Series, Real Estate
Series, and Unconstrained Bond Series. Payments made pursuant to such agreements
are generally based on the current assets and/or number of accounts of the
Series attributable to the financial intermediary. Any payments made pursuant to
such agreements may be in addition to, rather than in lieu of, any Rule 12b-1
Fee payable under the Rule 12b-1 Plan of the Fund.
Payments
by the Advisor and/or its Affiliates
The Advisor
may use its own resources to engage in activities that may promote the sale of
the Series’ shares, including payments, or other forms of incentives such as
discounted fees for products or services of affiliates, to third parties who
provide services such as shareholder servicing, marketing support, and
distribution assistance to the Series. These fees or other incentives are in
addition to any payments made to financial intermediaries by the Fund. The level
of payments made to financial intermediaries may be a fixed fee or based upon
one or more of the following factors: gross sales, current assets and/or number
of accounts of the Series attributable to the financial intermediary, the
particular type of Series, or other measures as agreed to in writing by the
Advisor, the Distributor and/or their affiliates and the financial
intermediaries or any combination thereof. The amount of these payments is
determined at the discretion of the Advisor, the Distributor and/or their
affiliates from time to time and may be different for different financial
intermediaries based on, for example, the nature of the services provided by the
financial intermediary.
The
Distributor may from time to time and from its own resources pay or allow
additional discounts or promotional incentives in the form of cash or other
compensation (including merchandise or travel) to financial intermediaries and
it is free to make additional payments out of its own assets to promote the sale
of Fund shares. The Advisor may also, from its own resources, defray or absorb
costs relating to distribution, including compensation of employees who are
involved in distribution. These payments or discounts may be substantial but are
paid or discounted by the Advisor or its affiliates, not by the Series or their
shareholders. Such payments may provide an incentive for the financial
intermediary to make shares of a Series available to its customers and may allow
a Series greater access to the financial intermediary’s customers, and may
create a conflict of interest by influencing the financial intermediary to
recommend a Series over another investment.
Transfer Agent, Dividend Disbursing Agent,
Custodian, Independent Registered Public Accounting Firm, and
Counsel
The transfer
agent and dividend disbursing agent for the Fund is BNY Mellon. Transfer agent
fees are charged to the Fund on a per account basis.
The
custodian for the Fund is The Bank of New York Mellon (the “Custodian”), 135
Santilli Highway, Everett, MA 02149. The Custodian holds cash, securities, and
other assets of the Fund as required by the 1940 Act. The Custodian may, at its
own expense, employ one or more sub-custodians on behalf of the Fund, provided
that it shall remain liable for all its duties as custodian. The foreign
sub-custodians will act as custodian for the foreign securities held by the
Fund.
PricewaterhouseCoopers
LLP (“PwC”), with offices at 300 Madison Avenue, New York, NY 10017, serves as
the independent registered public accounting firm for all the Series. In
addition to providing audit services, PwC assists in the preparation and review
of, and signs as paid preparer, the Series’ federal and New York State tax
returns and provides assistance on certain non-audit matters. The financial
highlights for the respective Series included in the Prospectuses and the
financial statements contained in the Annual Reports and incorporated by
reference into this SAI for the fiscal year ended December 31, 2022 have been
audited by PwC.
Morgan,
Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103, serves as
legal counsel to the Fund.
Paul
Hastings LLP, 101 California Street, 48th Floor, San Francisco, CA
94111, serves as legal counsel to the Independent Directors.
Purchases and Redemptions
Check Acceptance Policy. The Fund
reserves the right to reject certain forms of payment for share purchases. The
Fund maintains a check acceptance policy for share purchases. Checks must be
made payable to the Manning & Napier Fund, Inc. and must be in U.S.
dollars. The Fund will not accept cash, third party checks, starter checks,
travelers checks, credit card checks, or money orders. Investments that are
received in an unacceptable form will be returned.
Investors Outside the U.S. The Fund
does not generally accept investments by non-U.S. persons or U.S. persons living
outside the U.S. Investments from U.S. persons living outside the U.S. may be
accepted if the U.S. person maintains a physical address within the U.S. or
utilizes an APO or similar address. Non-U.S. persons may be permitted to invest
under certain limited circumstances.
Payment for shares redeemed. Payment
for shares presented for redemption may be delayed more than seven days only for
(1) any period (a) during which the NYSE is closed other than customary weekend
and holiday closings or (b) during which the SEC determines that trading on the
NYSE is restricted; (2) for any period during which the SEC determines that an
emergency exists as a result of which (a) disposal by the Fund of securities
owned by it is not reasonably practicable or (b) it is not reasonably
practicable for the Fund to determine the value of its net assets; or (3) for
such other periods as the SEC may by order permit.
The Fund may
make payment for shares redeemed in part by giving you portfolio securities. As
a redeeming shareholder, you will pay transaction costs to dispose of these
securities. In addition, you will continue to be subject to the risks of any
market fluctuation in the value of the securities until they are sold. An
in-kind distribution of portfolio securities could include illiquid securities.
Illiquid securities may not be able to be sold quickly or at a price that
reflects full value, or there may not be a market for such securities, which
could cause you to realize losses on the security if the security is sold at a
price lower than that at which it had been valued.
The Fund has
made an election pursuant to Rule 18f-1 under the 1940 Act committing itself to
pay in cash all requests for redemption by any shareholder of record of a
Series, limited in amount with respect to each shareholder during any 90-day
period to the lesser of (1) $250,000 or (2) 1% of the net asset value of the
Series at the beginning of such period.
Other Information about Purchases and
Redemptions. The Fund has authorized a number of brokers to accept
purchase and redemption orders on its behalf, and these brokers are authorized
to designate other intermediaries to accept purchase and redemption orders on
the Fund’s behalf. Orders placed with an authorized financial intermediary will
be processed at the share price of the appropriate Series next computed after
they are received in good order by the financial intermediary or its designee.
Accordingly, for you to receive the current business day’s share price, your
order must be received by an authorized financial intermediary or its designee
in good order before the close of regular trading on the NYSE. Your financial
intermediary is responsible for transmitting requests and delivering funds to
the Series on a timely basis.
Portfolio Managers
This section
includes information about the investment professionals that serve on the
Series’ Portfolio Management Teams, including information about the dollar range
of Fund shares they own, how they are compensated, and other accounts they
manage. The share ownership information is current as of December 31,
2022.
Name
and Title |
|
Fund
Management Role |
|
Dollar
Ranges of Equity Securities Beneficially Owned by the
Portfolio Manager in the Series covered by this
SAI* |
|
Aggregate
Dollar Range of Equity Securities Beneficially Owned
by the Portfolio Manager in all Manning &
Napier Fund Series* |
Elizaveta
Akselrod,
Senior
Analyst |
|
Member
of the Diversified Tax Exempt Series Portfolio Management Teams |
|
None |
|
Between
$10,001 and $50,000 |
Marc
Bushallow, CFA, Managing Director of Fixed Income |
|
Member
of Core Bond Series, Credit Series, High Yield Bond Series, Diversified
Tax Exempt Series, and Unconstrained Bond Series Portfolio Management
Teams |
|
Unconstrained
Bond Series – between $500,001 and $1,000,000 |
|
Between
$500,001 and $1,000,000 |
Bradley
Cronister, CFA |
|
Member
of the Core Bond Series and Unconstrained Bond Series Portfolio Management
Teams |
|
Core
Bond Series – between $10,001 and $50,000
Unconstrained
Bond Series – between $10,001 and $50,000 |
|
Between
$100,001 and $500,000 |
Scott
Friedman, CFA, Senior Analyst |
|
Member
of the High Yield Bond Series Portfolio Management Team |
|
Core
Bond Series – between $10,001 and $50,000
High
Yield Bond Series – between $10,001 and $50,000 |
|
Between
$100,001 and $500,000 |
R.
Keith Harwood,
Director
of Credit Research |
|
Member
of Core Bond Series, Credit Series, High Yield Bond Series, and
Unconstrained Bond Series Portfolio Management Teams |
|
None |
|
Between
$500,001 and $1,000,000 |
Name
and Title |
|
Fund
Management Role |
|
Dollar
Ranges of Equity Securities Beneficially Owned by the
Portfolio Manager in the Series covered by this
SAI* |
|
Aggregate
Dollar Range of Equity Securities Beneficially Owned
by the Portfolio Manager in all Manning &
Napier Fund Series* |
Joseph
R. Rydzynski, CFA, Senior Analyst |
| Member
of Real Estate Series Portfolio Management Team |
|
Real
Estate Series – between $100,001 and $500,000 |
|
Between
$100,001 and $500,000 |
Corey
A. Van Lare,
Senior
Analyst |
|
Member
of Real Estate Series Portfolio Management Team |
|
Real
Estate Series – between $100,001 and $500,000 |
|
Between
$100,001 and $500,000 |
* |
Dollar
ranges do not reflect interests owned by a Portfolio Manager in collective
investment trust funds managed by the Advisor, which may have investment
objectives, policies and strategies substantially similar to those of a
series of the Fund. |
Compensation
The
portfolio managers of the Series are compensated by the Advisor. The Advisor’s
portfolio manager compensation system includes a base salary and a bonus. The
bonus system has been established to provide a strong incentive for portfolio
managers to make investment decisions in the best interest of clients. Bonuses
may be several times the level of base salary for successful portfolio
managers.
Portfolio
managers are assigned a competitive target bonus. The target bonus may be
increased or decreased based on the absolute and relative performance of the
portfolio manager’s overall portfolio over 12- and 36-month time periods. The
bonus calculation could result in a negative, zero, or positive bonus. If the
bonus calculation results in a negative bonus, then the negative balance is
carried forward until the portfolio manager achieves a positive bonus to offset
the negative balance.
Portfolio
managers may also receive awards under the Manning & Napier P-Share Plan.
Recipients who receive an award under this plan will receive P-Shares, which are
notional interests, that will entitle the recipient, upon vesting of the award,
to have an opportunity to receive a cash bonus that is determined based on the
profits of Callodine MN Holdings, Inc., Manning & Napier's parent company,
over the course of the applicable performance period for such
award.
In addition,
certain portfolio managers may be awarded equity ownership in Callodine MN
Holdings, Inc., or the Series. Equity ownership represents an important
incentive for senior investment professionals and serves as another method to
align the long-term interest of portfolio managers with the best interest of
clients.
Management
of Other Portfolios
The
following table provides information about other portfolios managed by members
of the Series’ Portfolio Management Teams. The information provided is current
as of December 31, 2022. The information below excludes the Series in this
SAI.
Name |
|
Registered Investment
Companies |
|
Other
Pooled Investment Vehicles |
|
Other
Accounts |
Number
of Accts |
|
Total
Assets* |
|
Number
of Accts |
|
Total
Assets |
|
Number
of Accts |
|
Total
Assets |
Elizaveta
Akselrod |
|
0 |
|
0 |
|
0 |
|
0 |
|
62 |
|
$
332,750,069 |
Marc
Bushallow |
|
4 |
|
$
1,757,212,883 |
|
4 |
|
$
1,080,658,653 |
|
4,013 |
|
$
8,399,033,263 |
Bradley
Cronister |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
Scott
Friedman |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
R.
Keith Harwood |
|
0 |
|
0 |
|
0 |
|
0 |
|
207 |
|
$
509,441,424 |
Joseph
R. Rydzynski |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
Corey
A. Van Lare |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
* |
At
times assets of the Other Accounts in column 3 may be invested in series
of the Fund. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
of Conflicts of Interest
The
Advisor’s management of other accounts may give rise to potential conflicts of
interest in connection with its management of the Series' investments, on the
one hand, and the investments of the other accounts, on the other. The Advisor
may, for example, have an incentive to favor accounts with higher fees or
performance-based fees in the allocation of investment opportunities. However,
the Advisor has established policies and procedures to ensure that the purchase
and sale of securities among all accounts it manages are fairly and equitably
allocated.
For the
Fund, other pooled investment vehicles, and Other Accounts that have authorized
it to do so, the Advisor trades equities, futures and most fixed income
investments on an aggregate basis to improve execution efficiency and minimize
associated costs. Order management systems automatically allocate aggregated
orders according to pre-trade determinations using a random or pro-rata based
methodology. Each account that participates in an aggregated order will
participate at the average security price with all transaction costs shared on a
pro-rata basis.
The
Advisor’s trading function for equities and certain fixed income investments is
separate from its research function. The individuals who recommend and approve
trades are not the same individuals who execute trades. For equities and most
fixed income securities, traders exercise individual discretion in order to get
the best possible execution on trades, but guidelines as to security, position
size, and price are set by the analysts recommending the security. Proprietary
and third-party reporting systems monitor implementation of trading programs
across the account base. For certain fixed income trades, however, the trading
and research functions overlap. This means that Fixed Income Analysts select and
execute trades in certain bonds, primarily securitized debt, within these
portfolios.
To remove
the incentive for unauthorized trading and speculation in client accounts,
members of the Trading Department are not compensated for profits generated,
since the Research Department issues the investment directives and members of
the Trading Department merely implement them. In addition, the compensation
program for Research and Fixed Income Analysts, including those analysts that
execute trades, is based on the returns of the particular security recommended
or overall investment approach, rather than on the performance of any individual
account.
For certain
fixed income investments, the Series’ Portfolio Management Team identifies the
securities to be purchased and a member of the team executes the trades. The
team members do not execute trades in the types of securities held in the
Series’ portfolios for other accounts managed by the Advisor. Rather, when
similar fixed income securities are to be purchased for such other accounts,
traders exercise individual discretion in order to get the Advisor’s clients the
best possible execution on trades, but strict guidelines as to security,
position size, and price are set by the analysts recommending the security. With
respect to any account of the Advisor not receiving a full allocation of a
primary market issuance, the Advisor may purchase more bonds on behalf of such
account in the secondary market. In such case, the purchase price of such bonds
will likely be different than that of the initial issue.
Portfolio Transactions and Brokerage
In
connection with the Advisor’s duty to arrange for the purchase and sale of
securities held in the Series’ portfolios, the Advisor shall select the
broker-dealers that, in the Advisor’s judgement, implement the Fund’s policy to
achieve best execution. The Fund defines best execution as the prompt and
efficient execution of securities trades at the most favorable price under the
circumstances.
In directing
trades to a given broker, the Advisor will consider the reliability, integrity
and financial condition of the broker, the size and difficulty in executing the
order and the value of the expected contribution of the broker to the investment
performance of the Series on a continuing basis.
The Advisor
also considers whether a broker provides brokerage and/or research services to
the Fund and/or other accounts of the Advisor and may allocate orders for the
Series to those brokers that provide such benefits. Such allocations shall be in
such amounts and proportions as the Advisor shall determine, and the Advisor
shall report on such allocations regularly to the Fund.
Examples of
research services for which the Advisor deploys the Fund’s commission dollars
include research reports and other information on the economy, industries,
sectors, groups of securities, individual companies, statistical information,
political developments, technical market action, pricing and appraisal services,
credit analysis, risk measurement analysis, performance and other analysis. The
research which the Advisor or the Sub-Advisor receives for the Series’ brokerage
commissions, whether or not useful to the Fund, may be useful to the Advisor or
the Sub-Advisor in managing the accounts of the Advisor’s or the Sub-Advisor’s
other advisory clients. Similarly, the research received for the commissions of
such accounts may be useful to the Fund.
Commissions
paid to such brokers may be higher than another broker would have charged if a
good faith determination is made by the Advisor that the commission is
reasonable in relation to the services provided, viewed in terms of either that
particular transaction or the Advisor’s holistic experience with that broker for
transactions executed across the Advisor’s client base.
A portion of
the Fund’s portfolio transactions may be transacted with primary market makers
acting as principal on a net basis, with no brokerage commissions being paid by
the Series. Such principal transactions may, however, result in a profit to
market makers. In certain instances the Advisor may make purchases of
underwritten issues for the Series at prices which include underwriting
fees.
The Fund
will direct futures trades to one or more Futures Commissions Merchants
(“FCMs”), as selected by the Advisor.
Brokerage
Commissions Paid in Last Three Fiscal Years. The following Series paid
brokerage commissions during the past three fiscal years.
|
|
2020 |
|
2021 |
|
2022 |
Core
Bond Series |
|
N/A |
|
$3,620 |
|
N/A |
Credit
Series |
|
$10,699 |
|
$7,883 |
|
N/A |
Diversified
Tax Exempt Series |
|
$3,228 |
|
N/A |
|
$933 |
High
Yield Bond Series |
|
$7,290 |
|
$4,197 |
|
$18,114 |
Real
Estate Series |
|
$200,671 |
|
$82,376 |
|
$183,103 |
Unconstrained
Bond Series |
|
$69,000 |
|
$48,250 |
|
$62,304 |
The
brokerage commissions paid by the Series will vary year to year based on the
market environment and the investment opportunities identified over the year, as
well as the level of cash flows.
The
brokerage commissions paid by the High Yield Bond Series were higher in 2022
compared to the two prior fiscal years due to increased utilization of ETFs to
manage cash flows. The brokerage commissions paid by the Real Estate Series were
higher in 2020 and 2022 due to increased trading activity in the portfolio
during those fiscal years.
There were
no brokerage commissions paid to affiliates during the last three fiscal
years.
Directed
Brokerage. For the fiscal year ended December 31, 2022, the following Series
paid brokerage commissions to brokers because of research services provided as
follows:
Series |
|
Brokerage
Commissions Directed in Connection with Research Services Provided |
|
Aggregate
Dollar Amount of Transactions for which
Such Commissions Were Paid |
Core
Bond Series |
|
N/A |
|
N/A
|
Credit
Series |
|
N/A |
|
N/A
|
Diversified
Tax Exempt Series |
|
$933 |
|
$7,083,057
|
High
Yield Bond Series |
|
$18,114 |
|
$101,905,678
|
Real
Estate Series |
|
$183,103 |
|
$285,827,636
|
Unconstrained
Bond Series |
|
$62,304 |
|
$7,001,162,364
|
Regular
Broker-Dealers. The Series’ regular broker-dealers are (i) the ten
broker-dealers that received the greatest dollar amount of brokerage commissions
from the Series; (ii) the ten broker-dealers that engaged as principal in the
largest dollar amount of portfolio transactions of the Series; and (iii) the ten
broker-dealers that sold the largest dollar amount of Series shares. During the
fiscal year ended December 31, 2022, the following Series purchased securities
issued by their regular broker-dealers:
|
Regular
Broker-Dealer |
Value
of Portfolio Holdings as of 12/31/22 (000’s omitted) |
Core
Bond Series |
BANK
OF AMERICA CORPORATION |
$2,240
|
|
CITIGROUP
GLOBAL MARKETS INC. |
$2,321 |
|
JPMORGAN
CHASE & CO. |
$3,752 |
|
|
|
Unconstrained
Bond Series |
BANK
OF AMERICA CORPORATION |
$6,422
|
|
GOLDMAN
SACHS GROUP, INC. |
$12,452
|
|
JPMORGAN
CHASE & CO. |
$10,037
|
|
MORGAN
STANLEY |
$4,969
|
|
|
|
High
Yield Bond Series |
JEFFERIES
& COMPANY INC. |
$3,250 |
|
|
|
Credit
Series |
BANK
OF AMERICA CORPORATION |
$3,638
|
|
CITIGROUP
GLOBAL MARKETS INC. |
$3,789
|
|
JPMORGAN
CHASE & CO. |
$7,644
|
Net Asset Value
The NAV is
determined on each day that the NYSE is open for trading. In determining the NAV
of each Series’ shares, common stocks that are traded OTC or listed on national
securities exchanges other than the NASDAQ National Market System are valued at
the last sale price on the exchange on which each stock is principally traded as
of the close of the NYSE (generally 4:00 p.m., Eastern time), or, in the absence
of recorded sales, at the closing bid prices on such exchanges. Securities
listed on the NASDAQ National Market System are valued in accordance with the
NASDAQ Official Closing Price. Unlisted securities that are not included in such
NASDAQ National Market System are valued at the quoted bid prices in the OTC
market. Short-term investments that mature in sixty days or less may be valued
at amortized cost, which approximates market value. Futures, and related options
on futures, traded on U.S. and foreign exchanges are valued at the exchange
settlement price, or if no settlement price is available, at the last sale price
as of the close of the exchange on the valuation date. Investments in registered
investment companies are valued at their NAV per share on valuation date. All
securities initially expressed in foreign currencies will be converted to U.S.
dollars using current exchange rates. Short securities positions are accounted
for at value, using the same method of valuation described above. Securities and
other assets for which market quotations are not readily available or are
unreliable, such as in the case of a security value that has been materially
affected by events occurring after the relevant market closes, are valued at
fair value. The Board has designated the Advisor as the Series’ valuation
designee to make all fair value determinations with respected to the Series’
portfolio investments, subject to the Board’s oversight. The Advisor has adopted
and implemented policies and procedures to be followed when making fair value
determinations, and it has established a Valuation Committee through which the
Advisor makes fair value determinations The Advisor’s determination of a
security’s fair value price often involves the consideration of a number of
subjective factors, and is therefore subject to the unavoidable risk that the
value that is assigned to a security may be higher or lower than the security’s
value would be if a reliable market quotation for the security was readily
available. The Advisor may use a pricing service to obtain the value of the
Fund’s portfolio securities where the prices provided by such pricing service
are believed to reflect the fair market value of such securities. The methods
used by the pricing service and the valuations so established will be reviewed
by the Advisor. Several pricing services are available, one or more of which may
be used by the Advisor. A change in a pricing service or a material change in a
pricing methodology for investments with no readily available market quotations
will be reported to the Fund’s Board by the Advisor in accordance with certain
requirements.
The foreign
securities held by the Series may be listed on foreign exchanges that trade on
days when the NYSE is not open and the Series do not price their shares. As a
result, the NAV of a Series may change at a time when shareholders are not able
to purchase or redeem shares.
Information About Fund Operations
The Fund
does not expect to hold annual meetings of shareholders, but special meetings of
shareholders may be held under certain circumstances. Shareholders of the Fund
retain the right, under certain circumstances, to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with
shareholder communications in connection with the meeting. The shares of the
Fund have equal rights with regard to voting, redemption and liquidations. The
Fund’s shareholders will vote in the aggregate and not by Series or class except
as otherwise expressly required by law or when the Board of Directors determines
that the matter to be voted upon affects only the interests of the shareholders
of a Series or a Class. Income, direct liabilities and direct operating expenses
of a Series will be allocated directly to the Series, and general liabilities
and expenses of the Fund will be allocated among the Series in proportion to the
total net assets of the Series by the Board of Directors. The holders of shares
have no preemptive or conversion rights. Shares when issued are fully paid and
non-assessable and do not have cumulative voting rights.
A Series may
participate in class action lawsuits relating to its portfolio securities. The
proceeds from the settlements of such lawsuits will generally be recorded as
assets of the Series in accordance with generally accepted accounting
principles. If the Series is liquidated prior to its recognition of the proceeds
of a settlement, however, the proceeds may be donated to charity in the event
that the officers of the Series reasonably determine that, after taking into
account all fees, costs and expenses reasonably related to the administration
and distribution of such proceeds, including, but not limited to, administrative
fees, mailing fees, and personnel costs, the amount to be distributed to each
applicable shareholder is either zero or a de minimis amount.
As part of
the Board’s considerations when approving the liquidation and dissolution of a
Series, the Board may approve the establishment of a liquidating trust for the
completion of the liquidation and distribution of a Series’ assets to
shareholders. This may be the case when, for example, the Series has assets and
liabilities which are contingent in nature that remain on the liquidation date.
If the Board establishes a liquidating trust for a Series, the Fund would grant,
assign and deliver to the liquidating trust all of the Series’ rights and
interests in any assets it currently owns and the liquidating trust would assume
all of such Series’ current liabilities and obligations, thereby allowing the
Series to fully liquidate and dissolve. The Board would also appoint one or more
trustees of the liquidation trust, which may be a Fund officer and/or an
employee of the Advisor or an affiliate of the Advisor, to oversee the
operations and administration of the trust. The Series’ former shareholders on
the liquidation date will be the beneficiaries of the liquidating
trust.
The
liquidating trust will exist solely for the purposes of holding, liquidating and
disposing of any assets received by it and paying or settling the liabilities
and obligations of the Series. All claims, expenses, charges, liabilities, and
obligations of the liquidating trust will be paid out of the trust’s assets. On
an interim or annual basis and only to the extent the liquidating trust receives
assets that are in excess of its costs, fees and expenses, the trust will
distribute those assets on a pro rata basis to the beneficiaries of the trust,
provided however, that the liquidating trustee may determine, in the exercise of
its reasonable judgment and in good faith, that the pro-rata amount of the
assets due to each beneficiary would not be practicable to distribute to the
beneficiaries because such amount is either zero or de minimis after taking into
account the fees, costs and expenses reasonably related to the administration
and distribution of such proceeds, including, but not limited to, administrative
fees, mailing fees, and personnel costs. In such instance, such amounts will be
distributed to a reputable non-profit charitable organization unaffiliated with
the Fund or Adviser.
Although the
Fund’s use of a liquidating trust for a Series is unique to the facts and
circumstances relating to the reasons for which it was created, a liquidating
trust would generally have a term of three years from the date upon which it was
established. At the conclusion of the liquidating trust’s term, the trust will
distribute any remaining assets to the beneficiaries of the trust, subject to
the cost considerations discussed above, and the trust would then liquidate. If
a Series (or its corresponding liquidating trust) were to receive any assets
after the liquidation of the liquidating trust, such assets will be considered
to be assets of the Fund generally and will be distributed by the Fund among all
currently active series of the Fund on a pro rata basis.
Federal
Taxes
The
following is only a summary of certain U.S. federal income tax considerations
generally affecting the Series and their shareholders, and is not intended as a
substitute for careful tax planning. The summary is very general, and does not
address investors subject to special rules, such as investors who hold shares
through an individual retirement account (“IRA”), 401(k) or other tax-advantaged
account. Shareholders are urged to consult their tax advisers with specific
reference to their own tax situations, including their state, local and foreign
tax liabilities.
The
following discussion of certain U.S. federal income tax consequences is based on
the Code, and the regulations issued thereunder as in effect on the date of this
SAI. New legislation, certain administrative changes, or court decisions may
significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated
herein.
Qualification as a Regulated Investment
Company. Each Series has elected and intends to qualify each year to be treated
as a RIC under Subchapter M of the Code. As such, each Series expects to be
relieved of federal income tax on investment company taxable income and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) timely distributed to shareholders.
In order to
qualify as a RIC each Series must, among other things, (1) derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies and net income derived from an interest in a qualified
publicly traded partnership (the “Qualifying Income Test”); and (2) diversify
its holdings so that at the close of each quarter of each taxable year (i) at
least 50% of the value of the Series’ total assets is represented by cash and
cash items, U.S. Government securities, securities of other RICs, and other
securities limited, in respect of any one issuer, to a value not greater than 5%
of the value of the Series’ total assets and 10% of the outstanding voting
securities of such issuer, including the equity securities of a qualified
publicly traded partnership and (ii) not more than 25% of the value of its
assets is invested, including through corporations in which the Series owns a
20% or more voting stock interest, in the securities of any one issuer (other
than U.S. Government securities or securities of any other RIC) or the
securities (other than the securities of other RICs) of two or more issuers that
are engaged in the same or similar trades or businesses or related trades or
businesses if the Series owns at least 20% of the voting power of each such
issuer, or the securities of one or more qualified publicly traded partnerships
(the “Asset Test”). These requirements may restrict the degree to which the
Series may engage in certain hedging transactions and may limit the range of the
Series’ investments. If a Series qualifies as a RIC, it will not be subject to
federal income tax on the part of its net investment income and net realized
capital gains, if any, which it timely distributes each year to the
shareholders, provided the Series distributes at least the sum of (a) 90% of its
investment company taxable income (generally, net investment income plus the
excess, if any, of net short-term capital gain over net long-term capital loss)
and (b) 90% of its net exempt interest income (the excess of (i) its tax-exempt
interest income over (ii) certain deductions attributable to that income), if
any (the “Distribution Requirement”).
If a Series
fails to satisfy the Qualifying Income or Asset Test in any taxable year, it may
be eligible for relief provisions if the failures are due to reasonable cause
and not willful neglect and if a penalty tax is paid with respect to each
failure to satisfy the applicable requirements. If these relief provisions are
not available to a Series for any year in which it fails to qualify as a RIC,
all of its taxable income will be subject to tax at the regular corporate rate
(currently 21%) without any deduction for distributions to shareholders, and its
distributions (including capital gains distributions) generally will be taxable
as ordinary income dividends to its shareholders, subject to the dividends
received deduction for corporate shareholders and lower tax rates on qualified
dividend income for individual shareholders. In addition, a Series could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before requalifying as a RIC under the Code. If a
Series determines that it will not qualify for treatment as a RIC, the fund will
establish procedures to reflect the anticipated tax liability in the NAV of such
Series. To requalify for treatment as a RIC in a subsequent taxable year, the
Series would be required to satisfy the RIC qualification requirements for that
year and to distribute any earnings and profits from any year in which the
Series failed to qualify for tax treatment as a RIC. If a Series failed to
qualify as a RIC for a period greater than two taxable years, it would generally
be required to pay a Series-level tax on certain net built-in gains recognized
with respect to certain of its assets upon a disposition of such assets within
five years of qualifying as a RIC in a subsequent year. The Board reserves the
right not to maintain the qualification of a Series for treatment as a RIC if it
determines such course of action to be beneficial to shareholders.
Each Series
may elect to treat part or all of any “qualified late year loss” as if it had
been incurred in the succeeding taxable year in determining the Series’ taxable
income, net capital gain, net short-term capital gain, and earnings and profits.
A “qualified late year loss” generally includes net capital loss, net long-term
capital loss, or net short-term capital loss incurred after October 31 of the
current taxable year (commonly referred to as “post-October losses”) and certain
other late-year losses.
The
treatment of capital loss carryovers for RICs is similar to the rules that apply
to individuals which provide that such losses are carried over by a Series
indefinitely. Thus, if a Series has a “net capital loss” (that is, capital
losses in excess of capital gains), the excess of the Series’ net short-term
capital losses over its net long-term capital gains is treated as a short-term
capital loss arising on the first day of such Series’ next taxable year, and the
excess (if any) of the Series’ net long-term capital losses over its net
short-term capital gains is treated as a long-term capital loss arising on the
first day of the Series’ next taxable year. In addition, the carryover of
capital losses may be limited under the general loss limitation rules if the
Series experiences an ownership change as defined in the Code.
Each Series
is treated as a separate corporation for federal income tax purposes. Each
Series therefore is considered to be a separate entity in determining its
treatment under the rules for RICs described herein. Losses in one Series do not
offset gains in another and the requirements (other than certain organizational
requirements) for qualifying RIC status are determined at the Series level
rather than at the Fund level.
Excise Tax. If a Series fails to
distribute in a calendar year at least 98% of its ordinary income for the year
and 98.2% of its capital gain net income (the excess of short- and long
term-capital gains over short- and long- term capital losses) for the one-year
period ending October 31 of that year (and any retained amount from the prior
year), the Series will be subject to a nondeductible 4% federal excise tax on
the undistributed amounts. For this purpose, any ordinary income or capital gain
net income retained by a Series and subject to corporate income tax will be
considered to have been distributed. Each Series generally intends to make
sufficient distributions to avoid imposition of this tax, but can make no
assurances that such tax liability will be entirely eliminated. A Series may in
certain circumstances be required to liquidate investments in order to make
sufficient distributions to avoid federal excise tax liability at a time when
the investment advisor might not otherwise have chosen to do so, and liquidation
of investments in such circumstances may affect the ability of the Series to
satisfy the requirements for qualification as a RIC.
Distributions and Dividends. Each
Series receives income generally in the form of dividends and interest on its
investments. This income, plus net short-term capital gains, if any, less
expenses incurred in the operation of a Series, constitutes its net investment
income from which dividends may be paid to you. All or a portion of the net
investment income distributions may be treated as qualified dividend income
(currently eligible for the reduced maximum capital gains rate to individuals of
up to 20% (lower rates apply to individuals in lower tax brackets)) to the
extent that a Series receives and reports its dividends as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States, in each case subject to certain limitations). A dividend will not be
treated as qualified dividend income to the extent that: (i) the shareholder has
not held the shares on which the dividend was paid for more than 60 days during
the 121-day period that begins on the date that is 60 days before the date on
which the shares become “ex-dividend” (which is the day on which declared
distributions (dividends or capital gains) are deducted from a Series’ assets
before it calculates the NAV) with respect to such dividend, (ii) a Series has
not satisfied similar holding period requirements with respect to the securities
it holds that paid the dividends distributed to the shareholder, (iii) the
shareholder is under an obligation (whether pursuant to a short sale or
otherwise) to make related payments with respect to substantially similar or
related property, or (iv) the shareholder elects to treat such dividend as
investment income under section 163(d)(4)(B) of the Code. Therefore,
if you lend your shares in a Series, such as pursuant to securities lending
arrangement, you may lose the ability to treat dividends (paid while the shares
are held by the borrower) as qualified dividend income. Distributions that
a Series receives from an underlying fund taxable as a RIC or from a REIT will
be treated as qualified dividend income only to the extent so reported by such
underlying fund or REIT. Certain Series’ investment strategies may limit their
ability to make distributions eligible to be treated as qualified dividend
income.
It is
expected that dividends received by a Series from a REIT and distributed from
that Series to a shareholder generally will be taxable to the shareholder as
ordinary income. A Series’ participation in the lending of securities may affect
the amount, timing, and character of distributions to its shareholders. If a
Series participates in a securities lending transaction and receives a payment
in lieu of dividends (a “substitute payment”) with respect to securities on loan
in a securities lending transaction, such income generally will not constitute
qualified dividend income and thus dividends attributable to such income will
not be eligible for taxation at the rates applicable to qualified dividend
income for individual shareholders and will not be eligible for the dividends
received deduction for corporate shareholders.
Any
distribution by a Series may be taxable to shareholders regardless of whether it
is received in cash or in additional shares. The Series may derive capital gains
and losses in connection with sales or other dispositions of the portfolio
securities. Distributions from net short-term capital gains will generally be
taxable to shareholders as ordinary income. Distributions from net long-term
capital gains will be taxable to shareholders as long-term capital gains
regardless of how long the shares have been held. The current maximum tax rate
on long-term capital gains for non-corporate shareholders is 20% (lower rates
apply to individuals in lower tax brackets). Distributions from capital gains
are generally made after applying any available capital loss
carryforwards.
Certain
distributions may qualify for a dividends received deduction for corporate
shareholders, subject to holding period requirements and other limitations under
the Code, if they are attributable to the qualifying dividend income a Series
receives from a domestic corporation and are properly reported by that Series.
Certain Series’ investment strategies may limit their ability to make
distributions eligible for the dividends received deduction for corporate
shareholders.
A RIC that
receives business interest income may pass through its net business interest
income for purposes of the tax rules applicable to the interest expense
limitations under Section 163(j) of the Code. A RIC’s total “Section 163(j)
Interest Dividend” for a tax year is limited to the excess of the RIC’s business
interest income over the sum of its business interest expense and its other
deductions properly allocable to its business interest income. A RIC may, in its
discretion, designate all or a portion of ordinary dividends as Section 163(j)
Interest Dividends, which would allow the recipient shareholder to treat the
designated portion of such dividends as interest income for purposes of
determining such shareholder’s interest expense deduction limitation under
Section 163(j) of the Code. This can potentially increase the amount of a
shareholder’s interest expense deductible under Section 163(j) of the Code. In
general, to be eligible to treat a Section 163(j) Interest Dividend as interest
income, you must have held your shares in a Series for more than 180 days during
the 361-day period beginning on the date that is 180 days before the date on
which the share becomes ex-dividend with respect to such dividend. Section
163(j) Interest Dividends, if so designated by a Series, will be reported to
your financial intermediary or otherwise in accordance with the requirements
specified by the IRS.
Each Series
(or its administrative agent) will inform you of the amount of your ordinary
income, exempt-interest dividends, qualified dividend income, and capital gain
distributions shortly after the close of each calendar year. Shareholders who
have not held the Series’ shares for a full year should be aware that the Series
may designate and distribute, as ordinary income or capital gain, a percentage
of income that is not equal to the actual amount of such income earned during
the period of investment in the Series. A distribution will reduce a Series’ NAV
per share and may be taxable to you as ordinary income or capital gain even
though, from an investment standpoint, the distribution may constitute a return
of capital. Therefore, an investor should consider the tax consequences of
purchasing shares immediately before a distribution record date.
U.S. REITs
in which a Series invests often do not provide complete and final tax
information to the Series until after the time that the Series issues the tax
reporting statement. As a result, the Series may at times find it necessary to
reclassify the amount and character of its distributions to you after it issues
your tax reporting statement. When such reclassification is necessary, the
Series will send you a corrected, final Form 1099-DIV to reflect the
reclassified information. If you receive a corrected Form 1099-DIV, use the
information on this corrected form, and not the information on the previously
issued tax reporting statement, in completing your tax returns.
MLPs in
which a Series invests deliver Schedules K-1 to the Series to report their share
of income, gains, losses, deductions and credits of the MLP. These Schedules K-1
may be delayed and may not be received until after the time that a Series issues
its tax reporting statements. As a result, a Series may at times find it
necessary to reclassify the amount and character of its distributions to you
after it issues you your tax reporting statement.
If a Series’
distributions exceed its earnings and profits (as calculated for federal income
tax purposes) for a taxable year, all or a portion of the distributions made in
the same taxable year may be re-characterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder’s cost basis in the Series’ shares and result
in higher reported capital gain or lower reported capital loss when those shares
on which a distribution was received are sold.
Distributions
declared in October, November, or December to shareholders of record during
those months and paid during the following January are treated as if they were
received by each shareholder on December 31 of the year in which they are
declared for tax purposes.
U.S.
individuals with income exceeding $200,000 ($250,000 if married and filing
jointly) are subject to a 3.8% tax on their “net investment income,” including
interest, dividends, and capital gains (including capital gains realized on the
sale, exchange, or redemption of shares of the Series).
Sale, Exchange, or Redemption of
Shares. Any gain or loss recognized on a sale, exchange or redemption of
shares of a Series by a shareholder who holds a Series’ share as capital assetes
will generally, for individual shareholders, be treated as a long-term capital
gain or loss if the shares have been held for more than one year and otherwise
generally will be treated as short-term capital gain or loss. However, if shares
on which a shareholder has received a net capital gain distribution or
exempt-interest dividend are subsequently sold, exchanged or redeemed and such
shares have been held for six months or less, any loss recognized will be
treated as long-term capital loss to the extent of the net capital gain
distribution or disallowed to the extent of the exempt-interest dividend. In
addition, the loss realized on a sale or other disposition of shares will be
disallowed to the extent a shareholder repurchases (or enters into a contract or
option to repurchase) shares within a period of 61 days (beginning 30 days
before and ending 30 days after the disposition of the shares). This loss
disallowance rule will apply to shares received through the reinvestment of
dividends during the 61-day period. If disallowed, the loss will be reflected in
an upward adjustment to the basis of the shares acquired. For tax purposes, an
exchange of shares of a Series for shares of a different Series is the same as a
sale.
Each Series
(or its administrative agent) is required to report to the IRS and furnish its
shareholders the cost basis information for purchases of Series shares. In
addition to the requirement to report the gross proceeds from the sale of
shares, the Series is also required to report the cost basis information for
such shares and indicate whether the shares had a short-term or long-term
holding period. Each time a shareholder sells shares, the Series will permit the
shareholder to elect from among several IRS accepted cost basis methods,
including the average cost basis method. In the absence of an election, the
Series will use the average cost basis method. The cost basis method elected by
the shareholder (or the cost basis method applied by default) for each sale of
shares may not be changed after the settlement date of each such sale of shares.
Shareholders should consult their tax advisors to determine the best IRS
accepted cost basis method for their tax situation and to obtain more
information about how cost basis reporting applies to them. Shareholders also
should carefully review any cost basis information provided to them by the
Series and make any additional basis, holding period or other adjustments that
are required when reporting these amounts on their federal income tax
returns.
Tax Exempt Shareholders. Tax-exempt
entities are not permitted to offset losses from one trade or business against
the income or gain of another trade or business. Certain net losses incurred
prior to January 1, 2018 are permitted to offset gain and income created by an
unrelated trade or business, if otherwise available. Under current law, the
Series serve to block unrelated business taxable income (“UBTI”) from being
realized by their tax-exempt shareholders. Notwithstanding the foregoing, a
tax-exempt shareholder could realize UBTI by virtue of its investment in a
Series if shares in the Series constitute debt-financed property in the hands of
the tax-exempt shareholder within the meaning of section 514(b) of the Code.
Certain types of income received by a Series from REITs, REMICs, taxable
mortgage pools or other investments may cause the Series to designate some or
all of its distributions as “excess inclusion income.” To Series shareholders
such excess inclusion income may (i) constitute taxable income, as UBTI for
those shareholders who would otherwise be tax-exempt such as IRAs, 401(k)
accounts, Keogh plans, pension plans and certain charitable entities; (ii) not
be offset by otherwise allowable deductions for tax purposes; (iii) not be
eligible for reduced U.S. withholding for non-U.S. shareholders even from tax
treaty countries; and (iv) cause the Series to be subject to tax if certain
“disqualified organizations” as defined by the Code are Series shareholders.
Tax-exempt investors sensitive to UBTI, especially charitable remainder trusts,
are strongly encouraged to consult their tax advisers prior to investment in the
Series regarding this issue and IRS pronouncements regarding the treatment of
such income in the hands of such investors.
A Series’
shares held in a tax-qualified retirement account will generally not be subject
to federal taxation on income and capital gains distribution from the Series
until a shareholder begins receiving payments from its retirement account.
Because each shareholder’s tax situation is different, shareholders should
consult their tax advisor about the tax implications of an investment in the
shares of the Series.
Taxation of Series Investments. A
Series’ transactions in certain futures contracts, options, forward contracts,
foreign currencies, foreign debt securities, foreign entities treated as
investment companies, derivative securities, and certain other investment and
hedging activities will be subject to special tax rules. In a given case, these
rules may affect a Series’ ability to qualify as a RIC, accelerate income to the
Series, defer losses to the Series, require adjustments in the holding periods
of the Series’ assets, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Series’ income. These rules
could therefore affect the amount, timing, and character of distributions to
shareholders. Each Series will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Series.
With respect
to investments in zero coupon securities which are sold at original issue
discount (“OID”) and thus do not make periodic cash interest payments, a Series
will be required to include as part of its current income the imputed interest
on such obligations even though the Series has not received any interest
payments on such obligations during that period. Because each Series intends to
distribute all of its net investment income to its shareholders, a Series may
have to sell securities to distribute such imputed income which may occur at a
time when the Advisor or Sub-Advisor would not have chosen to sell such
securities and which may result in a taxable gain or loss. Special rules apply
if a Series holds inflation-indexed bonds. Generally, all stated interest on
such bonds is recorded as income by the Series under its regular method of
accounting for interest income. The amount of positive inflation adjustment,
which results in an increase in the inflation-adjusted principal amount of the
bond, is treated as OID. The OID is included in the Series’ gross income ratably
during the period ending with the maturity of the bond, under the general OID
inclusion rules. The amount of the Series’ OID in a taxable year with respect to
a bond will increase the Series’ taxable income for such year without a
corresponding receipt of cash, until the bond matures. As a result, the Series
may need to use other sources of cash to satisfy its distributions for such
year. The amount of negative inflation adjustments, which results in a decrease
in the inflation-adjusted principal amount of the bond, reduces the amount of
interest (including stated interest, OID, and market discount, if any) otherwise
includible in the Series’ income with respect to the bond for the taxable
year.
Any market
discount recognized on a bond is taxable as ordinary income. A market discount
bond is a bond acquired in the secondary market at a price below redemption
value or adjusted issue price if issued with original issue discount. Absent an
election by a Series to include the market discount in income as it accrues,
gain on its disposition of such an obligation will be treated as ordinary income
rather than capital gain to the extent of the accrued market
discount.
A Series may
invest in inflation-linked debt securities. Any increase in the principal amount
of an inflation-linked debt security will be OID, which is taxable as ordinary
income and is required to be distributed, even though the Series will not
receive the principal, including any increase thereto, until maturity. As noted
above, if a Series invests in such securities it may be required to liquidate
other investments, including at times when it is not advantageous to do so, in
order to satisfy its distribution requirements and to eliminate any possible
taxation at the Series level.
Each Series
is required for federal income tax purposes to mark-to-market and recognize as
income for each taxable year its net unrealized gains and losses on certain
futures and options contracts subject to section 1256 of the Code (“Section 1256
Contracts”) as of the end of the year as well as those actually realized during
the year. Gain or loss from Section 1256 Contracts on broad-based indexes
required to be marked to market will be 60% long-term and 40% short-term capital
gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. A Series may be required to defer the recognition
of losses on Section 1256 Contracts to the extent of any unrecognized gains on
offsetting positions held by the Series. It is anticipated that any net gain
realized from the closing out of Section 1256 Contracts with respect to
securities may be considered gain from the sale of securities and therefore may
be qualifying income for purposes of the Qualifying Income Test (as described
above). Each Series intends to distribute to shareholders at least annually any
net capital gains which have been recognized for federal income tax purposes,
including unrealized gains at the end of the Series’ fiscal year on futures or
options transactions. Such distributions are combined with distributions of
capital gains realized on the Series’ other investments and shareholders are
advised on the nature of the distributions.
Certain
investments in other underlying funds and ETFs may not produce qualifying income
for purposes of the Qualifying Income Test or satisfy the “Asset Test” (as
described above) for a Series to maintain its status as a RIC under the Code.
For example, investments in ETFs that track physical commodities and which are
treated as grantor trusts under the Code do not generate qualifying income and
are not considered “securities” for purposes of the Asset Test (as described
above). If one or more underlying funds and/or ETFs generates more
non-qualifying income for purposes of the Qualifying Income Test than a Series'
portfolio management expects, it could cause the Series to inadvertently fail
the Qualifying Income Test, thereby causing the Series to inadvertently fail to
qualify as a RIC under the Code.
In general,
for purposes of the Qualifying Income Test described above, income derived from
a partnership will be treated as qualifying income only to the extent such
income is attributable to items of income of the partnership that would be
qualifying income if realized directly by a Series. However, 100% of the net
income derived from an interest in a “qualified publicly traded partnership”
(generally, a partnership (i) interests in which are traded on an established
securities market or are readily tradable on a secondary market or the
substantial equivalent thereof, (ii) that derives at least 90% of its income
from the passive income sources specified in section 7704(d) of the Code, and
(iii) that generally derives less than 90% of its income from the same sources
as described in the Qualifying Income Test) will be treated as qualifying
income. In addition, although in general the passive loss rules of the Code do
not apply to RICs, such rules do apply to a RIC with respect to items
attributable to an interest in a qualified publicly traded
partnership.
A Series may
invest in certain MLPs which may be treated as qualified publicly traded
partnerships. Income from qualified publicly traded partnerships is qualifying
income for purposes of the Qualifying Income Test (as describe above), but a
Series’ investment in one or more of such qualified publicly traded partnerships
is limited under the Asset Test (as describe above) to no more than 25% of the
value of a Series’ assets. The Series will monitor their investments in such
qualified publicly traded partnerships in order to ensure compliance with the
Qualifying Income and Asset Tests.
“Qualified
publicly traded partnership income” within the meaning of Section 199A(e)(5) of
the Code is eligible for a 20% deduction by non-corporate taxpayers. “Qualified
publicly traded partnership income” is generally income of a “publicly traded
partnership” that is not treated as a corporation for U.S. federal income tax
purposes that is effectively connected with such entity’s trade or business, but
does not include certain investment income. A “publicly traded partnership” for
purposes of this deduction is not the same as a “qualified publicly traded
partnership” as defined above. This deduction, if allowed in full, equates to a
maximum effective tax rate of 29.6% (37% top rate applied to income after 20%
deduction). The Tax Act does not contain a provision permitting a RIC, such as a
Series, to pass the special character of this income through to its
shareholders. Currently, direct investors in entities that generate “qualified
publicly traded partnership income” will enjoy the lower rate, but investors in
RICs that invest in such entities will not. It is uncertain whether future
technical corrections or administrative guidance will address this issue to
enable a Series to pass through the special character of “qualified publicly
traded partnership income” to shareholders.
A Series may
invest in U.S. REITs. Investments in REIT equity securities may require a Series
to accrue and distribute income not yet received. To generate sufficient cash to
make the requisite distributions, a Series may be required to sell securities in
its portfolio (including when it is not advantageous to do so) that it otherwise
would have continued to hold. A Series’ investments in REIT equity securities
may at other times result in a Series’ receipt of cash in excess of the REIT’s
earnings; if a Series distributes these amounts, these distributions could
constitute a return of capital to such Series’ shareholders for federal income
tax purposes. Dividends paid by a REIT, other than capital gain distributions,
will be taxable as ordinary income up to the amount of the REIT’s current and
accumulated earnings and profits. Capital gain dividends paid by a REIT to a
Series will be treated as long-term capital gains by the Series and, in turn,
may be distributed by the Series to its shareholders as a capital gain
distribution. Dividends received by a Series from a REIT generally will not
constitute qualified dividend income or qualify for the dividends received
deduction. If a REIT is operated in a manner such that it fails to qualify as a
REIT, an investment in the REIT would become subject to double taxation, meaning
the taxable income of the REIT would be subject to federal income tax at the
regular corporate rate without any deduction for dividends paid to shareholders
and the dividends would be taxable to shareholders as ordinary income (or
possibly as qualified dividend income) to the extent of the REIT’s current and
accumulated earnings and profits.
“Qualified
REIT dividends” (i.e., ordinary REIT dividends other than capital gain dividends
and portions of REIT dividends designated as qualified dividend income eligible
for capital gain tax rates) are eligible for a 20% deduction by non-corporate
taxpayers. This deduction, if allowed in full, equates to a maximum effective
tax rate of 29.6% (37% top rate applied to income after 20% deduction).
Distributions by a Series to its shareholders that are attributable to qualified
REIT dividends received by the Series and which the Series properly reports as
“section 199A dividends,” are treated as “qualified REIT dividends” in the hands
of non-corporate shareholders. A section 199A dividend is treated as a qualified
REIT dividend only if the shareholder receiving such dividend holds the
dividend-paying RIC shares for at least 46 days of the 91-day period beginning
45 days before the shares become ex-dividend, and is not under an obligation to
make related payments with respect to a position in substantially similar or
related property. A Series is permitted to report such part of its dividends as
section 199A dividends as are eligible, but is not required to do so.
If a Series
invests directly in certain investments, such as commodities and
commodity-linked derivative instruments, such investments may not produce
qualifying income to the Series. To the extent a Series invests in such
investments directly, the Series will seek to restrict its income from such
instruments that do not generate qualifying income to a maximum of 10% of its
gross income (when combined with their other investments that produce
non-qualifying income).
If a Series
fails to qualify as a RIC and to avail itself of certain relief provisions, it
would be subject to tax at the regular corporate rate without any deduction for
distributions to shareholders, and its distributions would generally be taxable
as dividends. Please see the SAI for a more detailed discussion, including the
availability of certain relief provisions for certain failures by a Series to
qualify as a RIC.
Foreign Investments. Transactions by a
Series in foreign currencies and forward foreign currency contracts will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Series (i.e., may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Series and defer losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require a Series to mark-to-market certain types of positions in its
portfolio (i.e., treat them as if they were closed out) which may cause the
Series to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the RIC distribution requirements
for avoiding income and excise taxes. Each Series intends to monitor its
transactions, intends to make the appropriate tax elections, and intends to make
the appropriate entries in its books and records when it acquires any foreign
currency or forward foreign currency contract in order to mitigate the effect of
these rules so as to prevent disqualification of the Series as a RIC and
minimize the imposition of income and excise taxes.
The U.S.
Treasury Department has authority to issue regulations that would exclude
foreign currency gains from the Qualifying Income Test described above if such
gains are not directly related to the Series’ business of investing in stock or
securities (or options and futures with respect to stock or securities).
Accordingly, regulations may be issued in the future that could treat some or
all of a Series’ non-U.S. currency gains as non-qualifying income, thereby
potentially jeopardizing the Series’ status as a RIC for all years to which the
regulations are applicable.
If a Series
owns shares in certain foreign investment entities, referred to as “passive
foreign investment companies” or “PFICs,” the Series will be subject to one of
the following special tax regimes: (i) the Series is liable for U.S. federal
income tax, and an additional interest charge, on a portion of any “excess
distribution” from such foreign entity or any gain from the disposition of such
shares, even if the entire distribution or gain is paid out by the Series as a
dividend to its shareholders; (ii) if the Series were able and elected to treat
a PFIC as a “qualified electing fund” or “QEF,” the Series would be required
each year to include in income, and distribute to shareholders in accordance
with the distribution requirements set forth above, the Series’ pro rata share
of the ordinary earnings and net capital gains of the PFIC, whether or not such
earnings or gains are distributed to the Series; or (iii) the Series may be
entitled to mark-to-market annually shares of the PFIC, and in such event would
be required to distribute to shareholders any such mark-to-market gains in
accordance with the distribution requirements set forth above. The Series may
have to distribute to its shareholders certain “phantom” income and gain the
Series accrues with respect to its investment in a PFIC in order to satisfy its
distribution requirement and to avoid imposition of the 4% excise tax described
above. The Series will make the appropriate tax elections, if possible, and take
any additional steps that are necessary to mitigate the effect of these rules.
Amounts included in income each year by a Series arising from a QEF election
will be “qualifying income” under the Qualifying Income Test (as described
above) even if not distributed to the Series, if the Series derives such income
from its business of investing in stock, securities or currencies.
Foreign Taxes. Dividends and interest
received by a Series may be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield on
its securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate these taxes. Foreign countries generally do not impose taxes
on capital gains with respect to investments by foreign investors. If more than
50% of the value of a Series’ total assets at the close of its taxable year
consists of stock or securities of foreign corporations, the Series will be
eligible to, and may, file an election with the IRS that will enable
shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign and U.S. possessions’ income taxes paid by the Series. If
the Series were to make such an election, such Series would treat those taxes as
dividends paid to its shareholders. Each shareholder would be required to
include a proportionate share of those taxes in gross income as income received
from a foreign source and to treat the amount so included as if the shareholder
had paid the foreign tax directly. The shareholder may then either deduct the
taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit (subject to significant limitations) against the shareholder’s federal
income tax. If a Series makes the election, it will report annually to its
shareholders the respective amounts per share of the Series’ income from sources
within, and taxes paid to, foreign countries and U.S. possessions.
Foreign tax
credits, if any, received by a Series as a result of an investment in another
RIC (including an ETF which is taxable as a RIC) will not be passed through to
you unless the Series qualifies as a “qualified fund-of-funds” under the Code.
If a Series is a “qualified fund-of-funds” it will be eligible to file an
election with the IRS that will enable it to pass along these foreign tax
credits to its shareholders.
A Series
will be treated as a “qualified fund-of-funds” if at least 50% of the value of
the Series’ total assets (at the close of each quarter of the Series’ taxable
year) is represented by interests in other RICs.
To the
extent a Series invests in an underlying fund (including an ETF) that indicates
that such underlying fund intends to satisfy the tax requirements to be treated
as a RIC under the Code, the Series may be able to receive the benefits of a
“qualified fund-of-funds” as described above. If, however, an underlying fund
loses its status as a RIC under the Code, a Series would no longer be permitted
to count its investment in such underlying fund for purposes of satisfying the
requirements to be a “qualified fund-of-funds.” In addition, an underlying fund
that loses its status as a RIC would be treated as a regular corporation subject
to entity level taxation prior to making any distributions to a Series which
would affect the amount, timing and character of such income distributed by an
underlying fund to a Series.
Backup Withholding. In certain cases,
a Series will be required to withhold and remit to the U.S. Treasury 24% of any
taxable dividends, capital gain distributions and redemption proceeds paid to a
shareholder (1) who has failed to provide a correct and properly certified
taxpayer identification number, (2) who is subject to backup withholding by the
IRS, (3) who has not certified to the Series that such shareholder is not
subject to backup withholding, or (4) who has failed to certify that he or she
is a U.S. person (including a U.S. resident alien). This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder’s U.S. federal income tax liability (provided the appropriate
information is furnished to the IRS).
Foreign Shareholders. Foreign
shareholders (i.e., nonresident alien individuals and foreign corporations,
partnerships, trusts and estates) are generally subject to U.S. withholding tax
at the rate of 30% (or a lower tax treaty rate) on distributions derived from
net investment income. A Series may, under certain circumstances, report all or
a portion of a dividend as an “interest-related dividend” or a “short-term
capital gain dividend,” which would generally be exempt from this 30% U.S.
withholding tax, provided certain other requirements are met. Short-term capital
gain dividends received by a nonresident alien individual who is present in the
U.S. for a period or periods aggregating 183 days or more during the taxable
year are not exempt from this 30% withholding tax. Gains realized by foreign
shareholders from the sale or other disposition of shares of a Series generally
are not subject to U.S. taxation, unless the recipient is an individual who is
physically present in the U.S. for 183 days or more per year. Foreign
shareholders who fail to provide an applicable IRS form may be subject to backup
withholding on certain payments from a Series. Backup withholding will not be
applied to payments that are subject to the 30% (or lower applicable treaty
rate) withholding tax described in this paragraph. Different tax consequences
may result if the foreign shareholder is engaged in a trade or business within
the United States. In addition, the tax consequences to a foreign shareholder
entitled to claim the benefits of a tax treaty may be different than those
described above.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
a Series is required to withhold 30% of certain ordinary dividends it pays to
shareholders that fail to meet prescribed information reporting or certification
requirements. In general, no such withholding will be required with respect to a
U.S. person or non-U.S. person that timely provides the certifications required
by a Series or its agent on a valid IRS Form W-9 or applicable series of IRS
Form W-8, respectively. Shareholders potentially subject to withholding include
foreign financial institutions (“FFIs”), such as non-U.S. investment funds, and
non-financial foreign entities (“NFFEs”). To avoid withholding under FATCA, an
FFI generally must enter into an information sharing agreement with the IRS in
which it agrees to report certain identifying information (including name,
address, and taxpayer identification number) with respect to its U.S. account
holders (which, in the case of an entity shareholder, may include its direct and
indirect U.S. owners), and an NFFE generally must identify and provide other
required information to a Series or other withholding agent regarding its U.S.
owners, if any. Such non-U.S. shareholders also may fall into certain exempt,
excepted or deemed compliant categories as established by regulations and other
guidance. A non-U.S. shareholder resident or doing business in a country that
has entered into an intergovernmental agreement with the U.S. to implement FATCA
will be exempt from FATCA withholding provided that the shareholder and the
applicable foreign government comply with the terms of the agreement.
A non-U.S.
entity that invests in a Series will need to provide the Series with
documentation properly certifying the entity’s status under FATCA in order to
avoid FATCA withholding. Foreign shareholders are urged to consult their own tax
advisors concerning the applicability of the U.S. withholding tax and the proper
withholding form(s) to be submitted to the Series.
Potential Reporting Requirements.
Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss
of $2 million or more for an individual shareholder or $10 million or more for a
corporate shareholder, the shareholder must file with the IRS a disclosure
statement on Form 8886. Direct shareholders of portfolio securities are in many
cases excepted from this reporting requirement, but under current guidance,
shareholders of a RIC such as the Series are not excepted. Future guidance may
extend the current exception from this reporting requirement to shareholders of
most or all RICs. The fact that a loss is reportable under these regulations
does not affect the legal determination of whether the taxpayer’s treatment of
the loss is proper. Shareholders should consult their tax advisors to determine
the applicability of these regulations in light of their individual
circumstances.
Additional Tax Information Concerning the
Diversified Tax Exempt Series. The Diversified Tax Exempt Series is
designed to provide shareholders with current tax exempt interest income and is
not intended to constitute a balanced investment program. If at least 50% of the
value of the Diversified Tax Exempt Series’ total assets at the close of each
quarter of its taxable year consists of debt obligations that generate interest
exempt from U.S. Federal income tax, then the Diversified Tax Exempt Series may
qualify to pass through to its shareholders the tax-exempt character of its
income from such debt obligations by paying exempt interest dividends. The
Diversified Tax Exempt Series intends to qualify and to provide shareholders
with income exempt from U.S. Federal income tax in the form of exempt-interest
dividends.
With respect
to the Diversified Tax Exempt Series, a portion of its dividends may be exempt
in a shareholder's state of residence. The Diversified Tax Exempt Series will
report the portion of its dividends that are derived from interest on
obligations in each respective state. Because of these tax exemptions, an
investment in the Diversified Tax Exempt Series may not be a suitable investment
for retirement plans and other tax-exempt investors. The rules described above
do not apply to corporate shareholders and such shareholders should consult
their tax advisor concerning the application of these rules to their state tax
reporting.
Certain
recipients of Social Security and railroad retirement benefits may be required
to take into account income from the Diversified Tax Exempt Series in
determining the taxability of their benefits. In addition, the Diversified Tax
Exempt Series may not be an appropriate investment for shareholders that are
“substantial users” or persons related to such users of facilities financed by
private activity bonds or industrial revenue bonds. A “substantial user” is
defined generally to include certain persons who regularly use a facility in
their trade or business. Shareholders should consult their tax advisers to
determine the potential effect, if any, on their tax liability of investing in
the Diversified Tax Exempt Series.
Exempt-interest
dividends may nevertheless be subject to the Alternative Minimum Tax. The
Alternative Minimum Tax applicable to non-corporate taxpayers is imposed at a
rate of up to 28%. Exempt-interest dividends derived from certain “private
activity bonds” issued after August 7, 1986, will generally be an item of tax
preference (and therefore potentially subject to the Alternative Minimum
Tax).
The
deduction otherwise allowable to property and casualty insurance companies for
“losses incurred” will be reduced by an amount equal to a portion of
exempt-interest dividends received or accrued during the taxable year. Foreign
corporations engaged in a trade or business in the United States will be subject
to a “branch profits tax” on their “dividend equivalent amount” for the taxable
year, which will include exempt-interest dividends. Certain Subchapter S
corporations may also be subject to taxes on their “passive investment income”,
which could include exempt-interest dividends.
Issuers of
bonds purchased by the Diversified Tax Exempt Series (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with the
issuance of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Investors should be aware
that exempt-interest dividends derived from such bonds may become subject to
federal income taxation retroactively to the date thereof if such
representations are determined to have been inaccurate or if the issuer of such
bonds (or the beneficiary of such bonds) fails to comply with the
covenants.
Under the
Code, if a shareholder receives an exempt-interest dividend with respect to any
Series share and such Series share is subsequently sold, exchanged or redeemed
and such Series share has been held for six months or less, any loss recognized
will be disallowed to the extent of the amount of such exempt-interest
dividend.
Although the
Diversified Tax Exempt Series does not expect to earn any investment company
taxable income (as defined by the Code), any income earned on taxable
investments will be distributed and will be taxable to shareholders as ordinary
income. In general, “investment company taxable income” comprises taxable net
investment income plus the excess, if any, of net short-term capital gains over
net long-term capital losses. The Diversified Tax Exempt Series would be taxed
on any undistributed investment company taxable income. Since any such income
will be distributed, it is anticipated that no such tax will be paid by the
Diversified Tax Exempt Series.
State and Local Taxes. Distributions
by a Series to shareholders and the ownership of shares may be subject to state
and local taxes. Therefore, shareholders are urged to consult their tax advisors
concerning the application of state and local taxes to investments in the
Series, which may differ from the federal income tax consequences.
Many states
grant tax-free status to dividends paid to you from interest earned on direct
obligations of the U.S. Government, subject in some states to minimum investment
requirements that must be met by a Series. Investments in Ginnie Mae or Fannie
Mae securities, bankers acceptances, commercial paper, and repurchase agreements
collateralized by U.S. Government securities do not generally qualify for such
tax-fee treatment. The rules on exclusion of this income are different for
corporate shareholders. Shareholders are urged to consult their tax advisors
regarding whether, and under what conditions, such exemption is
available.
Shareholders
should consult their own tax advisors regarding the effect of federal, state,
local, and foreign taxes affecting an investment in shares of a
Series.
Performance Reporting
The
performance of the Series may be compared in publications to the performance of
various indices and investments for which reliable performance data is
available. It may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services. The Series’
annual reports contain additional performance information. These reports are
available without charge at the Fund’s website, www.manning-napier.com, or by
calling 1-800-466-3863.
Financial Statements
Each Series’
audited financial statements, including the report of PwC thereon, from the
Series’ annual reports for the fiscal year ended December 31, 2022 are hereby
incorporated by reference into this SAI. These Reports may be obtained without
charge by calling 1-800-466-3863.
Appendix A
- Description of Bond Ratings1
Moody’s
Investors Service, Inc. (“Moody’s”) Short-Term Prime Rating System - Taxable
Debt and Deposits Globally
Moody’s
short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody’s
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
Prime-1:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
Leading
market positions in well-established industries.
High rates
of return on funds employed.
Conservative
capitalization structure with moderate reliance on debt and ample asset
protection.
Broad
margins in earnings coverage of fixed financial charges and high internal cash
generation.
Well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Prime-2:
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime-3:
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime:
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Obligations
of a branch of a bank are considered to be domiciled in the country in which the
branch is located. Unless noted as an exception, Moody’s rating on a bank’s
ability to repay senior obligations extends only to branches located in
countries which carry a Moody’s Sovereign Rating for Bank Deposits. Such branch
obligations are rated at the lower of the bank’s rating or Moody’s Sovereign
Rating for Bank Deposits for the country in which the branch is
located.
When the
currency in which an obligation is denominated is not the same as the currency
of the country in which the obligation is domiciled, Moody’s ratings do not
incorporate an opinion as to whether payment of the obligation will be affected
by actions of the government controlling the currency of denomination. In
addition, risks associated with bilateral conflicts between an investor’s home
country and either the issuer’s home country or the country where an issuer’s
branch is located are not incorporated into Moody’s short-term debt
ratings.
If an issuer
represents to Moody’s that its short-term debt obligations are supported by the
credit of another entity or entities, then the name or names of such supporting
entity or entities are listed within the parenthesis beneath the name of the
issuer, or there is a footnote referring the reader to another page for the name
or names of the supporting entity or entities. In assigning ratings to such
issuers, Moody’s evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating
assessment.
1 |
The
ratings indicated herein are believed to be the most recent ratings
available at the date of this SAI for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily
represent ratings which will be given to these securities on the date of
the fund’s fiscal year-end. |
Moody’s
Municipal and Corporate Bond Ratings
Aaa: Bonds
which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as “gilt edge.”
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds
which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A: Bonds
which are rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds
which are rated Baa are considered as medium-grade obligations (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds
which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B: Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds
which are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or
interest.
Ca: Bonds
which are rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C: Bonds
which are rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note:
Moody’s applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicated that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicated
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Moody’s may
also assign conditional ratings to municipal bonds. Bonds for which the security
depends upon the completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by (a) earnings of projects under
constructions, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d)payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of
condition.
Standard
& Poor’s 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 vulnerable and has significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitments; however, it faces major ongoing uncertainties which could
lead to the obligor's inadequate capacity to meet its financial
commitments.
C: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A
short-term obligation rated 'D' is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the 'D' rating category is used
when payments on an obligation are not made on the date due, unless Standard
& Poor's believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The 'D' rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay
provisions. An obligation's rating is lowered to 'D' if it is subject to a
distressed exchange offer.
Standard
& Poor’s Municipal and Corporate Bond Ratings
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.
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. The 'CC'
rating is used when a default has not yet occurred, but Standard & Poor's
expects default to be a virtual certainty, regardless of the anticipated time to
default.
C: An
obligation rated 'C' is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
D: An
obligation rated 'D' is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the 'D' rating category is used when payments on
an obligation are not made on the date due, unless Standard & Poor's
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The 'D' rating also will be used upon the filing of
a bankruptcy petition or the taking of similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation's rating is lowered to 'D' if it is subject to a distressed
exchange offer.
NR: This
indicates that no rating has been requested, or 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.
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.
The letters
'pr' indicate that the rating was provisional. A provisional rating assumed the
successful completion of a project financed by the debt being rated and
indicates that payment of debt service requirements was 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, made no comment on the likelihood of or the risk of default upon
failure of such completion.
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 would 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.
Appendix B
- Procedures for the Nominating Committee’s Consideration of Potential Nominees
Submitted by Stockholders
A nominee
for nomination as a Director submitted by a stockholder will not be deemed to be
properly submitted to the Committee for the Committee’s consideration unless the
following qualifications have been met and procedures followed:
1. |
A
stockholder or group of stockholders (referred to in either case as a
“Nominating Stockholder”) that, individually or as a group, has
beneficially owned at least 5% of the Fund’s common stock for at least two
years prior to the date the Nominating Stockholder submits a candidate for
nomination as a Director may submit one candidate to the Committee for
consideration at an annual meeting of stockholders. |
2. |
The
Nominating Stockholder must submit any such recommendation (a “Stockholder
Recommendation”) in writing to the Fund, to the attention of the
Secretary, at the address of the principal executive offices of the
Fund. |
3. |
The
Stockholder Recommendation must be delivered to or mailed and received at
the principal executive offices of the Fund not less than the date
specified in a public notice by the Fund. Such public notice shall be made
at least 30 calendar days prior to the deadline for submission of
Stockholder Recommendations. Such public notice may be given in a
stockholder report or other mailing to stockholders or by any other means
deemed by the Committee or the Board of Directors to be reasonably
calculated to inform stockholders. |
4. |
The
Stockholder Recommendation must include: (i) a statement in writing
setting forth (A) the name, date of birth, business address and residence
address of the person recommended by the Nominating Stockholder (the
“candidate”); (B) any position or business relationship of the candidate,
currently or within the preceding five years, with the Nominating
Stockholder or an Associated Person of the Nominating Stockholder (as
defined below); (C) the class or Series and number of all shares of the
Fund owned of record or beneficially by the candidate, as reported to such
Nominating Stockholder by the candidate; (D) any other information
regarding the candidate that is required to be disclosed about a nominee
in a proxy statement or other filing required to be made in connection
with the solicitation of proxies for election of Directors pursuant to
Section 20 of the Investment Company Act of 1940, as amended (the “1940
Act”) and the rules and regulations promulgated thereunder; (E) whether
the Nominating Stockholder believes that the candidate is or will be an
“interested person” of the Fund (as defined in the 1940 Act) and, if
believed not to be an “interested person,” information regarding the
candidate that will be sufficient for the Fund to make such determination;
and (F) information as to the candidate’s knowledge of the investment
company industry, experience as a director or senior officer of public
companies, directorships on the boards of other registered investment
companies and educational background ; (ii) the written and signed consent
of the candidate to be named as a nominee and to serve as a Director if
elected; (iii) the written and signed agreement of the candidate to
complete a directors’ and officers’ questionnaire if elected; (iv) the
Nominating Stockholder’s consent to be named as such by the Fund; (v) the
class or Series and number of all shares of the Fund owned beneficially
and of record by the Nominating Stockholder and any Associated Person of
the Nominating Stockholder and the dates on which such shares were
acquired, specifying the number of shares owned beneficially but not of
record by each, and stating the names of each as they appear on the Fund’s
record books and the names of any nominee holders for each; and (vi) a
description of all arrangements or understandings between the Nominating
Stockholder, the candidate and/or any other person or persons (including
their names) pursuant to which the recommendation is being made by the
Nominating Stockholder. “Associated Person of the Nominating Stockholder”
as used in this paragraph 4 means any person required to be identified
pursuant to clause (vi) and any other person controlling, controlled by or
under common control with, directly or indirectly, (a) the Nominating
Stockholder or (b) any person required to be identified pursuant to clause
(vi). |
5. |
The
Committee may require the Nominating Stockholder to furnish such other
information as it may reasonably require or deem necessary to verify any
information furnished pursuant to paragraph 4 above or to determine the
qualifications and eligibility of the candidate proposed by the Nominating
Stockholder to serve on the Board. If the Nominating Stockholder fails to
provide such other information in writing within seven days of receipt of
written request from the Committee, the recommendation of such candidate
as a nominee will be deemed not properly submitted for consideration, and
will not be considered, by the Committee. |
Appendix C
– Proxy Policy and Procedures
MANNING
& NAPIER PROXY VOTING POLICIES AND PROCEDURES
January
26, 2023
GENERAL
POLICY
This policy
applies to Manning & Napier Advisors, LLC (“MNA”) and Rainier
Investment Management, LLC (“Rainier”), collectively “Manning &
Napier”, in their capacity as affiliated discretionary advisors to separate
account clients, collective investment trust funds, and advisor and sub-advisor,
respectively, to the Manning & Napier Fund, Inc. Manning &
Napier is a fiduciary that owes duties of care and loyalty to each client with
respect to its exercise of proxy voting authority. Manning & Napier is
committed to effective stewardship of client assets and will engage with the
companies in which we invest to vote proxies in a manner that we believe will
maximize the long-term value of the investment. Manning & Napier has
adopted and implemented the following policies and procedures, which it believes
are reasonably designed to ensure that proxies are voted in the best interest of
clients, in accordance with its fiduciary duties and applicable rules and
regulations.
Proxy votes
are the property of Manning & Napier’s clients. It is presumed,
however, that Manning & Napier, pursuant to its discretionary
authority, will vote proxies on each client’s behalf. Clients typically delegate
the authority and responsibility for proxy voting to Manning & Napier’s
through their written investment management agreement. Manning & Napier
uses Broadridge Financial Solutions, Inc. (“Broadridge”) to execute proxy votes
in accordance with this policy and Glass Lewis & Co. (“Glass Lewis”)
guidelines for those ballot issues that this policy does not address.
Manning & Napier’s analysts may override these guidelines or Glass
Lewis recommendations in accordance with and adherence to the procedure mandates
set forth below. All conflicts or potential conflicts will be resolved by
Manning & Napier’s Proxy Conflicts and Oversight Committee (the
“Committee”).
It is
Manning & Napier’s overarching policy regarding proxies to:
| 1. |
Discharge
our duties prudently, in the interest of plans, plan fiduciaries, plan
participants, beneficiaries, clients and shareholders (together
“clients”). |
| 2. |
Act
prudently in voting of proxies by considering those factors, which would
affect the value of client assets. |
| 3. |
Maintain
accurate records as to voting of such proxies that will enable clients to
periodically review voting procedures employed and actions taken in
individual situations. |
| 4. |
Provide,
upon request, a report of proxy activity for clients reflecting the
activity of the portfolio requested. |
| 5. |
By
following our procedures for reconciling proxies, take reasonable steps
under the particular circumstances to ensure that proxies for which we are
responsible are received by us. |
| 6. |
Make
available, upon request, this policy to all plan fiduciaries, client, and
shareholders. |
| 7. |
Comply
with all current and future applicable laws, rules, and regulation
governing proxy voting. |
POLICY
LIMITATIONS
Voting
proxies with respect to shares of foreign companies may involve significantly
greater effort and corresponding cost due to the variety of regulatory schemes
and corporate practices in foreign countries. Each country has its own rules and
practices regarding shareholder notification, voting restrictions, registration
conditions and share blocking. These conditions present challenges such as but
not limited to:
| ● |
The
shares in some countries may be “blocked” by the custodian or depository
for a specified number of days before or after the shareholder meeting.
When blocked, shares typically may not be traded until the day after the
blocking period. Manning & Napier may refrain from voting shares
of foreign stocks subject to blocking restrictions where, in its judgment,
the benefit from voting the shares is outweighed by the interest of
maintaining client liquidity in the shares; |
| ● |
Often
it is difficult to ascertain the date of a shareholder meeting and time
frames between notification and the actual meeting date may be too short
to allow timely action; |
| ● |
Language
barriers will generally mean that an English translation of proxy
information must be obtained or commissioned before the relevant
shareholder meeting; and |
| ● |
The
lack of “proxy voting service” or the imposition of voting fees may limit
our ability to lodge votes in such countries. |
Manning
& Napier will make best efforts to vote foreign proxies in accordance with
the guidelines set forth herein. There may be times, however, when
Manning & Napier is unable to vote foreign proxies due to the practical
limitations stipulated above. Manning & Napier might also refrain from
voting a foreign proxy when doing so is in the clients’ best interests, such as
when the explicit (e.g., travel) or imputed (e.g., trading limitations) cost of
voting the proxy exceeds the expected benefit to the client.
PROCEDURES
Manning
& Napier’s proxy voting policies and procedures are designed to align with
each investment strategy. Accordingly, Manning & Napier’s proxy voting
practices differ across strategies, which means that Manning & Napier
can vote “FOR” a ballot issue on a security held in one portfolio and “AGAINST”
a ballot issue on that same security held in another portfolio. Proxies for
companies held in MNA’s qualitative, bottom-up investment strategies follow the
parameters set forth in this policy and certain custom decisions provided to
Broadridge. At times, MNA’s analysts may wish to override pre-determined voting
protocols. The analyst who recommended the security for client portfolios is
most familiar with the company and is in the best position to determine how to
vote the proxy ballot. Therefore, MNA will defer to its analysts to vote the
proxy ballot in the best economic interest of the client even if they vote
contrary to these Guidelines. When voting contrary to the pre-determined voting
Guidelines an analyst will be required to document their rationale and complete
a conflicts questionnaire to ensure that the analyst is singularly focused on
the client’s best interests.
MNA votes
proxies in the Disciplined Value strategy in accordance with Glass Lewis
recommendations. Rainier votes proxies in the in the Rainier International Small
Cap strategy in accordance with Glass Lewis ESG recommendations. With regards to
Custom Solution portfolios that contain a mix of Manning & Napier’s
investment strategies, voting will occur pursuant to the strategy-level
procedures set forth above.
GUIDELINES
These
guidelines reflect Manning & Napier’s general views and serve to help
Manning & Napier’s customers understand how we tend to vote typical
ballot issues. Fundamentally, these guidelines are shaped by Manning &
Napier’s desire and responsibility to preserve and enhance the value of
securities for clients and to protect the long-term interests of our
clients.
This list is
not exhaustive and is subject to revision as new issues arise. Actual proxy
votes may differ from these guidelines because Manning & Napier may
determine that voting in contravention of these guidelines on a particular
issue(s) is in the best interest of our clients. In all circumstances, however,
Manning & Napier will discharge its proxy duties prudently, solely in
the best interest of our clients, and for the exclusive purpose of providing
benefits to those clients.
Generally,
if not contested, we will vote “FOR” the nominated directors. For each director,
care must be taken to determine from the proxy statement each director’s:
attendance at meetings, investment in the company, status inside and outside
company, governance profile, compensation, independence from management, and
related/relevant parameters. If the director’s actions are questionable on any
of these items, the analyst may vote “AGAINST” the election of the
director.
In a
contested race, voting decisions are based on the track record of both slates of
candidates, an analysis of what each side is offering to shareholders,
assessment of the likelihood of each slate to fulfill promises, and evaluation
of the economic benefits that a new board verses old board could generate for
shareholders. Candidate backgrounds and qualifications should be considered,
along with benefit to shareholders of diversity on the board. If the proposed
election of directors would change the number of directors, the change should
not diminish the overall quality and independence of the board.
Because of
the complexity and specific circumstances of issues concerning a contested race,
Manning & Napier’s analysts will evaluate and decide these issues on a
case-by-case basis.
| 2. |
Appointment of
Auditors: |
We will vote
“AGAINST” a change of auditors that compromises the integrity of the independent
audit process or a change of auditors due to the auditors’ refusal to approve a
company’s financial statement. We also will vote “AGAINST” the re-appointment of
an auditor if we believe their independence has been compromised.
| 3. |
Re-election of
Directors |
In order to
hold directors accountable, they should be subject to frequent reelection –
ideally, on an annual basis. Therefore, we recommend a vote “AGAINST” any
proposal to extend the terms of directors beyond one year and a vote “FOR”
annual election of directors.
A classified
board is one in which directors are divided into two (sometimes more) classes,
with each serving two-year (sometimes more) terms, with each class re-election
occurring in a different year. A non-staggered Board serves a one-year term and
Directors stand for re-election each year.
We will vote
“FOR” proposals to declassify currently staggered boards and “AGAINST” proposals
to retain or institute classified boards. Likewise, we will vote “FOR” proposals
to re-elect directors annually. In our view, staggered boards are less
accountable to shareholders than boards that are elected annually because
directors who are elected annually are more focused on shareholder
interests.
| 5. |
Majority Vote in Director
Elections |
We would
generally vote “FOR” binding resolutions requesting that the board change the
company’s bylaws to stipulate that directors need to be elected with an
affirmative majority of votes cast, provided it does not conflict with the state
law where the company is incorporated. Binding resolutions need to allow for a
carve-out for a plurality vote standard when there are more nominees than board
seats. Companies should also adopt a post-election policy (also known as a
director resignation policy) that will provide guidelines so that the company
will promptly address the situation of a holdover director.
Cumulative
voting permits proportional representation on the board of directors. Without
it, a group with a simple majority could elect all directors. Cumulative voting
is meant to enhance minority shareholder decision making power but may not
always be beneficial depending on the he independence of the existing board and
the operations of the majority voting structure. Accordingly, we will vote in
accordance with Glass Lewis recommendations on a given company’s
ballot.
| 7. |
Director/Management
Liability |
Directors
must be accountable to shareholders and liable for misdeeds. Therefore, we will
vote “AGAINST” proposals that limit director liability or unreasonably indemnify
directors. We recognize, however, that directors must be afforded certain
protections in order to perform their duties and, therefore support a company
taking certain measures, such as enrolling in liability insurance, to encourage
directors to take measured risks designed to benefit shareholders.
We believe
that a separation of roles between a CEO and a chairman create a better
governance structure than a combined CEO/chairman position. A separation of
roles enables the chairman and other board members to oversee the CEO, evaluate
CEO performance and hold the CEO accountable. As such, we will vote “FOR”
proposals to separate the roles of CEO and chairman. However, we will not
automatically vote against the election of a CEO as chairman because we
recognize the inevitability and necessity of this structure in smaller
companies.
| 9. |
Committee Independence
|
Where
practical, we believe that chairpersons of nominating, compensation, or audit
committees should be independent of management. Therefore, we recommend a vote
“FOR” requirements that these committees have a majority of independent
directors and “AGAINST” interested directors seeking appointment to one of these
positions.
| B. |
COMPENSATION and BENEFITS
|
Executive
compensation and benefit packages can vary significantly across companies and
the details of company plans can be quite nuanced and difficult to comprehend.
We generally believe that companies are in the best position to determine the
compensation and benefits that align with the company’s size, maturity,
financial condition, and industry peers and that will attract and retain the
talent required to execute company strategy and grow its value for shareholders.
However, we also believe that companies must adopt policies and practices to
link compensation and benefits with well-defined and clearly disclosed
performance measures.
| 2. |
Incentive
Compensation |
Incentive
compensation plans reward an executive’s performance through a combination of
cash compensation and stock awards. Typically, Manning & Napier will
vote “FOR” incentive compensation plans that are reasonable relative to peer
groups, derive from comprehensive and measurable performance metrics, are
designed to attract and retained skilled executives, are sufficiently linked to
an executive’s tenure and value-add, and are adequately disclosed to
shareholders. We generally will vote “AGAINST” incentive compensation plans that
dilute shareholder value, are disconnected from management performance, or offer
management an opportunity to purchase stock below market value.
“Say on Pay”
proposals give shareholders a non-binding vote on executive compensation.
Manning & Napier will vote in accordance with Glass Lewis
recommendations. Glass Lewis evaluates Say on Pay ballot measures on a
case-by-case basis, considering an analysis of a company’s current executive
compensation model, adequacy of the company’s disclosures around compensation
and the specific terms of the say on pay proposal
Pay for
performance refers to the link between an executive’s performance and their pay.
Glass Lewis evaluates shareholder-initiated pay for performance proposals on a
case-by-case basis, factoring in the alignment between the company’s long-term
interests and its executives’ financial incentives and the methodology for
setting executive compensation. Manning & Napier will defer to Glass
Lewis voting recommendations on a given ballot.
Golden
parachutes are severance payments made to departing executives after a
termination or change in control. We will typically vote “AGAINST” such payments
because these payments are often made despite an executive’s or company’s poor
performance. We will vote “FOR” proposals that require shareholder ratification
of company severance agreements and executive death benefits. While we generally
recommend voting “AGAINST” golden parachutes, an analyst might vote FOR such an
award if the analyst believes that it ultimately benefits
shareholders.
A clawback
provision allows a company to recoup or “claw back” incentive compensation paid
to an executive under certain circumstances such as when a company later
determines that the executive failed to meet applicable performance goals, or
the company must restate financials. Glass Lewis assesses each company’s
clawback policies and we will vote in accordance with the Glass Lewis
recommendations.
| 7. |
Anti-gross-up
Provisions |
We will vote
“FOR” anti-gross-up policies that prohibit companies from paying executives an
additional sum of money intended to reimburse them for tax liabilities.
Likewise, we will vote “AGAINST” ballot measures that seek to instate a tax
gross-up payment. In our view, gross-up payments often are not transparent,
making it difficult for shareholders to discern total compensation paid to
executives.
| C. |
SHAREHOLDER
RIGHTS and ANTI-TAKEOVER MEASURES |
| 1. |
Supermajority Voting
Provisions |
Supermajority
voting provisions require more than a simple shareholder majority in order to
ratify a proposal. We believe that supermajority provisions impede shareholder
action on critical ballot items and limit the voice of shareholders in making
crucial decisions. As such, we will vote “AGAINST” proposals to add a
supermajority vote requirement and “FOR” proposals to remove supermajority
provisions at non-controlled companies. At controlled companies we may vote
“AGAINST” removing supermajority vote requirements in order to preserve our
shareholder rights.
| 2. |
Special Meetings of
Shareholders |
We oppose
unreasonable limitations on shareholder rights but recognize management’s
authority to limit shareholder proposals under certain circumstances. As such,
we will vote these ballots in accordance with Glass Lewis
recommendations.
| 3. |
Shareholder recovery of proxy contest
costs |
We will vote
in accordance with Glass Lewis case-by-case determinations on shareholder
proposals that seek to require companies to reimburse shareholders for expenses
they incurred by initiating proxy contents.
Confidential
voting is the best way to guarantee an independent vote. Shareholders must be
able to vote all proxies on the merits of each proposal. Open voting alters the
concept of free choice in corporate elections and proxy proposal by providing
management the opportunity to influence the vote outcome – they can see who has
voted for or against proposals before the final vote is taken and therefore
management can pressure institutional shareholders, suppliers, customers, and
other shareholders with which it maintains a business relationship. This
process, which would give management the opportunity to coerce votes from its
shareholders, destroys the concept of management accountability. Therefore, we
recommend a vote “FOR” confidential voting.
| 5. |
Multiple Classes of
Stocks |
Multiple
classes of stock, which would give more voting rights to one class of
shareholders at the expense of another, would clearly affect the rights of all
shareholders. We recommend a vote “AGAINST” any proposal which divides common
equity into more than one class of stock, or which limits the voting rights of
certain shareholders of a single class of stock. The exception would only occur
if a subsidiary of a company issued its own class of common stock, such as
General Motor’s class E (for EDS) and H (for Hughes) stock.
Similarly,
we recommend a vote “AGAINST” any proposal to give the board of director’s broad
powers with respect to establishing new classes of stock and determining voting,
dividend, and other rights without shareholder review. An example would be
requests to authorize “blank check” preferred stock.
| 6. |
Shareholder Rights
Plans |
Shareholder
Rights Plans (“Poison Pills”) give shareholders the ability to purchase shares
from or sell shares back to the company or, in the case of a hostile
acquisition, to the potential acquirer at a price far out of line with their
fair market value, effectively making the company more expensive and less
attractive to potential acquirers. Typically, we will vote “AGAINST” poison pill
proposals and “FOR” proposals to eliminate existing poison pills and proposals
that require companies to submit poison pills for shareholder ratification.
However, there may be circumstances in which Glass Lewis recommends a vote FOR a
poison pill and we will vote in accordance with Glass Lewis’
recommendation.
We will vote
“FOR” anti-greenmail proposals that prevent company management from buying back
company stock from a greenmailer at a significant premium without shareholder
approval. However, anti-greenmail measures cannot be bundled with other
proposals designed to entrench existing management or discourage attractive
takeovers.
| D. |
CHANGES
IN CAPITAL STRUCTURE |
| 1. |
Increased Authorized Common
Stock |
Requests to
authorize increases in common stock can be expected from time-to-time, and when
handled in a disciplined manner such requests can be for beneficial purposes
such as stock splits, cost-effective means of raising capital, or reasonable
incentive programs. However, increases in common stock can easily become
dilutive, so by no means are they always in the best interest of shareholders.
Purpose and scale are the determining factors with respect to increases in
common stock. We will vote in accordance with Glass Lewis’ case-by-case
evaluation of these factors.
We believe
that corporate jurisdiction is an issue better suited to board determinations
than shareholder determinations. Companies seek reincorporation to obtain more
favorable tax treatment or reap other benefits that a new corporate jurisdiction
affords. Reincorporation can, however, negatively affect shareholder rights.
Accordingly, Manning & Napier’s analysts will vote on such matters on a
case-by-case basis.
| 3. |
Approving Other
Business |
Management
may, on occasion, seek broad authorization to approve business resolution
without shareholder consent. Management typically already has the authority
needed to make routine business decisions, so shareholders should avoid granting
blanket authority to management, which may reduce management accountability
and/or shareholders rights. Manning & Napier’s analysts will evaluate
these proposals on a case-by-case basis.
| E. |
ENVIRONMENTAL,
SOCIAL, GOVERNANCE MATTERS |
Material
environmental and social issues can have an impact on the value of a company’s
stock. Manning & Napier believes that companies must adequately
disclose policies and any data related to such issues in a consistent manner so
that they may be appropriately analyzed. To this end Manning & Napier
will generally support proposals seeking company disclosures in line with those
proposed by The Task Force on Climate-related Financial Disclosure (TCFD) and
the Sustainability Accounting Standards Board (SASB). As not all proposals seek
such broad disclosures Manning & Napier would also support reasonable
proposals seeking the disclosure of policies related to other Environmental and
Social issues including but not limited to:
As well as
data points including those related to:
| • |
Greenhouse
Gas emissions |
Shareholder
proposals on Environmental and Social issues may also seek to implement changes
at the company which seek to lower the potential for boycotts, lawsuits,
regulatory penalties, or other financially adverse outcomes. When we believe the
impact on the overall shareholders would be neutral or positive, we recommend a
vote FOR such proposals.
Examples may
include:
| • |
Resolution
to establish shareholder advisory committees |
| • |
Corporate
conduct and human rights policies |
| • |
Adoption
of the “MacBride Principles” of equal
employment |
| • |
Adoption
of “CERES Principles” of environmental
responsibility |
| • |
Legal
and regulatory compliance policies |
While the
international proxies generally follow the same guidelines listed above, there
are several issues which are not normally a part of the domestic proxies and as
such are addressed separately below.
We recommend
voting “FOR” such routine, non-controversial items. Most companies around the
world submit their financials to shareholders for approval, and this is one of
the first items on most agendas. When evaluating a company’s financial
statements, unless there are major concerns about the accuracy of the financial
statements, we would vote “FOR” this item.
| 2. |
Accepting the acts or performance of
the managing board or supervisory
board |
We recommend
voting “FOR” such items. The annual formal discharge of board and management
represents shareholder approval of actions taken during the year. Discharge is a
vote of confidence in the company’s management and policies. It does not
necessarily eliminate the possibility of future shareholder action, but it does
make such action more difficult to pursue. Meeting agendas normally list
proposals to discharge both the board and management as one agenda
item.
Discharge is
generally granted unless a shareholder states a specific reason for withholding
discharge and plans to undertake legal action. Withholding discharge is a
serious matter and is advisable only when a shareholder has concrete evidence of
negligence or abuse on the part of the board or management, has plans to take
legal action, or has knowledge of other shareholders’ plans to take legal
action.
| 3. |
Capital Increase per the
following |
1. with
rights, 2. without rights, 3. bonds with rights, or 4. bond without rights. In
the majority of cases, we would vote “FOR” capital increases. There may be cases
where the analyst deems the capital increase inappropriate and would then vote
“AGAINST” such an item.
Companies
can have one of two types of capital systems. The authorized capital system sets
a limit in a company’s articles on the total number of shares that can be issued
by the company’s board. The system allows companies to issue shares from this
pre-approved limit, although in many markets shareholder approval must be
obtained prior to an issuance. Companies also request shareholder approval for
increases in authorization when the number of shares contained in the articles
is inadequate for issuance authorities. When looking at such issues, we need to
review the following: the history of issuance requests; the size of the request;
and the purpose of the issuance associated with the increase in
authorization.
Under the
conditional capital system, companies seek authorizations for pools of capital
with fixed periods of availability. If a company seeks to establish a pool of
capital for general issuance purposes, it requests the creation of a certain
number of shares with or without preemptive rights, issuable piecemeal at the
discretion of the board for a fixed period of time. Unissued shares lapse after
the fixed time period expires. This type of authority would be used to carry out
general rights issue or small issuances without preemptive rights.
Requests for
a specific issuance authority are tied to a specific transaction or purpose,
such as an acquisition or the servicing of convertible securities. Such
authorities cannot be used for any purpose other than that specified in the
authorization. This pool of conditional capital also carries a fixed expiration
date.
In reviewing
these proposals, we need to look at the existence of pools of capital from
previous years. Because most capital authorizations are for several years, new
requests may be made on top of the existing pool of capital. While most requests
contain a provision to eliminate earlier pools and replace them with the current
request, this is not always the case. Thus, if existing pools of capital are
being left in place, the total potential dilution amount from all capital should
be considered.
There are
potential conflicts of interest that may arise in connection with the Firm or
the Analyst responsible for voting a company’s proxy. Examples of potential
conflicts may include the following: (1) the voting Analyst is aware that a
client of the advisor or its affiliates is a public company whose shares are
held in client portfolios; (2) the voting Analyst (or a member of their
immediate family) of the advisor or its affiliates also has a personal interest
in the outcome of a matter before shareholders of a particular security that
they cover as an Analyst; (3) an employee (or a member of their immediate
family) of the advisor or its affiliates is a Director or Officer of such
security; (4) an employee (or a member of their immediate family) is a Director
candidate on the proxy; or (5) the voting Analyst (or a member of their
immediate family), the advisor or its affiliates have a business relationship
with a participant in a proxy contest, corporate director or director
candidates.
In
recognizing the above potential conflicts, the following controls have been put
in place: (1) analysts provide written confirmation that no conflict of interest
exists with respect to each proxy vote on which the analyst opines. If an
Analyst indicates a conflict of interest, then the analyst will not be permitted
to vote the proxy; instead (2) the Committee will resolve any apparent or
potential conflicts of interest. The Committee may utilize the following to
assist in seeking resolution (including, without limitation, those instances
when the Advisor potentially has an institutional conflict): (1) voting in
accordance with the guidance of an independent consultant or outside counsel;
(2) designation of a senior employee or committee member to vote that has
neither a relationship with the company nor knowledge of any relationship
between the advisor or its affiliates with such company; (3) voting in
proportion to other shareholders of the issuer; (4) voting in other ways that
are consistent with the advisor’s and its affiliates’ obligation to vote in
clients’ collective best interest.
With respect
to proxies solicited by a Series of the Manning & Napier Fund, Inc.
held by separate account clients of Manning & Napier that have
delegated proxy voting responsibility to Manning & Napier pursuant to
the terms of their investment advisory agreements with Manning &
Napier, the Committee will determine if any material conflicts of interest arise
with respect to Manning & Napier voting the proxy. If the Committee
determines that a material conflict of interest arises with respect to
Manning & Napier voting the proxy, Manning & Napier will vote
the proxy in accordance with Glass Lewis & Co.’s proxy voting policies and
procedures. If the Committee determines that no material conflicts of interest
arise with respect to Manning & Napier voting the proxy, then the
Committee will determine how to vote the proxy and document its rationale for
making the conflict of interest and voting determinations.
With respect
to proxies solicited by a Series of the Manning & Napier Fund, Inc.
held by another Series of the Manning & Napier Fund, Inc.,
Manning & Napier will vote such proxies in the same proportion as the
vote of all other shareholders of the soliciting Series (i.e., “echo vote”),
unless otherwise required by law.
When
required by law or SEC exemptive order (if applicable), Manning &
Napier will also “echo vote” proxies of an unaffiliated mutual fund or exchange
traded fund (“ETF”). When not required to “echo vote,” Manning & Napier
will defer to Glass Lewis procedures and recommendations for voting proxies of
an unaffiliated mutual fund or ETF, subject to any custom policies of
Manning & Napier set forth herein. If Manning & Napier and/or
its affiliates own greater than a 5% position in an iShares Exchange Traded
Fund, we will vote the shares in the same proportion as the vote of all other
holders of shares of such iShares fund.
OVERSIGHT
Manning
& Napier has a responsibility to oversee its proxy voting processes
including those functions delegated to its service providers. Accordingly,
Manning & Napier has adopted the following processes:
| • |
The
Committee or persons that the Committee so designates will review these
Guidelines annually |
| • |
In
conjunction with the annual Guideline review, the Committee will review
the Glass Lewis guidelines and re-assess the prudence of relying on Glass
Lewis research and voting recommendations |
| • |
The
Committee or persons that the Committee so designates will conduct due
diligence on Glass Lewis to assess conflicts, review current voting
methodology and research development processes, among other
variables |
| • |
Manning
& Napier’s Vendor Oversight Committee will review Broadridge as a
service provider, evaluating such factors as contract fulfillment, error
occurrences, financial stability, control infrastructure, among other
variables. This review will be conducted in accordance with the Vendor
Oversight Committee’s risk-based review cycle. |
ISSUER
and LOBBYIST COMMUNICATION
Periodically,
analysts may receive calls from lobbyists or solicitors trying to persuade them
to vote a certain way on a proxy issue, or from other large stockholders trying
to persuade Manning & Napier to join a voting conglomerate in order to
exercise control of a company. We will take their opinions into consideration,
but our policy is simply to vote in accordance with what we feel is in the best
interest of our clients and shareholders and which maximizes the value of the
investment.
RECORDKEEPING
Manning
& Napier retains records of the following: (i) these and other related
Policies and procedures; (ii) copies of each proxy statement received regarding
client securities (except that Manning & Napier may rely on the SEC’s
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system; (iii) a
record of every vote cast on behalf of a client, which may be maintained by a
third-party provider under certain conditions; (iv) documents, if any, that
Manning & Napier prepared that were material to its proxy voting
decisions; (v) all requests for proxy voting records and Manning &
Napier’s reply to such requests; and (vi) documentation of conflicts of
interests and resolutions thereto. These records will be maintained in
accordance with applicable rules and regulations to which Manning &
Napier is subject.
INQUIRIES
Information
regarding these policies and procedures or voting records specific to your
account may be obtained through your Financial Consultant or Relationship
Manager.