ck0000711080-20220630
TOUCHSTONE
STRATEGIC TRUST
STATEMENT
OF ADDITIONAL INFORMATION
October 28,
2022
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Class A |
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Class C |
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Class Y |
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Institutional Class |
| Class
R6 |
Touchstone
Balanced Fund |
SEBLX |
| SBACX |
| SIBLX |
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| TBARX |
Touchstone
Core Municipal Bond Fund |
TOHAX |
| TOHCX |
| TOHYX |
| TOHIX |
| |
Touchstone
International Equity Fund |
SWRLX |
| SWFCX |
| SIIEX |
| TOIIX |
| |
Touchstone
International Growth Fund |
TNSAX |
|
TNSCX |
|
TNSYX |
|
TNSIX |
| |
Touchstone
Large Cap Focused Fund |
SENCX |
| SCSCX |
| SICWX |
| SCRLX |
| TSRLX |
Touchstone
Large Cap Fund |
TACLX |
|
TFCCX |
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TLCYX |
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TLCIX |
| |
Touchstone
Large Company Growth Fund |
TSAGX |
| TCGLX |
| TLGYX |
| DSMLX |
| |
Touchstone
Small Company Fund |
SAGWX |
| SSCOX |
| SIGWX |
| TICSX |
| SSRRX |
Touchstone
Value Fund |
TVLAX |
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TVLCX |
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TVLYX |
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TVLIX |
| TVLRX |
This
Statement of Additional Information (“SAI”) is not a prospectus and relates only
to the above-referenced funds (each a “Fund” and, together, the “Funds”). It is
intended to provide additional information regarding the activities and
operations of Touchstone Strategic Trust (the “Trust”) and should be read in
conjunction with the Funds’ prospectus dated October 28, 2022, as may be
amended. The Funds’ audited financial statements for the fiscal year ended
June 30, 2022, including the notes thereto and the report of
Ernst & Young LLP thereon, included in the annual
report
to shareholders (the “Annual Report”), are hereby incorporated into this SAI by
reference. A copy of the Trust's prospectus and Annual Report may be obtained
without charge by writing to the Trust at P.O. Box 9878, Providence, Rhode
Island 02940, by calling 1.800.543.0407, or by downloading a copy at
TouchstoneInvestments.com/Resources.
STATEMENT
OF ADDITIONAL INFORMATION
Touchstone
Strategic Trust
303
Broadway, Suite 1100
Cincinnati,
Ohio 45202-4203
Touchstone
Strategic Trust (the “Trust”), an open-end management investment company, was
organized as a Massachusetts business trust on November 18, 1982. This SAI
relates to the following separate series of the Trust: Touchstone Balanced Fund
(the "Balanced Fund"), Touchstone Core Municipal Bond Fund (the "Core Municipal
Bond Fund"), Touchstone International Equity Fund (the "International Equity
Fund"), Touchstone International Growth Fund (the “International Growth Fund”),
Touchstone Large Cap Focused Fund (the "Large Cap Focused Fund"), Touchstone
Large Cap Fund (the “Large Cap Fund”), Touchstone Large Company Growth Fund (the
"Large Company Growth Fund"), Touchstone Small Company Fund (the "Small Company
Fund"), and Touchstone Value Fund (the “Value Fund”) (each a “Fund”, and
collectively, the “Funds”). Each of the Balanced Fund, Core Municipal Bond Fund,
International Equity Fund, International Growth Fund, Large Cap Fund, Small
Company Fund and Value Fund is a diversified open-end management investment
company. Each of the Large Cap Focused Fund and Large Company Growth Fund is a
non-diversified open-end management investment company.
Touchstone
Advisors, Inc. (the “Advisor”) is the investment advisor and administrator
for each Fund. The Advisor has selected one or more sub-advisor(s) to
manage, on a daily basis, the assets of each Fund. The Advisor has
sub-contracted certain of the Trust complex's administrative and accounting
services to The Bank of New York Mellon and the Trust complex's Transfer Agent
services to BNY Mellon Investment Servicing (US) Inc. (collectively referred to
herein as “BNY Mellon”). Touchstone Securities, Inc. (“Touchstone
Securities” or the “Distributor”) is the principal distributor of the Funds’
shares. The Distributor is an affiliate of the Advisor.
The
Trust offers five separate classes of shares: Classes A, C, Y, Institutional,
and R6. The shares of a Fund represent an interest in the same assets of that
Fund. The shares have the same rights and are identical in all material respects
except that (i) each class of shares may bear different (or no)
distribution fees; (ii) each class of shares may be subject to different
(or no) sales charges; (iii) certain other class specific expenses will be
borne solely by the class to which such expenses are attributable, including
transfer agent fees attributable to a specific class of shares, printing and
postage expenses related to preparing and distributing materials to current
shareholders of a specific class, registration fees incurred by a specific class
of shares, the expenses of administrative personnel and services required to
support the shareholders of a specific class, litigation or other legal expenses
relating to a class of shares, Trustees’ fees or expenses incurred as a result
of issues relating to a specific class of shares and accounting fees and
expenses relating to a specific class of shares; (iv) each class has
exclusive voting rights with respect to matters relating to its own distribution
arrangements; and (v) certain classes offer different features and services
to shareholders and may have different investment minimums. The Board of
Trustees of the Trust (the “Board”) may classify and reclassify the shares of a
Fund into additional classes of shares at a future date.
Under
Massachusetts law, under certain circumstances, shareholders of a Massachusetts
business trust could be deemed to have the same type of personal liability for
the obligations of the Trust as does a partner of a partnership. However,
numerous investment companies registered under the Investment Company Act of
1940, as amended (the “1940 Act”), have been formed as Massachusetts business
trusts and the Trust is not aware of an instance where such result has occurred.
In addition, the Trust’s Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and provides for the indemnification out of
the Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Moreover, it provides that
the Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. As a result, and particularly because the Trust assets are readily
marketable and ordinarily substantially exceed liabilities, management believes
that the risk of shareholder liability is slight and limited to circumstances in
which the Trust itself would be unable to meet its obligations. Management
believes that, in view of the above, the risk of personal liability is
remote.
History
of the Funds
Value
Fund and International Growth Fund. Before
each of the Value Fund and International Small Cap Fund (now known as the
International Growth Fund) commenced operations, all of the assets and
liabilities of the corresponding Predecessor Fund identified below were
transferred to the Fund in a tax-free reorganization, as set forth in agreements
and plans of reorganization (collectively, the “Old Mutual Reorganizations”).
Each Old Mutual Reorganization occurred on April 16, 2012. As a result of
each Old Mutual Reorganization, the performance and accounting history of each
Predecessor Fund was assumed by its corresponding Fund. Shareholders of the
Predecessor Funds who owned Class Z shares of a Predecessor Fund received
Class Y shares of the corresponding Fund in the Old Mutual Reorganizations.
For each of the Value Fund and International Small Cap Fund, financial and
performance information prior to the date of the Old Mutual Reorganizations
included herein is that of the corresponding Predecessor Fund. In connection
with the Old Mutual Reorganizations, the Board of Trustees changed each Fund’s
fiscal year end from March 31 to June 30.
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Predecessor Funds |
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Funds |
Old
Mutual Barrow Hanley Value Fund |
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Value
Fund |
Old
Mutual Copper Rock International Small Cap Fund |
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International
Small Cap Fund |
Effective
January 1, 2006, certain assets of the Predecessor Fund to the
International Small Cap Fund began to be managed by sub-advisors different from
the Predecessor Fund’s former investment advisor, and the Predecessor Fund’s
former investment advisor became a sub-advisor to the Predecessor Fund.
Effective February 28, 2009, the former investment advisor to the
Predecessor Fund to the International Small Cap Fund ceased providing
sub-advisory services to the Predecessor Fund and was replaced with a new
sub-advisor. Effective May 21, 2011, the investment strategy of the
Predecessor Fund to the International Small Cap Fund changed from a domestic
small cap strategy to an international small cap strategy, and Copper Rock
Capital Partners LLC became the sole sub-advisor to the Predecessor
Fund.
Effective
May 22, 2020, Copper Rock Capital Partners LLC ceased providing sub-advisory
services to the International Small Cap Fund and was replaced by Russell
Investments Implementation Services, LLC.
On
September 11, 2020, the International Growth Opportunities Fund, a series of the
Trust (the "International Growth Predecessor Fund"), was reorganized into the
International Small Cap Fund (the "International Growth Reorganization").
Effective September 12, 2020, the International Small Cap Fund changed its name
to the International Growth Fund, and also changed its principal investment
strategies and sub-advisor to match those of the International Growth
Predecessor Fund. As a result of the International Growth Reorganization, the
International Growth Fund assumed the performance history and financial
highlights of the International Growth Predecessor Fund. Performance information
prior to September 12, 2020 included in the International Growth Fund’s
prospectus and SAI is that of the International Growth Predecessor
Fund.
Value
Fund. Prior
to January 1, 2006, the Predecessor Fund to the Value Fund was managed by an
investment advisor different from the Predecessor Fund’s investment advisor and
sub-advisor.
Large
Cap Fund.
The inception date of the Large Cap Fund is July 9, 2014.
Large
Company Growth Fund.
Before the Fund commenced operations, the assets of the DSM Large Cap Growth
Fund, the Predecessor Fund to the Large Company Growth Fund, were acquired by
the Fund in a tax-free reorganization as set forth in an agreement and plan of
reorganization between the Trust, on behalf of the Fund, and Professionally
Managed Portfolios, on behalf of the Predecessor Fund (the “Large Company Growth
Reorganization”). The Large Company Growth Reorganization occurred on
August 15, 2016. As a result of the Large Company Growth Reorganization,
the performance and accounting history of the Predecessor Fund were assumed by
the Fund. Financial and performance information prior to the date of the Large
Company Growth Reorganization included herein is that of the Predecessor
Fund.
Core
Municipal Bond Fund.
Before the Fund commenced operations, the assets of the Touchstone Ohio Tax-Free
Bond Fund, a series of Touchstone Tax-Free Trust (the "Predecessor Fund"), were
acquired by the Fund in a tax-free reorganization as set forth in an agreement
and plan of reorganization (the "Ohio Tax-Free Reorganization") between the
Trust, on behalf of the Fund, and Touchstone Tax-Free Trust, on behalf of the
Predecessor Fund. The Ohio Tax-Free Reorganization occurred on December 16,
2016. As a result of the Ohio Tax-Free Reorganization, the performance and
accounting history of the Predecessor Fund were assumed by the Fund. Financial
and performance information prior to the date of the Ohio Tax-Free
Reorganization included herein is that of the Predecessor Fund.
On
October 28, 2021, the Fund changed its name from the Touchstone Ohio Tax-Free
Bond Fund to the Touchstone Core Municipal Bond Fund and also changed its
diversification status, investment goal, principal investment strategy and
sub-advisor.
Balanced
Fund, International Equity Fund, Large Cap Focused Fund and Small Company Fund.
On
October 27, 2017, all of the assets and liabilities of the Predecessor Funds
listed below
(together,
the "Sentinel Predecessor Funds") were acquired by the corresponding Fund in
tax-free reorganizations as set forth in an agreement and plan of reorganization
(the “Sentinel Reorganizations”) between the Trust, on behalf of each Fund, and
Sentinel Group Funds, Inc., on behalf of each Predecessor Fund. As a result of
the Reorganizations, the performance and accounting history of each Sentinel
Predecessor Fund was assumed by the corresponding Fund. Financial and
performance information included prior to October 27, 2017 is that of the
Sentinel Predecessor Funds.
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Predecessor Funds |
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Funds |
Sentinel
Balanced Fund |
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Balanced
Fund |
Sentinel
International Equity Fund |
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International
Equity Fund |
Sentinel
Common Stock Fund |
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Large
Cap Focused Fund |
Sentinel
Small Company Fund |
| Small
Company Fund |
Each
Fund’s principal investment strategies and principal risks are described in the
Funds’ prospectus. The following supplements the information contained in the
prospectus concerning each Fund’s principal investment strategies and principal
risks. In addition, although not principal strategies of the Funds, the Funds
may invest in other types of securities and engage in other investment practices
as described in the prospectus or in this SAI. Unless otherwise indicated, each
Fund is permitted to invest in each of the investments listed below, or engage
in each of the investment techniques listed below consistent with the Funds’
investment goals, investment limitations, policies and strategies. In addition
to the fundamental and non-fundamental investment limitations set forth under
the section of this SAI entitled "Investment Limitations", the investment
limitations below are considered to be non-fundamental policies, which may be
changed at any time by a vote of the Trust’s Board. In addition, any stated
percentage limitations are measured at the time of the purchase of a
security.
ADRs,
ADSs, EDRs, CDRs, and GDRs.
American Depositary Receipts (“ADRs”) and American Depositary Shares (“ADSs”)
are U.S. dollar-denominated receipts typically issued by domestic banks or trust
companies that represent the deposit with those entities of securities of a
foreign issuer. They are publicly traded on exchanges or over-the-counter in the
United States. European Depositary Receipts (“EDRs”), which are sometimes
referred to as Continental Depositary Receipts (“CDRs”), and Global Depositary
Receipts (“GDRs”) may also be purchased by the Funds. EDRs, CDRs and GDRs are
generally issued by foreign banks and evidence ownership of either foreign or
domestic securities. Certain institutions issuing ADRs, ADSs, EDRs or GDRs may
not be sponsored by the issuer of the underlying foreign securities. A
non-sponsored depositary may not provide the same shareholder information that a
sponsored depositary is required to provide under its contractual arrangements
with the issuer of the underlying foreign securities. Holders of an unsponsored
depositary receipt generally bear all the costs of the unsponsored facility. The
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through to the holders of the receipts voting rights with
respect to the deposited securities.
Asset-Backed
Securities (“ABS”).
ABS are secured by assets such as company receivables, truck and auto loans,
leases and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
Covered bonds are a type of asset backed security that is created from public
sector loans or mortgage loans where the security is backed by a separate group
of loans. Covered bonds typically carry a 2 to 10 year maturity rate and enjoy
relatively high credit ratings, depending on the quality of the pool of loans
backing the bond.
The
credit quality of an asset-backed security transaction depends on the
performance of the underlying assets. ABS can be structured with various forms
of credit enhancement to address the possibility that some borrowers could miss
payments or even default on their loans. Some ABS are subject to interest-rate
risk and prepayment risk. A change in interest rates can affect the pace of
payments on the underlying loans, which in turn, affects total return on the
securities. ABS also carry credit or default risk. If many borrowers on the
underlying loans default, losses could exceed the credit enhancement level and
result in losses to investors in an ABS transaction. Finally, ABS have structure
risk due to a unique characteristic known as early amortization, or early
payout, risk. Built into the structure of most ABS are triggers for early
payout, designed to protect investors from losses. These triggers are unique to
each transaction and can include: a big rise in defaults on the underlying
loans, a sharp drop in the credit enhancement level, or even the bankruptcy of
the originator. Once early amortization begins, all incoming loan payments
(after expenses are paid) are used to pay investors as quickly as possible based
upon a predetermined priority of payment
Bank
Debt Instruments.
Bank debt instruments in which a Fund may invest consist of certificates of
deposit, bankers' acceptances and time deposits issued by national banks and
state banks, trust companies and mutual savings banks, or of banks or
institutions the accounts of which are insured by the Federal Deposit Insurance
Corporation. Certificates of deposit are negotiable certificates evidencing the
indebtedness of a commercial bank to repay funds deposited with it for a
definite period of time at a stated or variable interest rate. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to
pay
a draft which has been drawn on it by a customer, which instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The Fund will only invest in bankers' acceptances of
banks having a short-term rating of A-1 by Standard and Poor's Ratings Services
("S&P") or Prime-1 by Moody's Investors Service, Inc. ("Moody's"). Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. A Fund will not invest in
time deposits maturing in more than seven days if, as a result thereof, more
than 10% of the value of its net assets would be invested in such securities and
other illiquid securities.
Bear
Funds.
The Funds may invest in bear funds. Bear funds are designed to allow investors
to speculate on anticipated decreases in the S&P 500® Index
or another securities market index or to hedge an existing portfolio of
securities or mutual fund shares. Due to the nature of bear funds, investors
could experience substantial losses during sustained periods of rising equity
prices. This is the opposite result expected of investing in a traditional
equity mutual fund in a generally rising stock market. Bear funds employ certain
investment techniques, including engaging in short sales and in certain
transactions in stock index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes. Using these techniques,
bear funds will generally incur a loss if the price of the underlying security
or index increases between the date of the employment of the technique and the
date on which the fund terminates the position. Bear funds will generally
realize a gain if the underlying security or index declines in price between
those dates. The amount of any gain or loss on an investment technique may be
affected by any premium or amounts in lieu of dividends or interest that the
Funds pay or receive as a result of the transaction.
Borrowing
and Leveraging.
The Funds may borrow money from banks (including their custodian bank) or from
lenders to the extent permitted by applicable law. The 1940 Act requires the
Fund to maintain asset coverage (total assets, including assets acquired with
borrowed funds, less liabilities exclusive of borrowings) of at least 300% for
all such borrowings. If at any time the value of the Fund's assets should fail
to meet this 300% coverage test, the Fund, within three days (not including
Sundays and holidays), will reduce the amount of its borrowings to the extent
necessary to meet this test. A Fund may be required to liquidate portfolio
securities at a time when it would be disadvantageous to do so in order to meet
the 300% coverage test or make payments with respect to borrowing. The Fund will
not make any borrowings or enter into a reverse repurchase agreement that would
cause its outstanding borrowings to exceed one-third of the value of its total
assets.
Leveraging
a Fund through borrowing or other means (e.g., certain uses of derivatives)
creates an opportunity for increased net income, but, at the same time, creates
special risk considerations. Leveraging creates interest expenses for a Fund
which could exceed the income from the assets retained. To the extent the income
derived from securities purchased with borrowed funds exceeds the interest that
a Fund will have to pay, a Fund’s net income will be greater than if leveraging
were not used. Conversely, if the income from the assets retained with borrowed
funds is not sufficient to cover the cost of leveraging, the net income of a
Fund will be less than if leveraging were not used, and therefore the amount
available for distribution to shareholders as dividends will be reduced. As
further outlined in the “Derivatives” subsection, the SEC adopted Rule 18f-4
(the “Derivatives Rule”) on October 28, 2020, and in doing so announced it would
rescind SEC releases, guidance and no-action letters related to funds' coverage
and asset segregation practices. Funds were required to comply with the
Derivatives Rule requirements by August 19, 2022. Interest rate arbitrage
transactions, reverse repurchase agreements and dollar roll transactions create
leverage and will be entered into in accordance with the regulatory requirements
described in the “Derivatives” subsection.
In
an interest rate arbitrage transaction, a Fund borrows money at one interest
rate and lends the proceeds at another, higher interest rate. These leverage
transactions involve a number of risks; including the risk that the borrower
will fail or otherwise become insolvent or that there will be a significant
change in prevailing interest rates. The Funds may be required to liquidate
portfolio securities at a time when it would be disadvantageous to do so in
order to make payments with respect to any borrowing. The Funds have adopted
fundamental limitations and non-fundamental limitations which restrict
circumstances in which and degrees to which the Funds can engage in borrowing.
See the section entitled “Investment Limitations,” below.
Business
Development Companies (“BDCs”).
BDCs are a type of closed-end fund regulated under the 1940 Act. BDCs are
publicly-traded mezzanine/private equity funds that typically invest in and lend
to small and medium-sized private companies that may not have access to public
equity markets for capital raising. BDCs are unique in that at least 70% of
their investments must be made to private U.S. businesses and BDCs are required
to make available significant managerial assistance to their portfolio
companies. BDCs are not taxed on income distributed to shareholders provided
they comply with the applicable requirements of the Internal Revenue Code of
1986, as amended (the “Code”). BDCs have expenses associated with their
operations. Accordingly, the Fund will indirectly bear its proportionate share
of any management and other expenses, and of any performance based fees, charged
by the BDCs in which it invests.
Investments
in BDCs are subject to various risks, including management’s ability to meet the
BDC’s investment objective, and to manage the BDC’s portfolio when the
underlying securities are redeemed or sold, during periods of market turmoil and
as
investors’
perceptions regarding a BDC or its underlying investments change. BDC shares are
not redeemable at the option of the BDC shareholder and, as with shares of other
closed-end funds; they may trade in the secondary market at a discount to their
NAV.
Canadian
Income Trusts.
A Canadian Income Trust is a qualified income trust as designated by the Canada
Revenue Agency that operates as a profit-seeking corporation. This type of
income trust, which pays out all earnings to unit holders before paying taxes,
is usually traded publicly on a securities exchange. Canadian income trusts
enjoy special Canadian corporate tax privileges.
Commercial
Paper.
Commercial paper consists of short-term (usually from one to two hundred seventy
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A Fund will only invest in taxable commercial paper
provided the paper is rated in one of the two highest categories by any two
nationally recognized statistical rating organizations ("NRSROs") (or by any one
NRSRO if the security is rated by only that NRSRO). A Fund may also invest in
unrated commercial paper of issuers who have outstanding unsecured debt rated Aa
or better by Moody's or AA or better by S&P. Certain notes may have floating
or variable rates. Variable and floating rate notes with a demand notice period
exceeding seven days will be subject to the Fund's restrictions on illiquid
investments (see "Investment Limitations") unless, in the judgment of the
sub-advisor, subject to the direction of the Board of Trustees, such note is
liquid. The Funds do not presently intend to invest in taxable commercial paper.
Appendix A contains more information about commercial paper
ratings.
Commodity
Futures Trading Commission Regulation.
The Balanced Fund and the Advisor have claimed exclusion or exemption from
registering with the Commodity Futures Trading Commission (the “CFTC”). The
Fund, as applicable, complies with Rule 4.5 under the Commodity Exchange Act
(the “CEA”), which allows a mutual fund to be conditionally excluded from the
definition of the term “commodity pool.” Similarly, so long as the
applicable Fund satisfies this conditional exclusion, the Advisor intends to
comply with Rule 4.5, which allows the Advisor to be conditionally excluded from
the definition of “commodity pool operator” (“CPO”), and Rule 4.14(a)(5), which
provides a conditional exemption from registering as a “commodity trading
advisor.” The Advisor, on behalf of the applicable Fund and itself, has
filed a claim with the CFTC claiming the CPO exemption. Therefore, neither
the applicable Fund nor the Advisor expect to become subject to registration
under the CEA.
Common
Stocks.
Common stocks are securities that represent units of ownership in a company.
Common stocks usually carry voting rights and earn dividends. Unlike preferred
stocks, which are described below, dividends on common stocks are not fixed but
are declared at the discretion of the board of directors of the issuing
company.
Convertible
Securities.
Convertible securities are corporate securities that are exchangeable for a set
number of another security at a pre-stated price. Convertible securities
typically have characteristics of both fixed income and equity securities.
Because of the conversion feature, the market value of a convertible security
tends to move with the market value of the underlying stock. The value of a
convertible security is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
A
synthetic convertible security is a combination investment in which a Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. government securities and (ii) call options or warrants on
the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While
providing a fixed income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords a shareholder the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security’s
underlying common stock. A synthetic convertible position has similar investment
characteristics, but may differ with respect to credit quality, time to
maturity, trading characteristics and other factors. Because a Fund will create
synthetic convertible positions only out of high grade fixed income securities,
the credit rating associated with a Fund’s synthetic convertible investments is
generally expected to be higher than that of the average convertible security,
many of which are rated below high grade. However, because the options used to
create synthetic convertible positions will generally have expirations between
one month and three years of the time of purchase, the maturity of these
positions will generally be shorter than average for convertible securities.
Since the option component of a convertible security or synthetic convertible
position is a wasting asset (in the sense of losing “time value” as maturity
approaches), a synthetic convertible position may lose such value more rapidly
than a convertible security of longer maturity; however, the gain in option
value due to appreciation of the underlying stock may exceed such time value
loss. The market price of the option component generally reflects these
differences in maturities, and the Advisor and applicable sub-advisor take such
differences into account when evaluating such positions. When a synthetic
convertible position “matures” because of the expiration of the associated
option, a Fund may extend the maturity by
investing
in a new option with longer maturity on the common stock of the same or
different issuer. If a Fund does not so extend the maturity of a position, it
may continue to hold the associated fixed income security.
Corporate
Debt Securities.
Corporate debt securities are obligations of a corporation to pay interest and
repay principal. Corporate debt securities include commercial paper, notes and
bonds.
Corporate
Bonds.
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors, the
corporation promises to pay investors interest, and repay the principal amount
of the bond or note.
Custody
Receipts.
The Funds may invest in custody receipts that represent corporate debt
securities. Custody receipts, such as Morgan Stanley TRACERs, are derivative
products which, in the aggregate, evidence direct ownership in a pool of
securities. Typically, a sponsor will deposit a pool of securities with a
custodian in exchange for custody receipts evidencing those securities.
Generally the sponsor will then sell those custody receipts in negotiated
transactions at varying prices that are determined at the time of sale. Each
custody receipt evidences the individual securities in the pool, and the holder
of a custody receipt generally will have all the rights and privileges of owners
of those securities. Each holder of a custody receipt will be treated as
directly purchasing its pro rata share of the securities in the pool, for an
amount equal to the amount that such holder paid for its custody receipt. If a
custody receipt is sold, a holder will be treated as having directly disposed of
its pro rata share of the securities evidenced by the custody receipt.
Additionally, the holder of a custody receipt may withdraw the securities
represented by a custody receipt subject to certain conditions.
Custody
receipts are generally subject to the same risks as those securities evidenced
by the receipts which, in the case of the Funds, are corporate debt securities.
Additionally, custody receipts may be less liquid than the underlying securities
if the sponsor fails to maintain a trading market.
Derivatives.
The Funds may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement, the value
of which is based on, or “derived” from, a traditional security, asset, or
market index. There are many different types of derivatives and many
different ways to use them, and there is a range of risks associated with those
uses. Futures and options are commonly used both for traditional hedging
purposes to attempt to limit exposure to changing interest rates, securities
prices, or currency exchange rates and as a method of gaining exposure to a
particular security, securities index or other financial instrument without
investing directly in those instruments. Some uses of derivatives may have
the effect of creating leverage, which tends to magnify the portfolio effects of
the underlying instrument’s price changes as market conditions change.
Leverage involves the use of a small amount of money to control a large amount
of financial assets, and can lead to significant losses. A sub-advisor
will use derivatives only in circumstances where the sub-advisor believes they
offer the most economic means of improving the risk/reward profile of the
Fund. Derivatives will not be used to acquire exposure to changes in the
value of assets or indexes that by themselves would not be purchased for the
Funds. The use of derivatives for non-hedging purposes may be considered
speculative. A description of the specific derivatives that the Funds may
use and some of their associated risks is discussed below under the captions
"Equity Related Securities," "Foreign Securities-Forward Foreign Currency
Contracts," "Futures Contracts and Options on Futures Contracts," "Borrowing and
Leveraging," "Options" and "Swap Agreements."
Additionally,
the regulation of the U.S. and non-U.S. derivatives markets has undergone
substantial change in recent years and such change may continue. In particular,
effective August 19, 2022 (the “Compliance Date”), Rule 18f-4 under the 1940 Act
(the “Derivatives Rule”) replaced the asset segregation regime of Investment
Company Act Release No. 10666 (“Release 10666”) with a new framework for the use
of derivatives by registered funds. As of the Compliance Date, the SEC rescinded
Release 10666 and withdrew no-action letters and similar guidance addressing a
fund's use of derivatives and began requiring funds to satisfy the requirements
of the Derivatives Rule. As a result, on or after the Compliance Date, the Funds
are no longer required to engage in “segregation” or “coverage” techniques with
respect to derivatives transactions and will instead comply with the applicable
requirements of the Derivatives Rule.
The
Derivatives Rule mandates that a fund adopt and/or implement: (i) value-at-risk
limitations (“VaR”); (ii) a written derivatives risk management program; (iii)
new Board oversight responsibilities; and (iv) new reporting and recordkeeping
requirements. In the event that a fund's derivative exposure is 10% or less of
its net assets, excluding certain currency and interest rate hedging
transactions, it can elect to be classified as a limited derivatives user
(“Limited Derivatives User”) under the Derivatives Rule, in which case the fund
is not subject to the full requirements of the Derivatives Rule. Limited
Derivatives Users are excepted from VaR testing, implementing a derivatives risk
management program, and certain Board oversight and reporting requirements
mandated by the Derivatives Rule. However, a Limited Derivatives User is still
required to implement written compliance policies and procedures reasonably
designed to manage its derivatives risks. Each Fund has elected to be treated as
a Limited Derivatives User.
The
Derivatives Rule also provides special treatment for reverse repurchase
agreements, similar financing transactions and unfunded commitment agreements.
Specifically, a fund may elect whether to treat reverse repurchase agreements
and similar financing transactions as “derivatives transactions” subject to the
requirements of the Derivatives Rule or as senior securities equivalent to bank
borrowings for purposes of Section 18 of the 1940 Act. In addition, when-issued
or forward settling securities transactions that physically settle within
35-days are deemed not to involve a senior security.
Equity-Linked
Notes ("ELNs").
A Fund may purchase ELNs. The principal or coupon payment on an ELN is linked to
the performance of an underlying security or index. ELNs may be used, among
other things, to provide a Fund with exposure to international markets while
providing a mechanism to reduce foreign tax or regulatory restrictions imposed
on foreign investors. The risks associated with purchasing ELNs include the
creditworthiness of the issuer and the risk of counterparty default. Further, a
Fund’s ability to dispose of an ELN will depend on the availability of liquid
markets in the instruments. The purchase and sale of an ELN is also subject to
the risks regarding adverse market movements, possible intervention by
governmental authorities, and the effects of other political and economic
events.
Equity-Linked
Warrants.
Equity-linked warrants provide a way for investors to access markets where entry
is difficult and time consuming due to regulation. Typically, a broker issues
warrants to an investor and then purchases shares in the local market and issues
a call warrant hedged on the underlying holding. If the investor exercises his
call and closes his position, the shares are sold and the warrant is redeemed
with the proceeds.
Each
warrant represents one share of the underlying stock. Therefore, the price,
performance and liquidity of the warrant are all directly linked to the
underlying stock. The warrants can be redeemed for 100% of the value of the
underlying stock (less transaction costs). Being American style warrants, they
can be exercised at any time. The warrants are U.S. dollar denominated and
priced daily on several international stock exchanges.
Equity-Related
Securities. A
Fund may invest in equity-related securities, including low-exercise-price
options (“LEPOs”), low exercise price warrants (“LEPWs”), and participatory
notes (“P-notes”) to gain exposure to issuers in certain emerging or frontier
market countries. LEPOs, LEPWs, and P-notes are offshore derivative instruments
issued to foreign institutional investors and their sub-accounts against
underlying securities traded in emerging or frontier markets. These
securities may be listed on an exchange or traded over-the-counter, and are
similar to ADRs. As a result, the risks of investing in LEPOs, LEPWs, and
P-notes are similar to depositary receipts risk and foreign securities risk in
general. Specifically these securities entail both counterparty risk—the risk
that the issuer of the LEPO, LEPW, or P-Note may not be able to fulfill its
obligations or that the holder and counterparty or issuer may disagree as to the
meaning or application of contractual terms—and liquidity risk—the risk that a
liquid market may not exist for such securities.
Eurobonds.
A Eurobond is a bond denominated in U.S. dollars or another currency and sold to
investors outside of the country whose currency is used. Eurobonds may be issued
by government or corporate issuers, and are typically underwritten by banks and
brokerage firms from numerous countries. While Eurobonds typically pay principal
and interest in Eurodollars (U.S. dollars held in banks outside of the United
States), they may pay principal and interest in other currencies.
Exchange-Traded
Funds (“ETFs”).
The Funds may invest in ETFs. An ETF is a fund that holds a portfolio of common
stocks and is often designed to track the performance of a particular securities
index or sector of an index, like the S&P 500®
Index or NASDAQ, or a portfolio of bonds that may be designed to track a bond
index. Because they may be traded like stocks on a securities exchange (e.g.,
the New York Stock Exchange; the NYSE MKT or the NASDAQ Stock Market), ETFs may
be purchased and sold throughout the trading day based on their market price.
Each share of an ETF represents an undivided ownership interest in the portfolio
held by an ETF. ETFs that track indices or sectors of indices hold
either:
•shares
of all of the companies (or, for a fixed-income ETF, bonds) that are represented
by a particular index in the same proportion that is represented in the index
itself; or
•shares
of a sampling of the companies (or, for a fixed-income ETF, bonds) that are
represented by a particular index in a proportion meant to track the performance
of the entire index.
ETFs
are generally registered as investment companies and issue large blocks of
shares (typically 50,000) called “creation units” in exchange for a specified
portfolio of the ETF’s underlying securities, plus a cash payment generally
equal to accumulated dividends of the securities (net of expenses) up to the
time of deposit. Creation units are redeemed in kind for a portfolio of the
underlying securities (based on the ETF’s NAV), together with a cash payment
generally equal to accumulated dividends as of the date of redemption. As
investment companies, ETFs incur fees and expenses such as trustee fees,
operating expenses, licensing fees, registration fees, and marketing expenses,
each of which will be reflected in the NAV of ETFs. Accordingly, ETF
shareholders pay their proportionate share of these expenses.
Foreign
Securities.
Except as expressly set forth herein and in the prospectus, the Funds may invest
in securities of foreign issuers and in sponsored and unsponsored depositary
receipts. Foreign companies are companies that: (i) are organized under the
laws of a foreign country or maintain their principal place of business in a
foreign country; (ii) the principal trading market for their securities is
located in a foreign country; or (iii) derive at least 50% of their revenues or
profits from operations in a foreign country or have at least 50% of their
assets located in a foreign country. Investing in securities issued by
foreign companies and governments involves considerations and potential risks
not typically associated with investing in obligations issued by the U.S.
government and domestic corporations. Less information may be available about
foreign companies than about domestic companies and foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. The values of foreign investments are
affected by changes in currency rates or exchange control regulations,
restrictions or prohibitions on the repatriation of foreign currencies,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United States
or abroad) or changed circumstances in dealings between nations. Costs are
also incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions and custody fees are generally higher
than those charged in the United States, and foreign securities markets may be
less liquid, more volatile and less subject to governmental supervision than in
the United States. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations and could be subject to
extended clearance and settlement periods.
In
addition, there are risks relating to ongoing concerns regarding the economies
of certain European countries and their sovereign debt, as well as the potential
for one or more countries to leave the European Union ("EU").
Brexit
Risk.
Uncertainties surrounding the sovereign debt of a number of EU countries and the
viability of the EU have disrupted and may in the future disrupt markets in the
United States and around the world. If one or more countries leave the EU or the
EU dissolves, the global securities markets likely will be significantly
disrupted. In January 2020, the United Kingdom (“UK”) left the EU, commonly
referred to as “Brexit”, and the UK ceased to be a member of the EU. 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 went into
effect May 1, 2021 after ratification. While the full impact of Brexit is
unknown, Brexit has already resulted in volatility in European and global
markets. There remains significant market uncertainty regarding Brexit’s
ramifications, and the range and potential implications of possible political,
regulatory, economic, and market outcomes are difficult to predict. The
uncertainty resulting from the transition period may affect other countries in
the EU and elsewhere, cause volatility within the EU, or trigger prolonged
economic downturns in certain European countries. Despite the influence of the
lockdowns, and the economic bounce back, Brexit has had a material impact on the
UK's economy. Additionally, trade between the UK and the EU did not benefit from
the global rebound in trade in 2021, and remained at the very low levels
experienced at the start of the coronavirus (“COVID-19”) pandemic in 2020,
highlighting Brexit's potential long-term effects on the UK economy. In
addition, Brexit may create additional and substantial economic stresses for the
UK, including a contraction of the UK economy and price volatility in UK stocks,
decreased trade, capital outflows, devaluation of the British pound, wider
corporate bond spreads due to uncertainty, and declines in business and consumer
spending as well as foreign direct investment. Brexit may also adversely affect
UK-based financial firms that have counterparties in the EU or participate in
market infrastructure (trading venues, clearing houses, settlement facilities)
based in the EU. Additionally, the spread of the COVID-19 pandemic is likely to
continue to stretch the resources and deficits of many countries in the EU and
throughout the world, increasing the possibility that countries may be unable to
make timely payments on their sovereign debt. These events and the resulting
market volatility may have an adverse effect on the performance of a
Fund.
Foreign
Market Risk.
A Fund is subject to the risk that, because there are generally fewer investors
on foreign exchanges and a smaller number of shares traded each day, it may be
difficult for a Fund to buy and sell securities on those exchanges. In addition,
prices of foreign securities may fluctuate more than prices of securities traded
in the United States. Investments in foreign markets may also be adversely
affected by governmental actions such as the imposition of punitive taxes. In
addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or in
certain industries. Any of these actions could severely affect security prices,
impair a Fund’s ability to purchase or sell foreign securities or transfer a
Fund’s assets or income back into the United States or otherwise adversely
affect a Fund’s operations. Other potential foreign market risks include
exchange controls, difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal judgments in
foreign courts and political and social conditions, such as diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets or imposition of (or change in) exchange control regulations.
Legal remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or other
foreign countries. In addition, changes in government
administrations
or economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
adversely affect a Fund’s operations.
Public
Availability of Information.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. A Fund’s foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities in U.S. companies. In addition, there is
generally less government supervision and regulation of securities exchanges,
brokers and issuers in foreign countries than in the United States.
Settlement
Risk.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures and
trade regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and certain non-U.S.
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates in markets that still rely on physical
settlement. Settlements in certain foreign countries at times have not kept pace
with the number of securities transactions; these problems may make it difficult
for a Fund to carry out transactions. If a Fund cannot settle or is delayed in
settling a purchase of securities, it may miss attractive investment
opportunities and certain of its assets may be uninvested with no return earned
thereon for some period. If a Fund cannot settle or is delayed in settling a
sale of securities, it may lose money if the value of the security then declines
or, if it has contracted to sell the security to another party; a Fund could be
liable to that party for any losses incurred. Dividends or interest on, or
proceeds from the sale of, foreign securities may be subject to foreign taxes on
income from sources in such countries.
Governmental
Supervision and Regulation/Accounting Standards.
Many foreign governments supervise and regulate stock exchanges, brokers and the
sale of securities less than does the United States. Some countries may not have
laws to protect investors comparable to the U.S. securities laws. For example,
some foreign countries may have no laws or rules against insider trading.
Insider trading occurs when a person buys or sells a company’s securities based
on nonpublic information about that company. In addition, the U.S. government
has from time to time in the past imposed restrictions, through penalties and
otherwise, on foreign investments by U.S. investors. Accounting standards in
other countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for a Fund to completely and accurately
determine a company’s financial condition. Also, brokerage commissions and other
costs of buying or selling securities often are higher in foreign countries than
they are in the United States. This reduces the amount a Fund can earn on its
investments.
Foreign
Currency Risk.
While a Fund’s net assets are valued in U.S. dollars, the securities of foreign
companies are frequently denominated in foreign currencies. Thus, a change in
the value of a foreign currency against the U.S. dollar will result in a
corresponding change in value of securities denominated in that currency. Some
of the factors that may impair the investments denominated in a foreign currency
are: (1) it may be expensive to convert foreign currencies into U.S. dollars and
vice versa; (2) complex political and economic factors may significantly affect
the values of various currencies, including U.S. dollars, and their exchange
rates; (3) government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts, since
exchange rates may not be free to fluctuate in response to other market forces;
(4) there may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis; (5) available
quotation information is generally representative of very large round-lot
transactions in the inter-bank market and thus may not reflect exchange rates
for smaller odd-lot transactions (less than $1 million) where rates may be less
favorable; and (6) the inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while the markets
for the underlying currencies remain open, certain markets may not always
reflect significant price and rate movements.
Restrictions
on Investments.
There may be unexpected restrictions on investments in companies located in
certain foreign countries. For example, on November 12, 2020, the President of
the United States signed an Executive Order prohibiting U.S. persons from
purchasing or investing in publicly-traded securities of companies identified by
the U.S. government as “Communist Chinese military companies,” or in instruments
that are derivative of, or are designed to provide investment exposure to, such
securities. In addition, to the extent that a Fund holds such a security, one or
more Fund intermediaries may decline to process customer orders with respect to
such Fund unless and until certain representations are made by the Fund or the
prohibited holdings are divested. As a result of forced sales of a security, or
inability to participate in an investment the manager otherwise believes is
attractive, a Fund may incur losses.
Forward
Foreign Currency Contracts.
A Fund may enter into forward foreign currency contracts to manage foreign
currency exposure and as a hedge against possible variations in foreign exchange
rates. A Fund may enter into forward foreign currency contracts to hedge a
specific security transaction or to hedge a portfolio position. These contracts
may be bought or sold to
protect
a Fund, to some degree, against possible losses resulting from an adverse change
in the relationship between foreign currencies and the U.S. dollar. A Fund also
may invest in foreign currency futures and in options on currencies. A forward
contract involves an obligation to purchase or sell a specific currency amount
at a future date, agreed upon by the parties, at a price set at the time of the
contract. A Fund may enter into a contract to sell, for a fixed amount of U.S.
dollars or other appropriate currency, the amount of foreign currency
approximating the value of some or all of a Fund’s securities denominated in
such foreign currency.
By
entering into forward foreign currency contracts, a Fund will seek to protect
the value of its investment securities against a decline in the value of a
currency. However, these forward foreign currency contracts will not eliminate
fluctuations in the underlying prices of the securities. Rather, they simply
establish a rate of exchange which one can obtain at some future point in time.
Although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, they also tend to limit any potential gain
which might result should the value of such currency increase. At the maturity
of a forward contract, a Fund may either sell a portfolio security and make
delivery of the foreign currency, or it may retain the security and terminate
its contractual obligation to deliver the foreign currency by purchasing an
“offsetting” contract with the same currency trader, obligating it to purchase,
on the same maturity date, the same amount of the foreign currency. A Fund may
realize a gain or loss from currency transactions.
When
entering into a contract for the purchase or sale of a security in a foreign
currency, a Fund may enter into a forward foreign currency contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
Also,
when a Fund’s portfolio manager anticipates that a particular foreign currency
may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Fund may enter into a forward contract to
sell, for a fixed amount, the amount of foreign currency approximating the value
of its securities denominated in such foreign currency. With respect to any such
forward foreign currency contract, it will not generally be possible to match
precisely the amount covered by that contract and the value of the securities
involved due to changes in the values of such securities resulting from market
movements between the date the forward contract is entered into and the date it
matures. In addition, while forward foreign currency contracts may offer
protection from losses resulting from declines in value of a particular foreign
currency, they also limit potential gains which might result from increases in
the value of such currency. A Fund will also incur costs in connection with
forward foreign currency contracts and conversions of foreign currencies into
U.S. dollars. A Fund will only enter into Forward Foreign Currency Contracts
subject to the regulatory limitations outlined in the “Derivatives”
subsection.
Emerging
Markets and Frontier Market Securities.
Emerging market countries are generally countries that are included in the
Morgan Stanley Capital International (“MSCI”) Emerging Markets Index, or
otherwise excluded from the MSCI World Index. As of September 30, 2022, the
countries in the MSCI World Index included: Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom, and the United States. As of September 30,
2022, the countries in the MSCI Emerging Markets Index included: Brazil, Chile,
China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia,
Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia,
South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Frontier market
countries, which are those emerging market countries that have the smallest,
least mature economies and least developed capital markets, are generally
countries that are included in the MSCI Frontier Markets Index. As of September
30, 2022, the countries in the MSCI Frontier Markets Index included: Bahrain,
Bangladesh, Benin, Burkina Faso, Croatia, Estonia, Guinea-Bissau, Iceland, Ivory
Coast, Jordan, Kazakhstan, Kenya, Lithuania, Mali, Mauritius, Morocco, Niger,
Nigeria, Oman, Pakistan, Romania, Senegal, Serbia, Slovenia, Sri Lanka, Togo,
Tunisia and Vietnam. The country composition of the MSCI Emerging Markets Index,
the MSCI World Index and the MSCI Frontier Markets Index can change over
time.
Investments
in the securities of issuers domiciled in countries with emerging capital
markets involve certain additional risks that do not generally apply to
investments in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets; (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments; (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other foreign or U.S.
governmental laws or restrictions applicable to such investments; (iv) national
policies that may limit the Fund’s investment opportunities such as restrictions
on investment in issuers or industries deemed sensitive to national interests;
and (v) the lack or relatively early development of legal structures governing
private and foreign investments and private property. In addition to withholding
taxes on investment income, some countries with emerging markets may impose
capital gains taxes on foreign investors.
Political
and economic structures in emerging market countries may be undergoing
significant evolution and rapid development, and these countries may lack the
social, political and economic stability characteristic of more developed
countries. In such a dynamic environment, there can be no assurance that any or
all of these capital markets will continue to present viable investment
opportunities for the Fund. Some of these countries may have in the past failed
to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. There is no assurance that such
expropriations will not reoccur. In such an event, it is possible that the Fund
could lose the entire value of its investments in the affected market. As a
result, the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of investments in these countries
and the availability to a Fund of additional investments. The small size and
inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most
Western European countries.
Also,
there may be less publicly available information about issuers in emerging
markets than would be available about issuers in more developed capital markets,
and such issuers may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which U.S. companies
are subject. In certain countries with emerging capital markets, reporting
standards vary widely. As a result, traditional investment measurements used in
the United States, such as price/earnings ratios, may not be applicable.
Emerging market securities may be substantially less liquid and more volatile
than those of mature markets, and company shares may be held by a limited number
of persons. This may adversely affect the timing and pricing of the Fund’s
acquisition or disposal of securities.
Practices
in relation to settlement of securities transactions in emerging markets involve
higher risks than those in developed markets, in part because the Fund will need
to use brokers and counterparties that are less well capitalized, and custody
and registration of assets in some countries may be unreliable. The possibility
of fraud, negligence, undue influence being exerted by the issuer or refusal to
recognize ownership exists in some emerging markets, and, along with other
factors, could result in ownership registration being completely lost. The Fund
would absorb any loss resulting from such registration problems and may have no
successful claim for compensation.
Some
emerging market countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging market countries, however,
permit indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. Investments in these investment funds may be subject to
the provisions of the 1940 Act limiting investments in other investment
companies. Shareholders of a Fund that invests in such investment funds will
bear not only their proportionate share of the expenses of a Fund (including
operating expenses and the fees of the adviser), but also will indirectly bear
similar expenses of the underlying investment funds. In addition, these
investment funds may trade at a discount or premium to the fund’s NAV.
Participatory
notes (commonly known as P-notes) are offshore derivative instruments issued to
foreign institutional investors and their sub-accounts against underlying Indian
securities listed on the Indian bourses. These securities are not registered
with the Securities and Exchange Board of India. Participatory notes are similar
to ADRs, which are negotiable certificates issued by a U.S. bank and traded on
U.S. exchanges. ADRs are denominated in U.S. dollars and represent a specified
number of shares in a foreign security held by a U.S. financial institution
located in a foreign country. Both P-notes and ADRs are subject to the risks
discussed above with respect to securities of foreign issuers in
general.
Risk
of Investing in China A-shares (International Growth Fund only).
The Fund may invest in China A-shares of certain Chinese companies listed and
traded on the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange
("SZSE") through the Shanghai-Hong Kong and the Shenzhen-Hong Kong Stock Connect
Program (“Stock Connect”). Stock Connect is a securities trading and clearing
program developed by Hong Kong Exchanges and Clearing Limited ("HKEX"), the SSE,
the SZSE and the China Securities Depository and Clearing Corporation Limited.
Stock Connect facilitates foreign investment in the People’s Republic of China
(“PRC”) via brokers in Hong Kong. Investors through Stock Connect are subject to
PRC regulations and SSE listing rules, among others. These could include
limitations on trading or suspension of trading. There are special
considerations and risks associated with investing in A-shares via Stock
Connect.
Quota
Limitation Risk:
Trades
through Stock Connect are subject to daily quotas. If the daily quota is reached
during continuous trading or the opening call session, new buy orders will be
rejected for the remainder of the day. Thus, there is no guarantee that a buy
order can be effectively placed through Stock Connect. Such limitations may
restrict the Fund from investing in A-shares at the desired time or for the
desired quantity, which could have an effect on the Fund’s capacity to
successfully follow its investment strategy.
Block
or Manual Trade Not Allowed:
All trading must be conducted on SSE and/or SZSE, which means that no
over-the-counter or manual trades are permitted. Investment opportunities may be
limited because block trades, manual trades, reporting or internalization are
not permitted for Stock Connect shares.
Clearing,
Settlement and Custody Risks:
The Hong Kong Securities Clearing Company Limited, a wholly-owned subsidiary of
HKSCC and ChinaClear, the national central counterparty of China’s securities
market that serves as a comprehensive network of clearing, settlement and stock
holding infrastructure, establishes the clearing links. Both HKSCC and
ChinaClear participate in facilitating the clearing and settlement of the
cross-border trades of the other. In the event of ChinaClear defaulting, HKSCC
will in good faith seek recovery of stocks and monies from ChinaClear through
the accessible legal channels. In such an event, the Fund may not fully recover
its losses. In addition, the Stock Connect program’s trading, clearance and
settlement procedures are relatively untested in China, which could pose risks
to the Fund, including uncertainty related to “single-sided settlement”
procedures in which local sub-custodians receive settlement instructions from
the Fund’s executing broker as opposed to the Fund’s custodian.
Overseas
investors, such as the Fund, will not hold physical A-shares, but rather
maintain their SSE securities with broker or custodial accounts with the HKSCC.
Additionally, all trades of eligible Stock Connect A-shares must be settled in
renminbi (RMB). This may require that investors have well-timed access to a
reliable source of offshore RMB, which cannot always be guaranteed.
Nominee
Arrangements and Legal Rights:
Under
a nominee structure, HKSCC is the nominee holder of the Stock Connect A-shares
acquired by overseas investors, including the Fund. HKSCC will be the named
registrar of the purchased shares. A-shares purchased through the Northbound
Trading Link (i.e. non-Mainland investor market access channel) entitles foreign
investors to proprietary rights and benefits in accordance with applicable laws.
Under the Stock Connect guidelines, overseas investors may exercise their
shareholder rights as beneficial owners of SSE securities in accordance with the
laws and regulations of the Hong Kong Special Administrative Region. Beneficial
owners of SSE Securities may exercise their rights with the HKSCC as the nominee
holder, including the right to call, participate in shareholders’ meetings,
right to exercise voting rights, the right to receive dividends, amongst other
rights.
Current
PRC law does not expressly provide clear guidance for a beneficial owner under a
nominee structure to pursue or prevent legal action. However, the HKSCC, as
nominee holder of SSE Securities, may exercise shareholder rights and take legal
actions for its foreign investors. The courts in China may find that the
registrar, as a nominee or custodian, has full ownership of the Stock Connect
shares. PRC laws have not distinguished between legal ownership and beneficial
ownership, particularly regarding the Fund and its investors. Furthermore, there
have been few cases involving a nominee account structure in the PRC courts.
Other considerations regarding the rights and interests of the Fund relate to
uncertain enforcement mechanisms under PRC law. Consequently, the Fund is not
assured that its ownership of A-shares is in full possession at all times.
Furthermore, the Fund may face delays or difficulties in enforcing its ownership
rights in A-shares.
Tax
& Expense Risks:
Additional considerations include different fees, costs and taxes imposed on
foreign investors purchasing A-shares through Stock Connect. The Fund’s
investment may be subject to a number of tax rules. Application of these rules
may be uncertain. Mainland China implemented tax reforms in recent years, and
may amend or revise its existing tax laws in the future. These amendments may
have retroactive effects. Changes in applicable Chinese tax law could reduce
after-tax profits of the Fund. This could include reducing the after-tax profits
of companies in China in which the Fund invests. Chinese taxes that may apply to
the Fund's investments include income tax or withholding tax on dividends,
interest or gains earned by the Fund. These various uncertainties in Chinese tax
rules could result in unexpected tax liabilities for the Fund. Additionally,
taxes and related expenses may be higher than comparable expenses and taxes
imposed on foreign owners of other securities providing similar investment
exposure.
Additional
Considerations and Risks:
There is a risk that information technology and networking systems will not
properly function and that changes may occur as the market develops. Thus,
A-shares trading may be disrupted if systems do not function properly. There may
also be information technology capabilities and other risk management
requirements specified by the relevant exchanges or clearinghouses. See
"Emerging Market and Frontier Market Securities" above for more information on
other risks.
Futures
Contracts and Options on Futures Contracts.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security 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. A
Fund may use futures contracts and related options for bona
fide
hedging purposes, to offset changes in the value of securities held or expected
to be acquired or be disposed of, to minimize fluctuations in foreign
currencies, or to gain exposure to a particular market or instrument. Some
strategies reduce a Fund’s
exposure
to price fluctuations, while others tend to increase its exposure. A Fund will
minimize the risk that it will be unable to close out a futures contract by only
entering into futures contracts which are traded on national futures
exchanges.
Stock
and bond index futures are futures contracts for various stock and bond indices
that are traded on registered securities exchanges. Stock and bond index futures
contracts obligate the seller to deliver (and the purchaser to take) an amount
of cash equal to a specific dollar amount times the difference between the value
of a specific stock or bond index at the close of the last trading day of the
contract and the price at which the agreement is made.
Stock
and bond index futures contracts are bilateral agreements 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 stock or bond 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 stocks or bonds comprising the
index is made; generally contracts are closed out prior to the expiration date
of the contracts.
No
price is paid upon entering into futures contracts. Instead, a Fund would be
required to deposit an amount of cash or U.S. Treasury securities known as
“initial margin.” Subsequent payments, called “variation margin,” to and
from the broker, would be made on a daily basis as the value of the futures
position varies (a process known as “marking to market”). The margin is in the
nature of a performance bond or good-faith deposit on a futures
contract.
There
are risks associated with these activities, including the following: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by a Fund and the prices of
futures and options on futures; (3) there may not be a liquid secondary market
for a futures contract or option; (4) trading restrictions or limitations may be
imposed by an exchange; and (5) government regulations may restrict trading in
futures contracts and futures options.
A
Fund may buy and sell futures contracts and related options to manage its
exposure to changing interest rates and securities prices. Some strategies
reduce a Fund’s exposure to price fluctuations, while others tend to increase
its market exposure. Futures and options on futures can be volatile instruments
and involve certain risks that could negatively impact a Fund’s return. When a
Fund purchases or sells a futures contract, or sells an option thereon, a Fund
must deposit initial margin and, in some instances, daily variation margin, to
meet its obligations under a contract with a futures commission
merchant.
Guaranteed
Investment Contracts.
A Fund may make investments in obligations issued by highly rated U.S. insurance
companies, such as guaranteed investment contracts and similar funding
agreements (collectively “GICs”). A GIC is a general obligation of the issuing
insurance company and not a separate account. Under these contracts, a Fund
makes cash contributions to a deposit fund of the insurance company’s general
account. The insurance company then credits to the Fund on a monthly basis
guaranteed interest that is based on an index. The GICs provide that this
guaranteed interest will not be less than a certain minimum rate. GIC
investments that do not provide for payment within seven days after notice are
subject to the Fund’s policy regarding investments in illiquid
securities.
Illiquid
Securities.
Subject to the limitations in the 1940 Act and the rules thereunder, the Funds
may invest in illiquid securities.
No
Fund may acquire an illiquid security if, immediately after the acquisition, it
would have invested more than 15% of its net assets in illiquid securities.
Certain Funds may have additional limitations on investments in illiquid
securities. Illiquid securities are securities that a Fund reasonably expects
cannot be sold or disposed of in current market conditions in seven calendar
days or less without the sale or disposition significantly changing the market
value of the security.
The
Trust has implemented a written liquidity risk management program (the “LRM
Program”) and related procedures to manage the liquidity risk of each Fund in
accordance with Rule 22e-4 under the 1940 Act (“Rule 22e-4”). Rule 22e-4 defines
“liquidity risk” as the risk that a fund could not meet requests to redeem
shares issued by the fund without significant dilution of the remaining
investors' interests in the fund. The Board has designated Touchstone Advisors
to serve as the program administrator ("Program Administrator") of the LRM
Program and the related procedures. As a part of the LRM Program, the Program
Administrator is responsible for identifying illiquid investments and
categorizing the relative liquidity of each Fund's investments in accordance
with Rule 22e-4. Under the LRM Program, the Program Administrator assesses,
manages, and periodically reviews each Fund's liquidity risk, and is responsible
for making periodic reports to the Board and the SEC regarding the liquidity of
each Fund's investments, and for notifying the Board and the SEC of certain
liquidity events specified in Rule 22e-4. The liquidity of each Fund's portfolio
investments is determined based on relevant market, trading and
investment-specific considerations under the LRM Program.
Illiquid
securities include, among others, demand instruments with demand notice periods
exceeding seven days, securities for which there is no active secondary market,
and repurchase agreements with maturities of over seven days in length. A Fund
may
invest in securities that are neither listed on a stock exchange nor traded
over-the-counter, including privately placed securities. Investing in such
unlisted securities, including investments in new and early stage companies, may
involve a high degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Because these types of securities are thinly traded, if at all, and market
prices for these types of securities are generally not readily available, a Fund
typically determines the price for these types of securities in good faith in
accordance with policies and procedures adopted by the Board. Although these
securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by a Fund, or
less than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, a Fund may be required to bear the expenses of
registration.
In
addition, the Funds believe that certain investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and other
similar situations (collectively, “special situations”) could enhance a Fund's
capital appreciation potential. To the extent these investments are deemed
illiquid, a Fund's investment in them will be consistent with their applicable
restriction on investment in illiquid securities. Investments in special
situations and certain other instruments may be liquid, as determined by the
Program Administrator of the Funds' LRM Program.
Inflation-Protected
Debt Securities.
A Fund may invest in inflation-protected debt securities or inflation-indexed
bonds. Inflation-protected debt securities or inflation-indexed bonds include
securities of varying maturities issued by the U.S. government, its agencies and
instrumentalities, such as U.S. Treasury Inflation-Protected Securities
(“TIPS”), as well as securities issued by other entities such as corporations,
municipalities, foreign governments and foreign issuers. Typically, such
securities are structured as fixed income securities whose value is periodically
adjusted according to the rate of inflation. The following two structures are
common: (i) the U.S. Treasury and some other issuers issue inflation-indexed
bonds that accrue inflation into the principal value of the security and (ii)
other issuers may pay out the Consumer Price Index (“CPI”) accruals as part of a
semi-annual coupon. Other types of inflation-indexed bonds exist which use an
inflation index other than the CPI.
Inflation-indexed
bonds issued by the U.S. Treasury, such as TIPS, have maturities of
approximately five, ten or thirty years, although it is possible that securities
with other maturities will be issued in the future. Typically, TIPS pay interest
on a semi-annual basis equal to a fixed percentage of the inflation-adjusted
principal amount. For example, if a Fund purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and the rate of inflation over the first six months was 1%, the
mid-year par value of the bond would be $1,010 and the first semi-annual
interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the
second half of the year resulted in the whole year’s inflation equaling 3%, the
end-of-year par value of the bond would be $1,030 and the second semi-annual
interest payment would be $15.45 ($1,030 times 1.5%).
If
the periodic adjustment rate measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted downward, and consequently the interest
payable on these securities (calculated with respect to a smaller principal
amount) will be reduced. Repayment of the original bond principal upon maturity
(as adjusted for inflation) is guaranteed in the case of TIPS, even during a
period of deflation, although the inflation-adjusted principal received could be
less than the inflation-adjusted principal that had accrued to the bond at the
time of purchase. However, the current market value of the bonds is not
guaranteed and will fluctuate. A Fund may invest in other inflation-related
bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal amount.
The
value of inflation-indexed bonds is expected to change in response to changes in
real interest rates. Real interest rates in turn are tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if the rate
of inflation rises at a faster rate than nominal interest rates, real interest
rates might decline, leading to an increase in value of inflation-indexed bonds.
In contrast, if nominal interest rates increase at a faster rate than inflation,
real interest rates might rise, leading to a decrease in value of
inflation-indexed bonds.
While
inflation-indexed bonds are expected to be protected from long-term inflationary
trends, short-term increases in inflation may lead to a decline in value. If
interest rates rise due to reasons other than inflation (for example, due to
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond’s
inflation measure.
The
periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer
Price Index for All Urban Consumers (“CPI-U”), which is calculated monthly by
the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy.
Inflation-indexed
bonds issued by a foreign government are generally adjusted to reflect a
comparable inflation index calculated by that government. There can be no
assurance that the CPI-U or a foreign inflation index will accurately measure
the real rate of inflation in the prices of goods and services. Moreover, there
can be no assurance that the rate of inflation in a foreign country will be
correlated to the rate of inflation in the United States. If interest rates rise
due to reasons other than inflation (for example, due to changes in currency
exchange rates), investors in these securities may not be protected to the
extent that the increase is not reflected in the bond’s inflation measure. Any
increase in the principal amount of an inflation-indexed bond will be considered
taxable ordinary income for federal income tax purposes, even though the holder
does not receive its principal until maturity. See “Federal Income Taxes” for
more information.
Initial
Public Offerings (“IPOs”).
Due to the typically small size of the IPO allocation available to the Funds and
the nature and market capitalization of the companies involved in IPOs, the
sub-advisors will often purchase IPO shares that would qualify as a permissible
investment for a Fund but will, instead, decide to allocate those IPO purchases
to other funds they advise. Any such allocation will be done in a fair and
equitable manner according to a specific and consistent process. Because IPO
shares frequently are volatile in price, a Fund may hold IPO shares for a very
short period of time. This may increase the turnover of a Fund’s portfolio and
may lead to increased expenses to a Fund, such as commissions and transaction
costs. By selling shares of an IPO, a Fund may realize taxable capital gains
that it will subsequently distribute to shareholders.
Most
IPOs involve a high degree of risk not normally associated with offerings of
more seasoned companies. Companies involved in IPOs generally have limited
operating histories, and their prospects for future profitability are uncertain.
These companies often are engaged in new and evolving businesses and are
particularly vulnerable to competition and to changes in technology, markets and
economic conditions. They may be dependent on certain key managers and
third-parties, need more personnel and other resources to manage growth and
require significant additional capital. They may also be dependent on limited
product lines and uncertain property rights and need regulatory approvals.
Investors in IPOs can be affected by substantial dilution in the value of their
shares, by sales of additional shares and by concentration of control in
existing management and principal shareholders. Stock prices of IPOs can also be
highly unstable, due to the absence of a prior public market, the small number
of shares available for trading and limited investor information.
Interests
in Publicly Traded Limited Partnerships.
Interests in publicly traded limited partnerships (limited partnership interests
or units) represent equity interests in the assets and earnings of the
partnership’s trade or business. Unlike common stock in a corporation, limited
partnership interests have limited or no voting rights. However, many of the
risks of investing in common stocks are still applicable to investments in
limited partnership interests. In addition, limited partnership interests are
subject to risks not present in common stock. For example, income generated from
limited partnerships deemed not to be “publicly traded” may not be considered
“qualifying income” for purposes of the regulated investment company
requirements under the Code, and may trigger adverse tax consequences (please
refer to the “Federal Income Taxes” section of this SAI for a discussion of
relevant tax risks). Also, since publicly traded limited partnerships are a less
common form of organizational structure than corporations, the limited
partnership units may be less liquid than publicly traded common stock. Also,
because of the difference in organizational structure, the fair value of limited
partnership units in a Fund’s portfolio may be based either upon the current
market price of such units, or if there is no current market price, upon the pro
rata value of the underlying assets of the partnership. Limited partnership
units also have the risk that the limited partnership might, under certain
circumstances, be treated as a general partnership giving rise to broader
liability exposure to the limited partners for activities of the partnership.
Further, the general partners of a limited partnership may be able to
significantly change the business or asset structure of a limited partnership
without the limited partners having any ability to disapprove any such changes.
In certain limited partnerships, limited partners may also be required to return
distributions previously made in the event that excess distributions have been
made by the partnership, or in the event that the general partners, or their
affiliates, are entitled to indemnification.
Interfund
Lending. An
SEC exemptive order permits the Funds to participate in an interfund lending
program with other funds in the Touchstone family of funds. This program allows
the Touchstone Funds to borrow money from, and lend money to, each other for
temporary or emergency purposes, such as to satisfy redemption requests or to
cover unanticipated cash shortfalls. A Fund may not borrow through the interfund
lending program for leverage purposes. To the extent permitted by its investment
objective, strategies, and policies, a Fund may (1) lend uninvested cash to
other Touchstone Funds in an amount up to 15% of the lending Fund's net assets
at the time of the loan (including lending up to 5% of its net assets to any
single Touchstone Fund) and (2) borrow money from other Touchstone Funds
provided that total outstanding borrowings from all sources do not exceed 33
1/3% of its total assets. A Fund may borrow through the interfund lending
program on an unsecured basis (i.e., without posting collateral) if its
aggregate borrowings from all sources immediately after the interfund borrowing
represent 10% or less of the Fund’s total assets. However, if a Fund’s aggregate
borrowings from all sources immediately after the interfund borrowing would
exceed 10% of the Fund’s total assets, the Fund may borrow through the interfund
lending program on a secured basis only. Any Fund that has outstanding interfund
borrowings may not cause its outstanding borrowings, from all
sources,
to exceed 10% of its total assets without first securing each interfund loan. If
a Fund has any outstanding secured borrowings from other sources, including
another fund, at the time it requests an interfund loan, the Fund's interfund
borrowing will be secured on at least an equal priority basis with at least an
equivalent percentage of collateral to loan value as any outstanding
collateralized loan.
Any
loan made through the interfund lending program is required to be more
beneficial to a borrowing Fund (i.e., at a lower interest rate) than borrowing
from a bank and more beneficial to a lending Fund (i.e., at a higher rate of
return) than an alternative short-term investment. The term of an interfund loan
is limited to the time required to obtain sufficient cash to repay the loan
through either the sale of the Fund's portfolio securities or net sales of Fund
shares, but in no event more than seven days. In addition, an interfund loan is
callable with one business day’s notice.
The
limitations discussed above, other conditions of the SEC exemptive order, and
related policies and procedures implemented by Touchstone are designed to
minimize the risks associated with interfund lending for both borrowing Funds
and lending Funds. However, no borrowing or lending activity is without risk.
When a Fund borrows money from another Touchstone Fund, there is a risk that the
loan could be called on one business day’s notice or not renewed, in which case
the Fund may need to borrow from a bank at higher rates if an interfund loan
were not available from another Touchstone Fund. Furthermore, a delay in
repayment to a lending Fund could result in a lost investment opportunity or
additional lending costs.
Inverse
Floating Obligations.
The Core Municipal Bond Fund may invest in securities representing interests in
Municipal Obligations, known as inverse floating obligations, which pay interest
rates that vary inversely to changes in the interest rates of specified
short-term Municipal Obligations or an index of short-term Municipal
Obligations. The interest rates on inverse floating obligations will typically
decline as short-term market interest rates increase and increase as short-term
market rates decline. Such securities have the effect of providing a degree of
investment leverage, since they will generally increase or decrease in value in
response to changes in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate, long-term Municipal Obligations
increase or decrease in response to such changes. As a result, the market value
of inverse floating obligations will generally be more volatile than the market
value of fixed-rate Municipal Obligations.
Lease
Obligations. The
Core Municipal Bond Fund may invest in Municipal Obligations that constitute
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. 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. Lease
obligations provide a premium interest rate which, along with the regular
amortization of the principal, may make them attractive for a portion of the
Fund's assets. Certain of these 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 an annual basis. In addition to the "non-appropriation" risk,
these securities represent a type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"nonappropriation" lease obligations are secured by the leased property, the
disposition of the property in the event of foreclosure might prove difficult.
The Trust will seek to minimize the special risks associated with such
securities by only investing in "nonappropriation" lease obligations where
(1) the nature of the leased equipment or property is such that its
ownership or use is essential to a governmental function of the municipality,
(2) the lease payments will commence amortization of principal at an early
date resulting in an average life of seven years or less for the lease
obligation, (3) appropriate covenants will be obtained from the municipal
obligor prohibiting the substitution or purchase of similar equipment if the
lease payments are not appropriated, (4) the lease obligor has maintained
good market acceptability in the past, (5) the investment is of a size that
will be attractive to institutional investors, and (6) the underlying
leased equipment has elements of portability and/or use that enhance its
marketability in the event foreclosure on the underlying equipment were ever
required.
The
Core Municipal Bond Fund will not invest more than 10% of its net assets in
lease obligations if the sub-advisor determines that there is no secondary
market available for these obligations and all other illiquid securities. The
Fund does not intend to invest more than an additional 5% of its net assets in
municipal lease obligations determined by the sub-advisor, under the direction
of the Board of Trustees, to be liquid. In determining the liquidity of such
obligations, the sub-advisor will consider such factors as (1) the
frequency of trades and quotes for the obligation; (2) the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the marketplace trades,
including the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer. The Fund will only purchase unrated lease
obligations that meet its quality standards, as determined by the sub-advisor,
under the direction of the Board of Trustees, including an assessment of the
likelihood that the lease will not be cancelled.
Municipal
Obligations consist of tax-exempt bonds, tax-exempt notes and tax-exempt
commercial paper.
LIBOR
Transition.
Many debt securities, derivatives and other financial instruments in which the
Funds may invest, as well as any borrowings made by the Funds from banks or from
other lenders, may have or may continue to utilize the London Interbank Offered
Rate (“LIBOR”) as the reference or benchmark index for interest rate
calculations. LIBOR is a measure of the average interest rate at which major
global banks can borrow from one another. It is quoted in multiple currencies
and tenors using data reported by a panel of private-sector banks. Following
allegations of rate manipulation in 2012 and concerns regarding its thin
liquidity, the use of LIBOR came under increasing pressure, and in July 2017,
the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it
would stop encouraging banks to provide the quotations needed to sustain LIBOR.
The ICE Benchmark Administration Limited, the administrator of LIBOR, ceased
publishing certain LIBOR maturities, including some US LIBOR maturities, on
December 31, 2021, and is expected to cease publishing the remaining and most
liquid US LIBOR maturities on June 30, 2023. It is expected that market
participants have or will transition to the use of different reference or
benchmark indices. Additionally, although regulators have encouraged the
development and adoption of alternative rates such as the Secured Overnight
Financing Rate (“SOFR”), the future utilization of LIBOR or of any particular
replacement rate remains uncertain.
Although
the transition process away from LIBOR has become increasingly well-defined in
advance of the anticipated discontinuation dates, the impact on certain debt
securities, derivatives and other financial instruments remains uncertain. While
it is expected that market participants will adopt alternative rates such as
SOFR or otherwise amend financial instruments referencing LIBOR to include
fallback provisions and other measures that contemplate the discontinuation of
LIBOR or other similar market disruption events, neither the effect of the
transition process nor the viability of such measures is known. Further,
uncertainty and risk remain regarding the willingness and ability of issuers and
lenders to include alternative rates and revised provisions in new and existing
contracts or instruments.
To
facilitate the transition of legacy derivatives contracts referencing LIBOR, the
International Swaps and Derivatives Association, Inc. launched a protocol to
incorporate fallback provisions. However, while market participants have begun
transitioning away from LIBOR, there are obstacles to converting certain longer
term securities and transactions to a new benchmark or benchmarks. The
effectiveness of multiple alternative reference indices as opposed to one
primary reference index has not been determined. Certain proposed replacement
rates to LIBOR, such as SOFR, which is a broad measure of secured overnight US
Treasury repo rates, are materially different from LIBOR, and changes in the
applicable spread for financial instruments transitioning away from LIBOR will
need to be made to accommodate the differences. Furthermore, the risks
associated with the expected discontinuation of LIBOR and transition to
replacement rates may be exacerbated if an orderly transition to an alternative
reference rate is not completed in a timely manner. The effectiveness of
alternative reference indices used in new or existing financial instruments and
products has also not yet been determined.
As
market participants transition away from LIBOR, LIBOR's usefulness may
deteriorate, and these effects could be experienced until the permanent
cessation of the majority of U.S. LIBOR rates in 2023. The transition process
may lead to increased volatility and illiquidity in markets that currently rely
on LIBOR to determine interest indices. LIBOR's deterioration may adversely
affect the liquidity and/or market value of securities that use LIBOR as a
benchmark interest index, including securities and other financial instruments
held by the Funds. Further, the utilization of an alternative reference index,
or the transition process to an alternative reference index, may adversely
affect the Funds' performance. Alteration of the terms of a debt instrument or a
modification of the terms of other types of contracts to replace LIBOR or
another interbank offered rate (“IBOR”) with a new reference rate could result
in a taxable exchange and the realization of income and gain/loss for U.S.
federal income tax purposes. The IRS has issued final regulations regarding the
tax consequences of the transition from IBOR to a new reference rate in debt
instruments and non-debt contracts. Under the final regulations, alteration or
modification of the terms of a debt instrument to replace an operative rate that
uses a discontinued IBOR with a qualified rate (as defined in the final
regulations) including true up payments equalizing the fair market value of
contracts before and after such IBOR transition, to add a qualified rate as a
fallback rate to a contract whose operative rate uses a discontinued IBOR or to
replace a fallback rate that uses a discontinued IBOR with a qualified rate
would not be taxable. The IRS may provide additional guidance, with potential
retroactive effect.
Loans.
A Fund may invest in senior and subordinated loans to corporations and other
business entities.
Senior
Loans:
Senior loans generally hold a first or second lien priority and typically pay
interest at rates that are determined periodically on the basis of a floating
base lending rate, primarily the LIBOR, plus a spread. Senior loans are
typically made to U.S. and, to a lesser extent, non-U.S. borrowers. Borrowers
may obtain senior loans, among other reasons, to refinance existing debt, engage
in acquisitions, pay dividends, recapitalize, complete leveraged buyouts and for
general corporate purposes. Senior loans rated below investment grade are
sometimes referred to as “leveraged loans.” A Fund may invest in senior loans
through assignments of or, to a lesser extent, participations in senior
loans.
The
senior loans in which a Fund will invest will primarily be rated below
investment grade, but may also be unrated and of comparable credit quality. As a
result, although senior loans are senior and typically secured in a first or
second lien position in contrast to other below investment grade fixed income
instruments, which are often subordinated or unsecured, the risks associated
with such senior loans are generally similar to the risks of other below
investment grade fixed income instruments. See “Lower-Rated Securities” below.
Investments in below investment grade senior loans are considered speculative
because of the credit risk of the borrowers. Such borrowers are more likely than
investment grade borrowers to default on their payments of interest and
principal owed to a Fund, and such defaults could reduce a Fund’s NAV and income
distributions. An economic downturn would generally lead to a higher non-payment
rate, and a senior loan may lose significant market value before a default
occurs. Moreover, any specific collateral used to secure a senior loan may
decline in value or become illiquid, which would adversely affect the senior
loan’s value. Senior loans are subject to a number of risks described elsewhere
in this prospectus, including non-payment of principal, liquidity risk and the
risk of investing in below investment grade fixed income
instruments.
Senior
loans are subject to the risk of non-payment of scheduled interest or principal.
Such non-payment would result in a reduction of income to a Fund, a reduction in
the value of the investment and a potential decrease in the Fund’s NAV. There
can be no assurance that the liquidation of any collateral securing a senior
loan would satisfy the borrower’s obligation in the event of non-payment of
scheduled interest or principal payments, whether when due or upon acceleration,
or that the collateral could be liquidated, readily or otherwise. In the event
of bankruptcy or insolvency of a borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral, if any, securing a senior loan. The collateral securing a senior
loan, if any, may lose all or substantially all of its value in the event of the
bankruptcy or insolvency of a borrower. Some senior loans are subject to the
risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate such senior loans to presently existing or future indebtedness
of the borrower or take other action detrimental to the holders of senior loans
including, in certain circumstances, invalidating such senior loans or causing
interest previously paid to be refunded to the borrower. Additionally, a senior
loan may be “primed” in bankruptcy, which reduces the ability of the holders of
the senior loan to recover on the collateral. Priming takes place when a debtor
in bankruptcy is allowed to incur additional indebtedness by the bankruptcy
court and such indebtedness has a senior or pari
passu
lien with the debtor’s existing secured indebtedness, such as existing senior
loans or secured corporate bonds.
There
may be less readily available information about most senior loans and the
borrowers thereunder than is the case for many other types of securities,
including securities issued in transactions registered under the Securities Act
of 1933, as amended ("1933 Act"). Senior loans may be issued by companies that
are not subject to SEC reporting requirements, and these companies, therefore,
do not file reports with the SEC that must comply with SEC form requirements and
in addition are subject to a less stringent liability disclosure regime than
companies subject to SEC reporting requirements. As a result, the sub-advisor
will rely primarily on its own evaluation of a borrower’s credit quality rather
than on any available independent sources. Therefore, a Fund will be
particularly dependent on the analytical abilities of the
sub-advisor.
The
secondary trading market for senior loans may be less liquid than the secondary
trading market for registered investment grade debt securities. No active
trading market may exist for certain senior loans, which may make it difficult
to value them. Illiquidity and adverse market conditions may mean that a Fund
may not be able to sell senior loans quickly or at a fair price. To the extent
that a secondary market does exist for certain senior loans, the market for them
may be subject to irregular trading activity, wide bid/ask spreads and extended
trade settlement periods.
Senior
loans and other variable rate debt instruments are subject to the risk of
payment defaults of scheduled interest or principal. Such payment defaults would
result in a reduction of income to a Fund, a reduction in the value of the
investment and a potential decrease in the NAV of the common shares. Similarly,
a sudden and significant increase in market interest rates may increase the risk
of payment defaults and cause a decline in the value of these investments and in
a Fund’s NAV. Other factors (including, but not limited to, rating downgrades,
credit deterioration, a large downward movement in stock prices, a disparity in
supply and demand of certain securities or market conditions that reduce
liquidity) can reduce the value of senior loans and other debt obligations,
impairing the NAV of the common shares.
Senior
loans are subject to legislative risk. If legislation or state or federal
regulations impose additional requirements or restrictions on the ability of
financial institutions to make loans, the availability of senior loans for
investment by the Fund may be adversely affected. In addition, such requirements
or restrictions could reduce or eliminate sources of financing for certain
borrowers. This would increase the risk of default. If legislation or federal or
state regulations require financial institutions to increase their capital
requirements, this may cause financial institutions to dispose of senior loans
that are considered highly levered transactions. Such sales could result in
prices that, in the opinion of the sub-advisor, do not represent fair value. If
the Fund attempts to sell a senior loan at a time when a financial institution
is engaging in such a sale, the price the Fund could receive for the senior loan
may be adversely affected.
A
Fund expects to acquire senior loans primarily through assignments and, to a
lesser extent, through participations. The purchaser of an assignment typically
succeeds to all the rights and obligations of the assigning institution and
becomes a lender under the credit agreement with respect to the debt obligation;
however, the purchaser’s rights can be more restricted than those of the
assigning institution, and a Fund may not be able to unilaterally enforce all
rights and remedies under the loan and with regard to any associated collateral.
In general, a participation is a contractual relationship only with the
institution participating out the interest, not with the borrower. Sellers of
participations typically include banks, broker-dealers, other financial
institutions and lending institutions. In purchasing participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement against the borrower, and the Fund may not directly
benefit from the collateral supporting the debt obligation in which it has
purchased the participation. As a result, (i) a Fund will be exposed to the
credit risk of both the borrower and the institution selling the participation.
Further, in purchasing participations in lending syndicates, a Fund may be more
limited than it otherwise would be in its ability to conduct due diligence on
the borrower. In addition, as a holder of the participations, the Fund may not
have voting rights or inspection rights that the Fund would otherwise have if it
were investing directly in the senior loan, which may result in the Fund being
exposed to greater credit or fraud risk with respect to the borrower or the
senior loan.
Subordinated
Loans.
A Fund may also invest in subordinated loans. Subordinated loans generally have
similar characteristics as senior loans except that such loans are subordinated
in payment and/or lower in lien priority to first lien holders.
Although
the Funds do not expect subordinated loans to be a significant component of its
portfolios, it may invest in such instruments from time to time. Subordinated
loans generally are subject to similar risks as those associated with
investments in senior loans, except that such loans are subordinated in payment
and/or lower in lien priority to first lien holders. In the event of default on
a subordinated loan, the first priority lien holder has first claim to the
underlying collateral of the loan to the extent such claim is secured.
Additionally, an over-secured creditor may be entitled to additional interest
and other charges in bankruptcy increasing the amount of their allowed claim.
Subordinated loans are subject to the additional risk that the cash flow of the
borrower and property securing the loan or debt, if any, may be insufficient to
meet scheduled payments after giving effect to the senior obligations of the
borrower. This risk is generally higher for subordinated unsecured loans or
debt, which are not backed by a security interest in any specific collateral.
Subordinated loans generally have greater price volatility than senior loans and
may be less liquid.
Loan
Participation Notes.
The Funds may invest in loan participation notes. A loan participation note
represents participation in a corporate loan of a commercial bank with a
remaining maturity of one year or less. Such loans must be to corporations in
whose obligations the Funds may invest. Any participation purchased by a Fund
must be issued by a bank in the United States with total assets exceeding $1
billion. When purchasing such instruments, the Fund may assume the credit risks
associated with the original bank lender as well as the credit risks associated
with the borrower. Investments in loan participations present the possibility
that the Fund could be held liable as a co-lender under emerging legal theories
of lender liability. In addition, if the loan is foreclosed, the Fund could be
part owner of any collateral, and could bear the costs and liabilities of owning
and disposing of the collateral. Loan participations are generally not rated by
major rating agencies and may not be protected by securities laws. Also, loan
participations are generally considered to be illiquid and are therefore subject
to the Fund’s limitation on illiquid securities.
Lower-Rated
Securities.
A Fund may invest in lower-rated bonds commonly referred to as “junk bonds” or
high-yield/high-risk securities. Lower-rated securities are defined as
securities rated below the fourth highest rating category by a NRSRO or, if
unrated, deemed to be of comparable quality by the Fund’s sub-advisor. Such
obligations are speculative and may be in default. There may be no bottom limit
on the ratings of high-yield securities that may be purchased or held by a Fund.
Lower-rated or comparable unrated (i.e., high-yield) securities are more likely
to react to developments affecting issuers than are more highly rated
securities, which primarily react to movements in the general level of interest
rates. The market values of fixed-income securities tend to vary inversely with
the level of interest rates. Yields and market values of high-yield securities
will fluctuate over time, reflecting not only changing interest rates but the
market’s perception of credit quality and the outlook for economic growth. When
economic conditions appear to be deteriorating, medium to lower-rated securities
may decline in value due to heightened concern over credit quality, regardless
of prevailing interest rates. Investors should carefully consider the relative
risks of investing in high-yield securities and understand that such securities
are not generally meant for short-term investing.
Adverse
economic developments can disrupt the market for high-yield securities, and
severely affect the ability of issuers, especially highly leveraged issuers, to
service their debt obligations or to repay their obligations upon maturity which
may lead to a higher incidence of default on such securities. In addition, the
secondary market for high-yield securities, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, a Fund could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Furthermore, a Fund may experience
difficulty in valuing certain securities at certain
times.
Prices realized upon the sale of such lower-rated or unrated securities, under
these circumstances, may be less than the prices used in calculating each Fund’s
NAV.
Lower-rated
or unrated debt obligations also present risks based on payment expectations. If
an issuer calls the obligations for redemption, a Fund may have to replace the
security with a lower yielding security, resulting in a decreased return for
investors. If a Fund experiences unexpected net redemptions, it may be forced to
sell its higher rated securities, resulting in a decline in the overall credit
quality of a Fund’s investment portfolio and increasing the exposure of a Fund
to the risks of high-yield securities.
Growth
of High-Yield, High-Risk Bond Market:
The widespread expansion of government, consumer and corporate debt within the
U.S. economy has made the corporate sector more vulnerable to economic downturns
or increased interest rates. Further, an economic downturn could severely
disrupt the market for lower-rated bonds and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal and
interest. The market for lower-rated securities may be less active, causing
market price volatility and limited liquidity in the secondary market. This may
limit a Fund’s ability to sell such securities at their market value. In
addition, the market for these securities may be adversely affected by
legislative and regulatory developments. Credit quality in the junk bond market
can change suddenly and unexpectedly, and even recently issued credit ratings
may not fully reflect the actual risks imposed by a particular
security.
Sensitivity
to Interest Rate and Economic Changes:
Lower-rated bonds are very sensitive to adverse economic changes and corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress that
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay interest
or principal or entered into bankruptcy proceedings, a Fund may incur losses or
expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and change can be expected to result in increased
volatility of market prices of high-yield, high-risk bonds and a Fund’s
NAV.
Payment
Expectations:
High-yield, high-risk bonds may contain redemption or call provisions. If an
issuer exercised these provisions in a declining interest rate market, a Fund
would have to replace the security with a lower yielding security, resulting in
a decreased return for investors. Conversely, a high-yield, high-risk bond’s
value will decrease in a rising interest rate market, as will the value of a
Fund’s assets. If a Fund experiences significant unexpected net redemptions,
this may force it to sell high-yield, high-risk bonds without regard to their
investment merits, thereby decreasing the asset base upon which expenses can be
spread and possibly reducing a Fund’s rate of return.
Taxes:
A Fund may purchase debt securities (such as zero-coupon or pay-in-kind
securities) that contain original issue discount ("OID") (generally a debt
obligation with a purchase price less than its principal amount, such as a zero
coupon bond). OID that accrues in a taxable year is treated as earned by a Fund
and therefore is subject to the distribution requirements of the Code even
though a Fund has not received any interest payments on such obligations during
that period. Because the OID earned by a Fund in a taxable year is not
represented by cash, a Fund may have to dispose of other securities and use the
proceeds to make distributions to shareholders. In the event a Fund realizes net
capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would have received in the absence
of such transactions. See “Federal Income Taxes” for more
information.
Special
Considerations Concerning Distressed and Defaulted Securities:
Distressed securities are speculative and involve significant risks in addition
to the risks generally applicable to high-yield, high-risk bonds.
Distressed securities bear a substantial risk of default, and may be in default
at the time of investment. A Fund will generally not receive interest
payments on distressed securities, and there is a significant risk that
principal will not be repaid, in full or at all. A Fund may incur costs to
protect its investment in distressed securities, which may include seeking
recovery from the issuer in bankruptcy. In any reorganization or
liquidation proceeding relating to the issuer of distressed securities, a Fund
may lose its entire investment or may be required to accept cash or securities
with a value less than its original investment. Distressed securities, and
any securities received in exchange for distressed securities, will likely be
illiquid and may be subject to restrictions on resale.
Market
Disruption Risk.
During periods of extreme market volatility, prices of securities held by a Fund
may be negatively impacted due to imbalances between market participants seeking
to sell the same or similar securities and market participants willing or able
to buy such securities. As a result, the market prices of securities held by a
Fund could decline, at times without regard to the financial condition of or
specific events impacting the issuer of the security.
Federal,
state, and other governments, their regulatory agencies, or self-regulatory
organizations may take actions that affect the regulation of the instruments in
which a Fund invests, or the issuers of such instruments, in ways that are
unforeseeable.
Legislation
or regulation may also change the way in which a Fund itself is regulated. Such
legislation or regulation could limit or preclude the Fund's ability to achieve
its investment goals.
Governments
or their agencies may also acquire distressed assets from financial institutions
and acquire ownership interests in those institutions. The implications of
government ownership and disposition of these assets are unclear, and such a
program may have positive or negative effects on the liquidity, valuation and
performance of a Fund's portfolio holdings. Furthermore, volatile financial
markets can expose the Fund to greater market and liquidity risk and potential
difficulty in valuing portfolio instruments held by a Fund. The Fund has
established procedures to assess the liquidity of portfolio holdings and to
value instruments for which market prices may not be readily available. The
Advisor and sub-advisor will monitor developments and seek to manage the Fund in
a manner consistent with achieving the Fund's investment goals, but there can be
no assurance that they will be successful in doing so.
Micro-Cap
Securities.
The Funds may invest in companies whose total market capitalization at the time
of investment is generally between $30 million and $500 million, referred to as
micro-cap companies. Micro-cap companies may not be well-known to the investing
public, may not have significant institutional ownership and may have cyclical,
static or only moderate growth prospects. Micro-cap companies may have greater
risk and volatility than large companies and may lack the management depth of
larger, mature issuers. Micro-cap companies may have relatively small revenues
and limited product lines, markets, or financial resources, and their securities
may trade less frequently and in more limited volume than those of larger, more
mature companies. In addition, micro-cap companies may be developing or
marketing new products or services for which markets are not yet established and
may never become established. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
Money
Market Instruments.
Money market securities are high-quality, dollar-denominated, short-term debt
instruments. They include: (i) bankers’ acceptances, certificates of deposits,
notes and time deposits of highly-rated U.S. banks and U.S. branches of foreign
banks; (ii) U.S. Treasury obligations and obligations issued or guaranteed by
the agencies and instrumentalities of the U.S. government; (iii) high-quality
commercial paper issued by U.S. and foreign corporations; (iv) debt obligations
with a maturity of one year or less issued by corporations with outstanding
high-quality commercial paper ratings; and (v) repurchase agreements involving
any of the foregoing obligations entered into with highly-rated banks and
broker-dealers.
Mortgage-Related
and Other Asset-Backed Securities. The
mortgage-backed securities market has been and may continue to be negatively
affected by the COVID-19 pandemic. The U.S. government, its agencies or its
instrumentalities may implement initiatives in response to the economic impacts
of the COVID-19 pandemic applicable to federally backed mortgage loans. These
initiatives could involve forbearance of mortgage payments or suspension or
restrictions of foreclosures and evictions. The Funds cannot predict with
certainty the extent to which such initiatives or the economic effects of the
pandemic generally may affect rates of prepayment or default or adversely impact
the value of the Funds' investments in securities in the mortgage industry as a
whole.
Asset-Backed
Securities:
Asset-backed securities ("ABS") are secured by non-mortgage assets such as
company receivables, truck and auto loans, leases and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt. Covered bonds are a type of asset backed security
that is created from public sector loans or mortgage loans where the security is
backed by a separate group of loans. Covered bonds typically carry a 2 to 10
year maturity rate and enjoy relatively high credit ratings, depending on the
quality of the pool of loans backing the bond.
The
credit quality of an ABS transaction depends on the performance of the
underlying assets. ABS can be structured with various forms of credit
enhancement to address the possibility that some borrowers could miss payments
or even default on their loans. Some ABS are subject to interest-rate risk and
prepayment risk. A change in interest rates can affect the pace of payments on
the underlying loans, which in turn, affects total return on the securities. ABS
also carry credit or default risk. If many borrowers on the underlying loans
default, losses could exceed the credit enhancement level and result in losses
to investors in an ABS transaction. Finally, ABS have structure risk due to a
unique characteristic known as early amortization, or early payout, risk. Built
into the structure of most ABS are triggers for early payout, designed to
protect investors from losses. These triggers are unique to each transaction and
can include: a big rise in defaults on the underlying loans, a sharp drop in the
credit enhancement level, or even the bankruptcy of the originator. Once early
amortization begins, all incoming loan payments (after expenses are paid) are
used to pay investors as quickly as possible based upon a predetermined priority
of payment.
Mortgage
Pass-Through Securities:
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call
dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a “pass-through”
of the monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by Government National Mortgage Association (GNMA)
(“Ginnie Mae”)) are described as “modified pass-through.” These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
The
rate of pre-payments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective duration of the security relative to what was
anticipated at the time of purchase. To the extent that unanticipated rates of
pre-payment on underlying mortgages increase the effective duration of a
mortgage-related security, the volatility of such security can be expected to
increase. The residential mortgage market in the United States has experienced
difficulties in recent years that may adversely affect the performance and
market value of certain of a Fund’s mortgage-related investments. Delinquencies
and losses on residential mortgage loans (especially subprime and second-lien
mortgage loans) generally have increased and may continue to increase, and a
decline in or flattening of housing values (as has been experienced and may
continue to be experienced in many housing markets) may exacerbate such
delinquencies and losses. Borrowers with adjustable rate mortgage loans are more
sensitive to changes in interest rates, which affect their monthly mortgage
payments, and may be unable to secure replacement mortgages at comparably low
interest rates. Also, a number of residential mortgage loan originators have
experienced serious financial difficulties or bankruptcy. Consequently, reduced
investor demand for mortgage loans and mortgage-related securities and increased
investor yield requirements have caused limited liquidity in the secondary
market for mortgage-related securities, which can adversely affect the market
value of mortgage-related securities. It is possible that such limited liquidity
in such secondary markets could continue or worsen.
Government
Pass-Through Securities:
Government pass-through securities are securities that are issued or guaranteed
by a U.S. government agency representing an interest in a pool of mortgage
loans. The primary issuers or guarantors of these mortgage-backed securities are
Ginnie Mae, Federal National Mortgage Association (FNMA) (“Fannie Mae”), and
Federal Home Loan Mortgage Corporation (FHLMC) (“Freddie Mac”). Ginnie Mae,
Fannie Mae and Freddie Mac guarantee timely distributions of interest to
certificate holders. Ginnie Mae and Fannie Mae also guarantee timely
distributions of scheduled principal. Freddie Mac generally guarantees only the
ultimate collection of principal of the underlying mortgage loan. Certain
federal agencies, such as Ginnie Mae, have been established as instrumentalities
of the United States government to supervise and finance certain types of
activities. Issues of these agencies, while not direct obligations of the United
States government, are either backed by the full faith and credit of the United
States (e.g., Ginnie Mae securities) or supported by the issuing agencies’ right
to borrow from the U.S. Treasury. The issues of other agencies are supported by
the credit of the instrumentality (e.g., Fannie Mae securities). Government and
private guarantees do not extend to the securities’ value, which is likely to
vary inversely with fluctuations in interest rates.
There
are a number of important differences among the agencies and instrumentalities
of the U.S. government that issue mortgage-backed securities and among the
securities that they issue. Mortgage-related securities issued by Ginnie Mae
include GNMA Mortgage Pass-Through Certificates (also known as “Ginnie Mae
Pass-Throughs”) which are guaranteed as to the timely payment of principal and
interest by Ginnie Mae and such guarantee is backed by the full faith and credit
of the U.S. Government. Ginnie Mae Pass-Throughs are created by an “issuer,”
which is a Federal Housing Administration (“FHA”) approved mortgagee that also
meets criteria imposed by Ginnie Mae. The issuer assembles a pool of FHA,
Farmers’ Home Administration or Veterans’ Administration (“VA”) insured or
guaranteed mortgages which are homogeneous as to interest rate, maturity and
type of dwelling. Upon application by the issuer, and after approval by Ginnie
Mae of the pool, Ginnie Mae provides its commitment to guarantee timely payment
of principal and interest on the Ginnie Mae Pass-Throughs backed by the
mortgages included in the pool. The Ginnie Mae Pass-Throughs, endorsed by Ginnie
Mae, then are sold by the issuer through securities dealers. Ginnie Mae
Pass-Throughs bear a stated “coupon rate” which represents the effective FHA-VA
mortgage rate at the time of issuance, less fees from Ginnie Mae and the issuer.
Ginnie Mae is authorized under the National Housing Act to guarantee timely
payment of principal and interest on Ginnie Mae Pass-Throughs. This guarantee is
backed by the full faith and credit of the U.S. Government. Ginnie Mae may
borrow Treasury funds to the extent needed to make payments under its guarantee.
When mortgages in the pool underlying a Ginnie Mae Pass-Through are prepaid by
mortgagors or by result of foreclosure, such principal payments are passed
through to the certificate holders. Accordingly, the life of the Ginnie Mae
Pass-Through is likely to be substantially shorter than the stated maturity of
the mortgages in the underlying pool. Because of such variation in prepayment
rates, it is not possible to predict the life of a particular Ginnie Mae
Pass-Through. Payments to holders of Ginnie Mae Pass-Throughs consist of the
monthly distributions of interest and principal less the fees of Ginnie Mae and
the issuer. The actual yield to be earned by a holder of a Ginnie Mae
Pass-Through is calculated by dividing interest payments by the purchase price
paid for the Ginnie Mae Pass-Through (which may be at a premium or a discount
from the face value of the
certificate).
Monthly distributions of interest, as contrasted to semi-annual distributions
which are common for other fixed interest investments, have the effect of
compounding and thereby raising the effective annual yield earned on Ginnie Mae
Pass-Throughs.
Mortgage-related
securities issued by Fannie Mae include Fannie Mae Guaranteed Mortgage
Pass-Through Certificates (also known as “Fannie Mae Pass-Throughs”) that are
solely the obligations of Fannie Mae and are not backed by or entitled to the
full faith and credit of the United States. Fannie Mae Pass-Throughs are
guaranteed as to timely payment of the principal and interest by Fannie
Mae.
Mortgage-related
securities issued by Freddie Mac include FHLMC Mortgage Participation
Certificates (also known as “Freddie Mac PCs”). Freddie Mac PCs are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Mac PCs entitle the holder to timely payment of interest, which is
guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
Freddie Mac does not guarantee timely payment of principal, Freddie Mac may
remit the amount due on account of its guarantee of ultimate payment of
principal at any time after default on an underlying mortgage, but in no event
later than one year after it becomes payable.
Collateralized
Mortgage Obligations (“CMOs”).
A CMO is a debt obligation of a legal entity that is collateralized by mortgages
and divided into classes. Similar to a bond, interest and prepaid principal is
paid, in most cases, on a monthly basis. CMOs may be collateralized by whole
mortgage loans or private mortgage bonds, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, Freddie
Mac, or Fannie Mae, and their income streams.
CMOs
are structured into multiple classes, often referred to as “tranches,” with each
class bearing a different stated maturity and entitled to a different schedule
for payments of principal and interest, including pre-payments. Actual maturity
and average life will depend upon the pre-payment experience of the collateral.
In the case of certain CMOs (known as “sequential pay” CMOs), payments of
principal received from the pool of underlying mortgages, including
pre-payments, are applied to the classes of CMOs in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs until all other classes having an earlier
final distribution date have been paid in full.
Real
Estate Mortgage Investment Conduits (“REMICs”).
REMICs are private entities formed for the purpose of holding a fixed pool of
mortgages secured by interests in real property. For Freddie Mac REMIC
certificates, Freddie Mac guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates. Fannie Mae REMIC certificates
are issued and guaranteed as to timely distribution of principal and interest by
Fannie Mae.
Commercial
Mortgage-Backed Securities (“CMBS”).
CMBS include securities that reflect an interest in, and are secured by,
mortgage loans on commercial real property. The market for CMBS developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-backed securities. Many of the risks of investing in CMBS 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. CMBS may be less liquid and exhibit
greater price volatility than other types of mortgage- or asset-backed
securities.
Mortgage
Dollar Rolls.
Mortgage “dollar rolls” are transactions in which mortgage-backed securities are
sold for delivery in the current month and the seller simultaneously contracts
to repurchase substantially similar securities on a specified future date. The
difference between the sale price and the purchase price (plus any interest
earned on the cash proceeds of the sale) is netted against the interest income
foregone on the securities sold to arrive at an implied borrowing rate.
Alternatively, the sale and purchase transactions can be executed at the same
price, with a Fund being paid a fee as consideration for entering into the
commitment to purchase. Mortgage dollar rolls may be renewed prior to cash
settlement and initially may involve only a firm commitment agreement by a Fund
to buy a security. If the broker-dealer to whom a Fund sells the security
becomes insolvent, the Fund’s right to repurchase the security may be
restricted. Other risks involved in entering into mortgage dollar rolls include
the risk that the value of the security may change adversely over the term of
the mortgage dollar roll and that the security a Fund is required to repurchase
may be worth less than the security that the Fund originally held. As further
outlined in the “Derivatives” subsection, Mortgage Dollar Rolls will be entered
into in accordance with the regulatory requirements described in the
“Derivatives” subsection.
Stripped
Mortgage-Backed Securities (“SMBS”).
SMBS are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the
foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal.
In
the most extreme case, one class will receive all of the interest (the
interest-only or “IO” class), while the other class will receive the entire
principal (the principal-only or “PO” class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
pre-payments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Fund’s yield to
maturity from these securities. If the assets underlying the interest-only
securities experience greater than anticipated prepayments of principal, a Fund
may fail to recoup fully its initial investment in these securities. Conversely,
principal-only securities tend to increase in value if prepayments are greater
than anticipated and decline if prepayments are slower than anticipated. The
secondary market for SMBS may be more volatile and less liquid than that for
other mortgage-backed securities, potentially limiting a Fund’s ability to buy
or sell these securities at any particular time.
Collateralized
Loan Obligations (“CLOs”). A
CLO is a type of asset-backed security that is an obligation of a trust
typically collateralized by pools of loans, which may include domestic and
foreign senior secured and unsecured loans and subordinate corporate loans,
including loans that may be rated below investment grade, or equivalent unrated
loans. The cash flows from the trust are split into two or more portions, called
tranches, which vary in risk and yield. The riskier portion is the residual, or
“equity,” tranche, which bears some or all of the risk of default by the loans
in the trust, and therefore protects the other more senior tranches from default
in all but the most severe circumstances. Since it is partially protected from
defaults, a senior tranche of a CLO trust typically has higher ratings and lower
yields than its underlying securities, and can be rated investment grade.
Despite the protection provided by the equity tranche, senior CLO tranches can
experience substantial losses due to actual defaults, increased sensitivity to
defaults due to collateral default, the total loss of the equity tranche due to
losses in the collateral, market anticipation of defaults, fraud by the trust,
and the illiquidity of CLO securities.
The
risks of an investment in a CLO largely depend on the type of underlying
collateral securities and the tranche in which the Fund invests. Typically, CLOs
are privately offered and sold, and thus are not registered under the securities
laws. As a result, the Fund may characterize its investments in CLOs as
illiquid, unless an active dealer market for a particular CLO allows the CLO to
be purchased and sold in Rule 144A transactions. CLOs are subject to the
typical risks associated with debt instruments (i.e., interest rate risk and
credit risk). Additional risks of CLOs include (i) the possibility that
distributions from collateral securities will be insufficient to make interest
or other payments, (ii) a decline in the quality of the collateral, and
(iii) the possibility that the Fund may invest in a subordinate tranche of
a CLO. In addition, due to the complex nature of a CLO, an investment in a CLO
may not perform as expected. An investment in a CLO also is subject to the risk
that the issuer and the investors may interpret the terms of the instrument
differently, giving rise to disputes.
Municipal
Securities.
Municipal securities consist of (i) debt obligations issued by or on behalf of
public authorities to obtain funds to be used for various public facilities, for
refunding outstanding obligations, for general operating expenses, and for
lending such funds to other public institutions and facilities; and (ii) certain
private activity and industrial development bonds issued by or on behalf of
public authorities to obtain funds to provide for the construction, equipment,
repair, or improvement of privately operated facilities. Municipal notes include
general obligation notes, tax anticipation notes, revenue anticipation notes,
bond anticipation notes, certificates of indebtedness, demand notes and
construction loan notes and participation interests in municipal notes.
Municipal bonds include general obligation bonds, revenue or special obligation
bonds, private activity and industrial development bonds, and participation
interests in municipal bonds. General obligation bonds are backed by the taxing
power of the issuing municipality. Revenue bonds are backed by the revenues of a
project or facility. The payment of principal and interest on private activity
and industrial development bonds generally is dependent solely on the ability of
the facility’s user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment. Yields on
municipal securities are the product of a variety of factors, including the
general conditions of the money market and of the municipal bond and municipal
note markets, the size of a particular offering, the maturity of the obligation
and the rating of the issue. Although the interest on municipal securities may
be exempt from federal income tax, dividends paid by a Fund to its shareholders
may not be tax-exempt.
The
costs associated with combating the COVID-19 pandemic and the negative impact on
tax revenues has adversely affected the financial condition of many states and
their political subdivisions. The effects of this pandemic could affect the
ability of states and their political subdivisions to make payments on debt
obligations when due and could adversely impact the value of their bonds, which
could negatively impact the performance of the Funds.
General
Obligation Securities.
General Obligation Securities are backed by the taxing power of the issuing
municipality and are considered the safest type of municipal bond. The proceeds
from general obligation securities are used to fund a wide range of public
projects, including the construction or improvement of schools, highways and
roads, and water and sewer systems.
Revenue
or Special Obligation Securities.
Revenue or Special Obligation Securities are backed by the revenues of a
specific project or facility (e.g.,
tolls from a toll bridge). The proceeds from revenue or special obligation
securities are used to fund a wide variety of capital projects, including
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Many municipal
issuers also establish a debt service reserve fund from which principal and
interest payments are made. Further security may be available in the form of the
state’s ability, without obligation, to make up deficits in the reserve
fund.
Municipal
Lease Obligations.
Municipal Lease Obligations may take the form of a lease, an installment
purchase or a conditional sale contract issued by state and local governments
and authorities to acquire land, equipment and facilities. Usually, a Fund will
purchase a participation interest in a municipal lease obligation from a bank or
other financial intermediary. The participation interest gives the holder a
pro-rata, undivided interest in the total amount of the obligation.
Municipal
leases frequently have risks distinct from those associated with general
obligation or revenue bonds. The interest income from the lease obligation may
become taxable if the lease is assigned. Also, to free the municipal issuer from
constitutional or statutory debt issuance limitations, many leases and contracts
include non-appropriation clauses providing that the municipality has no
obligation to make future payments under the lease or contract unless money is
appropriated for that purpose by the municipality on a yearly or other periodic
basis. Finally, the lease may be illiquid.
Bond
Anticipation Notes.
Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. The long-term bonds then provide money for
the repayment of the notes.
Tax
Anticipation Notes.
Tax Anticipation Notes finance working capital needs of municipalities and are
issued in anticipation of various seasonal tax revenues, to be payable for these
specific future taxes.
Revenue
Anticipation Notes.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program.
Industrial
Development Bonds (“IDBs”) and Private Activity Bonds (“PABs”).
IDBs and PABs are specific types of revenue bonds issued on or behalf of public
authorities to finance various privately operated facilities such as
educational, hospital or housing facilities, local facilities for water supply,
gas, electricity, sewage or solid waste disposal, and industrial or commercial
facilities. PABs generally are such bonds issued after April 15, 1986. These
obligations are included within the term “municipal bonds” if the interest paid
on them is exempt from federal income tax in the opinion of the bond issuer’s
counsel. IDBs and PABs are in most case revenue bonds and thus are not payable
from the unrestricted revenues of the issuer. The credit quality of the IDBs and
PABs is usually directly related to the credit standing of the user of the
facilities being financed, or some form of credit enhancement such as a letter
of credit.
Resource
Recovery Bonds.
Resource Recovery Bonds are affected by a number of factors, which may affect
the value and credit quality of these revenue or special obligations. These
factors include the viability of the project being financed, environmental
protection regulations and project operator tax incentives.
Tax-Exempt
Commercial Paper and Short-Term Municipal Notes.
Tax-Exempt Commercial Paper and Short-Term Municipal Notes provide for
short-term capital needs and usually have maturities of one year or less. They
include tax anticipation notes, revenue anticipation notes and construction loan
notes.
Construction
Loan Notes.
Construction Loan Notes are sold to provide construction financing. After
successful completion and acceptance, many projects receive permanent financing
through the U.S. Federal Housing Administration by way of Fannie Mae or Ginnie
Mae.
Put
Bonds.
Put Bonds are municipal bonds which give the holder the right to sell the bond
back to the issuer or a third-party at a specified price and exercise date,
which is typically well in advance of the bond’s maturity date.
Build
America Bonds (“BABs”).
BABs are taxable municipal bonds that carry special tax credits and federal
subsidies for either the bond issuer or the bondholder. There are two types of
BABs - Tax Credit BABs and Direct Payment BABs. Direct Payment BABs provide a
federal subsidy of 35% of the interest paid on the bonds to the issuer. Tax
Credit BABs provides a federal subsidy as a refundable tax credit directly to
the bondholders. While the bondholder is the recipient of the tax credit
through
Tax Credit BABs, and the bond issuer is the recipient of the tax subsidy through
Direct Payment BABs, both options reduce the cost of borrowing for the bond
issuer in comparison to traditional taxable corporate bonds, and in many cases,
it is more cost effective than issuing traditional tax-exempt
bonds.
After
purchase by a Fund, an issue of municipal securities may cease to be rated by
Moody’s or S&P, or another NRSRO, or the rating of such a security may be
reduced below the minimum credit quality rating required for purchase by a Fund.
Neither event would require a Fund to dispose of the security. To the extent
that the ratings applied by Moody’s, S&P or another NRSRO to municipal
securities may change as a result of changes in these rating systems, a Fund
will attempt to use comparable credit quality ratings as standards for its
investments in municipal securities.
A
Fund may invest in municipal securities that are insured by financial insurance
companies. If a Fund invests in municipal securities backed by insurance
companies and other financial institutions, changes in the financial condition
of these institutions could cause losses to a Fund and affect its share
price.
A
Fund may also invest in taxable municipal securities. Taxable municipal
securities are debt securities issued by or on behalf of states and their
political subdivisions, the District of Columbia, and possessions of the United
States, the interest on which is not exempt from federal income
tax.
The
yields on municipal securities are dependent on a variety of factors, including
general economic and monetary conditions, money market factors, conditions of
the municipal securities market, size of a particular offering, and maturity and
rating of the obligation. Because many municipal securities are issued to
finance similar projects, especially those related to education, healthcare,
transportation and various utilities, conditions in those sectors and the
financial condition of an individual municipal issuer can affect the overall
municipal market. The market values of the municipal securities held by a Fund
will be affected by changes in the yields available on similar securities. If
yields increase following the purchase of a municipal security, the market value
of such municipal security will generally decrease. Conversely, if yields
decrease, the market value of a municipal security will generally
increase.
Natural
Disasters, Adverse Weather Conditions and Climate Change.
Certain areas of the world may be exposed to adverse weather conditions, such as
major natural disasters and other extreme weather events, including hurricanes,
earthquakes, typhoons, floods, tidal waves, tsunamis, volcanic eruptions,
wildfires, droughts, windstorms, coastal storm surges, heat waves, and rising
sea levels, among others. Some countries and regions may not have the
infrastructure or resources to respond to natural disasters, making them more
economically sensitive to environmental events. Such disasters, and the
resulting damage, could have a severe and negative impact on a Fund’s investment
portfolio and, in the longer term, could impair the ability of issuers in which
a Fund invests to conduct their businesses in the manner normally conducted.
Adverse weather conditions also may have a particularly significant negative
effect on issuers in the agricultural sector and on insurance companies that
insure against the impact of natural disasters.
Climate
change, which is the result of a change in global or regional climate patterns,
may increase the frequency and intensity of such adverse weather conditions,
resulting in increased economic impact, and may pose long-term risks to a Fund’s
investments. The future impact of climate change is difficult to predict but may
include changes in demand for certain goods and services, supply chain
disruption, changes in production costs, increased legislation, regulation,
international accords and compliance-related costs, changes in property and
security values, availability of natural resources and displacement of peoples.
Climate change regulation may result in increased operations and capital costs
for the companies in which the Fund invests. Voluntary initiatives and mandatory
controls have been adopted or are being discussed both in the U.S. and worldwide
to reduce emissions of “greenhouse gases” such as carbon dioxide, a by-product
of burning fossil fuels, which some scientists and policymakers believe
contribute to global climate change. These current and future measures may
result in certain companies in which the Fund invests incurring increased costs
to generally continue operating its business, to operate and maintain facilities
specifically, or to administer and manage a greenhouse gas emissions program.
Additionally, the effects of these measures may result in a reduction of the
demand for goods or services that produce significant greenhouse gas emissions
or are related to carbon-based energy sources.
Obligations
of Supranational Entities.
Obligations of supranational entities are obligations of entities established
through the joint participation of several governments, such as the Asian
Development Bank, the Inter-American Development Bank, International Bank of
Reconstruction and Development (World Bank), African Development Bank, European
Economic Community, European Investment Bank and the Nordic Investment
Bank.
Operational
Risk and Cyber Security.
With the increased use of technologies, such as mobile devices and "cloud"-based
service offerings and the dependence on the Internet and computer systems to
perform necessary business functions, the Funds' service providers are
susceptible to operational and information or cyber security risks that could
result in losses to a Fund and
its
shareholders. Cyber security breaches are either intentional or unintentional
events that allow an unauthorized party to gain access to Fund assets, customer
data, or proprietary information, or cause a Fund or Fund service provider to
suffer data corruption or lose operational functionality. Intentional cyber
security incidents include: unauthorized access to systems, networks, or devices
(such as through “hacking” activity or "phishing"); infection from computer
viruses or other malicious software code; and attacks that shut down, disable,
slow, or otherwise disrupt operations, business processes, or website access or
functionality. Cyber-attacks can also be carried out in a manner that does not
require gaining unauthorized access, such as causing denial-of-service attacks
on the service providers' systems or websites rendering them unavailable to
intended users or via "ransomware" that renders the systems inoperable until
appropriate actions are taken. In addition, unintentional incidents can occur,
such as the inadvertent release of confidential information (possibly resulting
in the violation of applicable privacy laws).
A
cyber security breach could result in the loss or theft of customer data or
funds, loss or theft of proprietary information or corporate data, physical
damage to a computer or network system, or costs associated with system repairs,
any of which could have a substantial impact on a Fund. For example, in a denial
of service, Fund shareholders could lose access to their electronic accounts
indefinitely, and employees of the Advisor, a Sub-Advisor, or the Funds’ other
service providers may not be able to access electronic systems to perform
critical duties for the Funds, such as trading, NAV calculation, shareholder
accounting, or fulfillment of Fund share purchases and redemptions. Cyber
security incidents could cause a Fund, the Advisor, a Sub-Advisor, or other
service provider to incur regulatory penalties, reputational damage, compliance
costs associated with corrective measures, litigation costs, or financial loss.
They may also result in violations of applicable privacy and other laws. In
addition, such incidents could affect issuers in which a Fund invests, thereby
causing the Fund’s investments to lose value.
Cyber-events
have the potential to materially affect the Funds' and the Advisor’s
relationships with accounts, shareholders, clients, customers, employees,
products, and service providers. The Funds have established risk management
systems reasonably designed to seek to reduce the risks associated with
cyber-events. There is no guarantee that the Funds will be able to prevent or
mitigate the impact of any or all cyber-events.
The
Funds are exposed to operational risk arising from a number of factors,
including, but not limited to, human error, processing and communication errors,
errors of the Funds’ service providers, counterparties, or other third parties,
failed or inadequate processes, and technology or system failures.
The
Advisor, each Sub-Advisor, and their affiliates have established risk management
systems that seek to reduce cybersecurity and operational risks, and business
continuity plans in the event of a cybersecurity breach or operational failure.
However, there are inherent limitations in such plans, including that certain
risks have not been identified, and there is no guarantee that such efforts will
succeed, especially since none of the Advisor, each Sub-Advisor, or their
affiliates controls the cybersecurity or operations systems of the Funds’ third
party service providers (including the Funds’ custodian), or those of the
issuers of securities in which the funds invest.
In
addition, other disruptive events, including (but not limited to) natural
disasters and public health crises (such as the COVID-19 pandemic), may
adversely affect a Fund’s ability to conduct business, in particular if the
Fund’s employees or the employees of its service providers are unable or
unwilling to perform their responsibilities as a result of any such event. Even
if the Fund’s employees and the employees of its service providers are able to
work remotely, those remote work arrangements could result in the Fund’s
business operations being less efficient than under normal circumstances, could
lead to delays in its processing of transactions, and could increase the risk of
cyber-events.
Obligations
with Puts Attached.
The Core Municipal Bond Fund may purchase Municipal Obligations with the right
to resell the obligation to the seller at a specified price or yield within a
specified period. The right to resell is commonly known as a "put" or a "standby
commitment." The Fund may purchase Municipal Obligations with puts attached from
banks and broker-dealers. The Fund intends to use obligations with puts attached
for liquidity purposes to ensure a ready market for the underlying obligations
at an acceptable price. Although no value is assigned to any puts on Municipal
Obligations, the price that the Fund pays for the obligations may be higher than
the price of similar obligations without puts attached. The purchase of
obligations with puts attached involves the risk that the seller may not be able
to repurchase the underlying obligation. The Fund intends to purchase such
obligations only from sellers deemed by the sub-advisor, under the direction of
the Board of Trustees, to present minimal credit risks. In addition, the value
of the obligations with puts attached held by the Fund will not exceed 10% of
its net assets.
Options.
A put option 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 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. The
initial purchase (sale) of an option
contract
is an “opening transaction.” In order to close out an option position, a
Fund may enter into a “closing transaction,” which is simply the sale (purchase)
of an option contract on the same security with the same exercise price and
expiration date as the option contract originally opened. If a Fund is unable to
effect a closing purchase transaction with respect to an option it has written,
it will not be able to sell the underlying security until the option expires or
a Fund delivers the security upon exercise.
A
Fund may purchase put and call options 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 a Fund may seek to purchase in the future. A
Fund will pay a premium when purchasing put and call options. If price movements
in the underlying securities are such that exercise of the options would not be
profitable for a Fund, loss of the premium paid may be offset by an increase in
the value of a Fund’s securities or by a decrease in the cost of acquisition of
securities by a Fund.
A
Fund may write both covered call and put options. A Fund may write covered call
options as a means of increasing the yield on its portfolio and as a means of
providing limited protection against decreases in its market value. When a Fund
sells an option, if the underlying securities do not increase or decrease 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 a Fund
will realize as profit the premium received for such option. When a call option
written by a Fund is exercised, a Fund 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 written by a Fund is exercised, a Fund will be required to purchase the
underlying securities at the strike price, which may be in excess of the market
value of such securities.
A
Fund may purchase and write options on an exchange or over-the-counter.
Over-the-counter options (“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 done normally by reference to information from a market maker. It is
the position of the staff of the SEC that OTC options are generally
illiquid.
A
Fund may purchase and write put and call options on foreign currencies (traded
on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates.
Buyers
and sellers of foreign currency options are subject to the same risks that apply
to options generally. There are certain additional risks associated with foreign
currency options. The markets in foreign currency options are relatively new,
and a Fund’s ability to establish and close out positions on such options is
subject to the maintenance of a liquid secondary market. There can be no
assurance that a liquid secondary market will exist for a particular option at
any specific time. In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates and investments
generally.
The
value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar. As a result, the price of the option
position may vary with changes in the value of either or both currencies and may
have no relationship to the investment merits of a foreign security. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There
is no systematic reporting of last sale information for foreign currencies or
any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller transactions (i.e.,
less than $1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent that the
U.S. option markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options markets until they
reopen.
A
Fund may purchase and write put and call options on indices and enter into
related closing transactions. 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. A Fund may choose to
terminate an option position by entering into a closing transaction. The ability
of a Fund to enter into closing transactions depends upon the existence of a
liquid secondary market for such transactions.
Options
written on indices may be covered and all options will be entered into in
accordance with the regulatory requirements described in the "Derivatives"
subsection.
A
Fund will not engage in transactions involving interest rate futures contracts
for speculation but only as a hedge against changes in the market values of debt
securities held or intended to be purchased by a Fund and where the transactions
are appropriate to reduce a Fund’s interest rate risks. There can be no
assurance that hedging transactions will be successful. A Fund also could be
exposed to risks if it cannot close out its futures or options positions because
of any illiquid secondary market.
Futures
and options have effective durations that, in general, are closely related to
the effective duration of the securities that underlie them. Holding purchased
futures or call option positions (backed by segregated cash or other liquid
securities) will lengthen the duration of a Fund’s portfolio.
Risks
associated with options transactions include: (1) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while a Fund may 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. As further outlined in the
“Derivatives” subsection, all options will be entered into in accordance with
the regulatory requirements described in the “Derivatives”
subsection.
Caps,
Collars and Floors.
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. An interest rate collar combines elements of buying a cap and selling a
floor.
Inverse
Floaters.
A Fund may invest in inverse floaters. Inverse floaters are derivative
securities whose interest rates vary inversely to changes in short-term interest
rates and whose values fluctuate inversely to changes in long-term interest
rates. The value of certain inverse floaters will fluctuate substantially more
in response to a given change in long-term rates than would a traditional debt
security. These securities have investment characteristics similar to leverage,
in that interest rate changes have a magnified effect on the value of inverse
floaters.
Ordinary
Shares.
Ordinary shares are shares of foreign issuers that are traded abroad and on a
United States exchange. Ordinary shares may be purchased with and sold for U.S.
dollars. Investing in foreign companies may involve risks not typically
associated with investing in United States companies. See “Foreign
Securities.”
Other
Investment Companies.
Investment companies include open- and closed-end funds, exchange-traded funds,
and any other pooled investment vehicle that meets the definition of an
investment company under the 1940 Act, whether such companies are required to
register under the 1940 Act or not. As a shareholder of another investment
company, a Fund would be subject to the same risks as any other investor in that
investment company. A Fund’s purchase of such investment company securities
results in the layering of expenses, such that shareholders would indirectly
bear a proportionate share of the operating expenses of such investment
companies, including advisory fees, in addition to paying Fund expenses.
Investments in registered investment company shares are subject to limitations
prescribed by the 1940 Act and its rules, and applicable SEC staff
interpretations or applicable exemptive relief granted by the SEC. The 1940 Act
currently provides, in part, that a Fund generally may not purchase shares of a
registered investment company if (a) such a purchase would cause a Fund to own
in the aggregate more than 3% of the total outstanding voting stock of the
investment company or (b) such a purchase would cause a Fund to have more than
5% of its total assets invested in the investment company or (c) more than 10%
of a Fund’s total assets would be invested in the aggregate in all registered
investment companies.
Over-The-Counter
Stocks.
A Fund may invest in over-the-counter stocks. In contrast to securities
exchanges, the over-the-counter market is not a centralized facility that limits
trading activity to securities of companies which initially satisfy certain
defined standards. Generally, the volume of trading in an unlisted or
over-the-counter common stock is less than the volume of trading in a listed
stock. This means that the depth of market liquidity of some stocks in which
each Fund invests may not be as
great
as that of other securities and, if a Funds were to dispose of such a stock,
they might have to offer the shares at a discount from recent prices, or sell
the shares in small lots over an extended period of time.
Participation
Interests.
A Fund may invest in participation interests in fixed income securities. A
participation interest provides the certificate holder with a specified interest
in an issue of fixed income securities.
Some
participation interests give the holders differing interests in the underlying
securities, depending upon the type or class of certificate purchased. For
example, coupon strip certificates give the holder the right to receive a
specific portion of interest payments on the underlying securities; principal
strip certificates give the holder the right to receive principal payments and
the portion of interest not payable to coupon strip certificate holders. Holders
of certificates of participation in interest payments may be entitled to receive
a fixed rate of interest, a variable rate that is periodically reset to reflect
the current market rate or an auction rate that is periodically reset at
auction. Asset-backed residuals represent interests in any excess cash flow
remaining after required payments of principal and interest have been
made.
More
complex participation interests involve special risk considerations. Since these
instruments have only recently been developed, there can be no assurance that
any market will develop or be maintained for the instruments. Generally, the
fixed income securities that are deposited in trust for the holders of these
interests are the sole source of payments on the interests; holders cannot look
to the sponsor or trustee of the trust or to the issuers of the securities held
in trust or to any of their affiliates for payment.
Participation
interests purchased at a discount may experience price volatility. Certain types
of interests are sensitive to fluctuations in market interest rates and to
prepayments on the underlying securities. A rapid rate of prepayment can result
in the failure to recover the holder’s initial investment.
The
extent to which the yield to maturity of a participation interest is sensitive
to prepayments depends, in part, upon whether the interest was purchased at a
discount or premium, and if so, the size of that discount or premium. Generally,
if a participation interest is purchased at a premium and principal
distributions occur at a rate faster than that anticipated at the time of
purchase, the holder’s actual yield to maturity will be lower than that assumed
at the time of purchase. Conversely, if a participation interest is purchased at
a discount and principal distributions occur at a rate faster than that assumed
at the time of purchase, the investor’s actual yield to maturity will be higher
than that assumed at the time of purchase.
Participation
interests in pools of fixed income securities backed by certain types of debt
obligations involve special risk considerations. The issuers of securities
backed by automobile and truck receivables typically file financing statements
evidencing security interests in the receivables, and the servicers of those
obligations take and retain custody of the obligations. If the servicers, in
contravention of their duty to the holders of the securities backed by the
receivables, were to sell the obligations, the third-party purchasers could
acquire an interest superior to the interest of the security holders. Also, most
states require that a security interest in a vehicle must be noted on the
certificate of title and the certificate of title may not be amended to reflect
the assignment of the lender’s security interest. Therefore, the recovery of the
collateral in some cases may not be available to support payments on the
securities. Securities backed by credit card receivables are generally
unsecured, and both federal and state consumer protection laws may allow
set-offs against certain amounts owed.
Pay
in-Kind ("PIK") Bonds.
Pay in-kind bonds are securities which, at the issuer’s option, pay interest in
either cash or additional securities for a specified period. Pay in-kind bonds,
like zero coupon bonds, are designed to give an issuer flexibility in managing
cash flow. Pay in-kind bonds are expected to reflect the market value of the
underlying debt plus an amount representing accrued interest since the last
payment. Pay in-kind bonds are usually less volatile than zero coupon bonds, but
more volatile than cash pay securities.
Preferred
Stock.
Preferred stock has a preference over common stock in liquidation (and generally
for dividend receipt as well) but is subordinated to the liabilities of the
issuer in all respects. As a general rule, the market value of preferred stock
with a fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risk, while the market price of convertible
preferred stock generally also reflects some element of conversion value.
Because preferred stock is junior to debt securities and other obligations of
the issuer, deterioration in the credit quality of the issuer will cause greater
changes in the value of a preferred stock than in a more senior debt security
with similar stated yield characteristics. Unlike interest payments on debt
securities, preferred stock dividends generally are payable only if declared by
the issuer’s board of directors. Preferred stock also may be subject to optional
or mandatory redemption provisions.
Privatization.
Privatizations are foreign government programs for selling all or part of the
interests in government owned or controlled enterprises. The ability of a U.S.
entity to participate in privatizations in certain foreign countries may be
limited by local law, or the terms on which a Fund may be permitted to
participate may be less advantageous than those applicable for
local
investors. There can be no assurance that foreign governments will continue to
sell their interests in companies currently owned or controlled by them or that
privatization programs will be successful.
Receipts.
Receipts are sold as zero coupon securities, which mean that they are sold at a
substantial discount and redeemed at face value at their maturity date without
interim cash payments of interest or principal. This discount is accreted over
the life of the security, and such accretion will constitute the income earned
on a security for both accounting and federal income tax purposes. Because of
these features, such securities may be subject to greater interest rate
volatility than interest paying investments.
Real
Estate Investment Trusts (“REITs”).
The Funds may invest in REITs, which pool investors’ money for investment in
income producing commercial real estate or real estate related loans or
interests.
A
REIT is not subject to federal income tax on income distributed to its
shareholders or unitholders if it complies with regulatory requirements relating
to its organization, ownership, assets and income, and with a regulatory
requirement that it distribute to its shareholders or unitholders at least 90%
of its taxable income for each taxable year. 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. A
shareholder in a Fund should realize that by investing in REITs indirectly
through a Fund, he or she will bear not only his or her proportionate share of
the expenses of a Fund, but also indirectly, similar expenses of underlying
REITs.
A
Fund may be subject to certain risks associated with the direct investments of
the REITs. REITs may be affected by changes in their underlying properties and
by defaults by borrowers or tenants. Mortgage REITs may be affected by the
quality of the credit extended. 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, the performance of a 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.
ReFlow
Liquidity Program. The
Funds may participate in the ReFlow liquidity program, which is designed to
provide an alternative liquidity source for mutual funds experiencing
redemptions of their shares. In order to pay cash to shareholders who redeem
their shares on a given day, a mutual fund typically must hold cash in its
portfolio, liquidate portfolio securities, or borrow money, all of which impose
certain costs on the fund. ReFlow Fund, LLC ("ReFlow") provides participating
mutual funds with another source of cash by standing ready to purchase shares
from a fund up to the amount of the fund’s net redemptions on a given day.
ReFlow then generally redeems those shares when the fund experiences net sales.
In return for this service, the Fund will pay a fee to ReFlow at a rate
determined by a daily auction with other participating mutual funds. The costs
to the Fund for participating in ReFlow are expected to be influenced by and
comparable to the cost of other sources of liquidity, such as the Fund’s
short-term lending arrangements or the costs of selling portfolio securities to
meet redemptions. In accordance with federal securities laws, ReFlow is
prohibited from acquiring more than 3% of the outstanding voting securities of
the Fund. There is no assurance that ReFlow will have sufficient funds available
to meet the Fund's liquidity needs on a particular day. Investments in the Fund
by ReFlow in connection with the ReFlow liquidity program are not subject to the
market timing limitations described in the Funds' prospectus.
Repurchase
Agreements.
Repurchase agreements are transactions by which the Funds purchase a security
and simultaneously commit to resell that security to the seller at an agreed
upon time and price, thereby determining the yield during the term of the
agreement. In the event of a bankruptcy or other default of the seller of a
repurchase agreement, a Fund could experience both delays in liquidating the
underlying security and losses. To minimize these possibilities, the Funds
intend to enter into repurchase agreements only with their custodian, with banks
having assets in excess of $10 billion and with broker-dealers who are
recognized as primary dealers in U.S. government obligations by the Federal
Reserve Bank of New York. Collateral for repurchase agreements is held for
safekeeping in the customer-only account of the Fund's custodian at the Federal
Reserve Bank. A Fund will not enter into a repurchase agreement not terminable
within seven days if, as a result thereof, more than 15% of the value of its net
assets would be invested in such securities and other illiquid
securities.
Although
the securities subject to a repurchase agreement might bear maturities exceeding
one year, settlement for the repurchase would never be more than one year after
a Fund’s acquisition of the securities and normally would be within a shorter
period of time. The resale price will be in excess of the purchase price,
reflecting an agreed upon market rate effective for the period of time that each
Fund’s money will be invested in the securities, and will not be related to the
coupon rate of the purchased security. At the time a Fund enters into a
repurchase agreement, the value of the underlying security, including
accrued
interest, will equal or exceed the value of the repurchase agreement, and in the
case of a repurchase agreement exceeding one day, the seller will agree that the
value of the underlying security, including accrued interest, will at all times
equal or exceed the value of the repurchase agreement. The collateral securing
the seller’s obligation must consist of cash or securities that are issued or
guaranteed by the United States government or its agencies. The collateral will
be held by the custodian or in the Federal Reserve Book Entry
System.
For
purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from a
Fund to the seller subject to the repurchase agreement and is therefore subject
to the applicable Fund’s investment restrictions applicable to loans. It is not
clear whether a court would consider the securities purchased by a Fund subject
to a repurchase agreement as being owned by that Fund or as being collateral for
a loan by a Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the securities before
repurchase of the security under a repurchase agreement, a Fund may encounter
delays and incur costs before being able to sell the security. Delays may
involve loss of interest or decline in price of the security. If a court
characterized the transaction as a loan and a Fund has not perfected a security
interest in the security, that Fund may be required to return the security to
the seller’s estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a Fund would be at risk of losing some or all of the
principal and income involved in the transaction. As with any unsecured debt
obligation purchased for a Fund, the sub-advisor seeks to minimize the risk of
loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case, the seller. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the security, in which case a Fund may incur a loss if the proceeds
to the applicable Fund of the sale of the security to a third party are less
than the repurchase price. However, if the market value of the securities
subject to the repurchase agreement becomes less than the repurchase price
(including interest), a Fund involved will direct the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. It is
possible that a Fund will be unsuccessful in seeking to enforce the seller’s
contractual obligation to deliver additional securities.
Reverse
Repurchase Agreement, Dollar Roll, and Reverse Dollar Roll
Transactions.
A reverse repurchase agreement involves a sale by a Fund of securities that it
holds to a bank, broker-dealer or other financial institution concurrently with
an agreement by a Fund to repurchase the same securities at an agreed-upon price
and date. Reverse repurchase agreements are considered borrowing by a Fund and
are subject to the applicable Fund’s limitations on borrowing. A dollar roll
transaction involves a sale by a Fund of an eligible security to a financial
institution concurrently with an agreement by the applicable Fund to repurchase
a similar eligible security from the institution at a later date at an
agreed-upon price. A reverse dollar roll transaction involves a purchase by a
Fund of an eligible security from a financial institution concurrently with an
agreement by the applicable Fund to resell a similar security to the institution
at a later date at an agreed-upon price. As further outlined in the
“Derivatives” subsection, all Reverse Repurchase Agreement, Dollar Roll, and
Reverse Dollar Roll Transactions will be entered into in accordance with the
regulatory requirements described in “Derivatives” subsection. Furthermore, a
Fund will either treat reverse repurchase agreements and similar financings as
derivatives subject to the Derivatives Rule limitations or not as derivatives
and treat reverse repurchase agreements and similar financings transactions as
senior securities equivalent to bank borrowings subject to asset coverage
requirements of Section 18 of the 1940 Act.
Royalty
Trusts.
Royalty trusts are structured similarly to REITs. A royalty trust generally
acquires an interest in natural resource companies or chemical companies and
distributes the income it receives to the investors of the royalty trust. A
sustained decline in demand for crude oil, natural gas and refined petroleum
products could adversely affect income and royalty trust revenues and cash
flows. Factors that could lead to a decrease in market demand include a
recession or other adverse economic conditions, an increase in the market price
of the underlying commodity, higher taxes or other regulatory actions that
increase costs, or a shift in consumer demand for such products. A rising
interest rate environment could adversely impact the performance of royalty
trusts. Rising interest rates could limit the capital appreciation of royalty
trusts because of the increased availability of alternative investments at more
competitive yields.
Rule
144A Securities.
Rule 144A securities are securities exempt from registration on resale pursuant
to Rule 144A under the 1933 Act. Rule 144A securities are traded in the
institutional market pursuant to this registration exemption, and, as a result,
may not be as liquid as exchange-traded securities since they may only be resold
to certain qualified institutional investors. Due to the relatively limited size
of this institutional market, these securities may affect the liquidity of Rule
144A securities to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Nevertheless, Rule 144A
securities may be treated as liquid securities pursuant to the Funds' LRM
Program.
Sector
Focus.
If
a Fund’s portfolio is overweighted in a certain sector or related sectors, any
negative development affecting that sector will have a greater impact on a Fund
than a fund that is not overweighted in that sector.
Communication
Services Sector Risk.
The
communication services sector is subject to extensive government regulation. The
costs of complying with governmental regulations, delays or failure to receive
required regulatory approvals, or the enactment
of
new regulatory requirements may negatively affect the business of communications
services companies. Government actions around the world, specifically in the
area of pre-marketing clearance of products and prices, can be arbitrary and
unpredictable. The domestic communications services market is characterized by
increasing competition and regulation by various state and federal regulatory
authorities. Companies in the communication services sector may encounter
distressed cash flows due to the need to commit substantial capital to meet
increasing competition, particularly in formulating new products and services
using new technology. Technological innovations may make the products and
services of certain communications services companies obsolete.
Consumer
Discretionary Sector Risk.
Because
companies in the consumer discretionary sector manufacture products and provide
discretionary services directly to the consumer, the success of these companies
is tied closely to the performance of the overall domestic and international
economy, interest rates, competition and consumer confidence. Success depends
heavily on disposable household income and consumer spending. Changes in
demographics and consumer tastes also can affect the demand for, and success of,
consumer discretionary products in the marketplace.
Consumer
Staples Sector Risk.
The
consumer staples sector may be affected by food and drug regulations and
production methods, fads, marketing campaigns and other factors affecting
consumer demand. In particular, tobacco companies may be adversely affected by
new laws, regulations and litigation. The consumer staples sector may also be
adversely affected by changes or trends in commodity prices, which may be
influenced or characterized by unpredictable factors.
Energy
Sector Risk.
The
profitability of companies in the energy sector is related to worldwide energy
prices, exploration, and production spending. Such companies also are subject to
risks of changes in exchange rates, government regulation, world events,
depletion of resources and economic conditions, as well as market, economic and
political risks of the countries where energy companies are located or do
business. Oil and gas exploration and production can be significantly affected
by natural disasters. Oil exploration and production companies may be adversely
affected by changes in exchange rates, interest rates, government regulation,
world events, and economic conditions. Oil exploration and production companies
may be at risk for environmental damage claims.
Financial
Sector Risk.
The
financial services industries are subject to extensive government regulation,
can be subject to relatively rapid change due to increasingly blurred
distinctions between service segments, and can be significantly affected by
availability and cost of capital funds, changes in interest rates, the rate of
corporate and consumer debt defaults, and price competition. Numerous financial
services companies have experienced substantial declines in the valuations of
their assets, taken action to raise capital (such as the issuance of debt or
equity securities), or even ceased operations. These actions have caused the
securities of many financial services companies to experience a dramatic decline
in value. Issuers that have exposure to the real estate, mortgage and credit
markets have been particularly affected by the foregoing events and the general
market turmoil, and it is uncertain whether or for how long these conditions
will continue.
Healthcare
Sector Risk.
The
profitability of companies in the healthcare sector may be affected by extensive
government regulation, restrictions on government reimbursement for medical
expenses, rising costs of medical products and services, pricing pressure, an
increased emphasis on outpatient services, limited number of products, industry
innovation, changes in technologies and other market developments. Many
healthcare companies are heavily dependent on patent protection. The expiration
of patents may adversely affect the profitability of these companies. Many
healthcare companies are subject to extensive litigation based on product
liability and similar claims. Healthcare companies are subject to competitive
forces that may make it difficult to raise prices and, in fact, may result in
price discounting. Many new products in the healthcare sector may be subject to
regulatory approvals. The process of obtaining such approvals may be long and
costly.
Industrials
Sector Risk.
The stock prices of companies in the industrials sector are affected by supply
and demand both for their specific product or service, industrials sector
products in general, and the costs of materials and other commodities. The
products of manufacturing companies may face product obsolescence due to rapid
technological developments and frequent new product introduction. Government
regulation, world events and economic conditions may affect the performance of
companies in the industrials sector. Companies in the industrials sector may be
at risk for environmental damage and product liability claims.
Information
Technology Sector Risk.
Information
technology companies face intense competition, both domestically and
internationally, which may have an adverse effect on profit margins. Like other
technology companies, information technology companies may have limited product
lines, markets, financial resources or personnel. The products of information
technology companies may face product obsolescence due to rapid technological
developments and frequent new product introduction, unpredictable changes in
growth rates and competition for the services of qualified personnel. Technology
companies and companies that rely heavily on technology, especially those of
smaller, less-seasoned companies, tend to be more volatile than the overall
market. Companies in the information technology sector are heavily dependent on
patent and intellectual property
rights.
The loss or impairment of these rights may adversely affect the profitability of
these companies. Finally, while all companies may be susceptible to network
security breaches, certain companies in the information technology sector may be
particular targets of hacking and potential theft of proprietary or consumer
information or disruptions in service, which could have a material adverse
effect on their businesses. These risks are heightened for information
technology companies in foreign markets.
Materials
Sector Risk.
Companies
in the materials sector could be adversely affected by commodity price
volatility, exchange rates, import controls and increased competition.
Production of industrial materials often exceeds demand as a result of
overbuilding or economic downturns, leading to poor investment returns.
Companies in the materials sector are at risk for environmental damage and
product liability claims. Companies in the materials sector may be adversely
affected by depletion of resources, technical progress, labor relations, and
government regulations.
Real
Estate Sector Risk.
An investment in a real property company may be subject to risks similar to
those associated with direct ownership of real estate, including, by way of
example, the possibility of declines in the value of real estate, losses from
casualty or condemnation, and changes in local and general economic conditions,
supply and demand, interest rates, environmental liability, zoning laws,
regulatory limitations on rents, property taxes, and operating expenses. Some
real property companies have limited diversification because they invest in a
limited number of properties, a narrow geographic area, or a single type of
property.
Securities
Lending.
In order to generate additional income, a Fund may lend its securities pursuant
to agreements requiring that the loan be continuously secured by collateral
consisting of: (1) cash in U.S. dollars; (2) securities issued or fully
guaranteed by the United States government or issued and unconditionally
guaranteed by any agencies thereof; or (3) irrevocable performance letters of
credit issued by banks approved by each Fund. All collateral must equal at least
100% of the market value of the loaned securities. A Fund continues to receive
interest on the loaned securities while simultaneously earning interest on the
investment of cash collateral. Collateral is marked to market daily. There may
be risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially or become
insolvent. In addition, cash collateral invested by the lending Fund is subject
to investment risk and the Fund may experience losses with respect to its
collateral investments. The SEC currently requires that the following conditions
must be met whenever a Fund’s portfolio securities are loaned: (1) the Fund must
receive at least 100% cash collateral from the borrower; (2) the borrower must
increase such collateral whenever the market value of the securities rises above
the level of such collateral; (3) the Fund must be able to terminate the loan at
any time; (4) the Fund must receive reasonable interest on the loan, as well as
any dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees
approved by the Board in connection with the loan; (6) while voting rights on
the loaned securities may pass to the borrower, the Fund must have the ability
to terminate the loan and regain the right to vote the securities if a material
event adversely affecting the investment occurs, and (7) the Fund may not loan
its portfolio securities so that the value of the loaned securities is more than
one-third of its total asset value, including collateral received from such
loans.
The
Trust has appointed Brown Brothers Harriman & Co. (“BBH”) as its lending
agent in connection with the Funds’ securities lending program. BBH administers
the securities lending program in accordance with operational procedures it has
established in conjunction with the Funds. As the securities lending agent, BBH
lends certain securities, which are held in custody accounts maintained with
BBH, to borrowers that have been approved by the Funds. As securities lending
agent, BBH is authorized to execute certain agreements and documents and take
such actions as may be necessary or appropriate to carry out the securities
lending program. On September 7, 2021, BBH announced to its clients that it had
entered into an agreement to sell its Investor Services business, including its
custody, accounting, fund administration, global markets, securities lending and
technology services, to State Street Bank and Trust Company (“State Street”) and
asked its clients, including the Trust, to consent to the assignment of all
client agreements that are part of the BBH’s Investor Services business to State
Street. The Board approved and the Trust consented to the continuation of the
Agreement with State Street.
The
dollar amounts of income and fees and compensation paid to all service providers
related to the Funds that participated in securities lending activities during
the fiscal year (or period) ended June 30, 2022 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Balanced
Fund |
Core
Municipal Bond Fund |
International
Equity Fund |
International
Growth Fund |
Large
Cap Focused Fund |
Large
Cap Fund |
Large
Company Growth Fund |
Small
Company Fund |
Value
Fund |
Gross
Income from securities lending activities |
$ |
5,885 |
| $ |
— |
| $ |
17,785 |
| $ |
13,181 |
| $ |
513 |
| $ |
— |
| $ |
2,208 |
| $ |
13,689 |
| $ |
— |
|
Fees
and/or compensation for securities lending activities and related
services |
|
|
|
|
|
|
|
| |
| Fees
paid to securities lending agent from a revenue split |
$ |
736 |
| $ |
— |
| $ |
2,301 |
| $ |
1,211 |
| $ |
77 |
| $ |
— |
| $ |
332 |
| $ |
1,452 |
| $ |
— |
|
| Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
$ |
2,489 |
| $ |
— |
| $ |
1,990 |
| $ |
2,442 |
| $ |
263 |
| $ |
— |
| $ |
1,159 |
| $ |
4,307 |
| $ |
— |
|
| Administrative
fees not included in revenue split |
$ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
|
| Indemnification
fee not included in revenue split |
$ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
|
| Rebate
(paid to borrower) |
$ |
978 |
| $ |
— |
| $ |
2,437 |
| $ |
5,110 |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
4,008 |
| $ |
— |
|
| Other
fees not included in revenue split (specify) |
$ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
| $ |
— |
|
Aggregate
fees/compensation for securities lending activities |
$ |
4,203 |
| $ |
— |
| $ |
6,728 |
| $ |
8,763 |
| $ |
340 |
| $ |
— |
| $ |
1,491 |
| $ |
9,767 |
| $ |
— |
|
Net
Income from securities lending activities |
$ |
1,682 |
| $ |
— |
| $ |
11,057 |
| $ |
4,418 |
| $ |
173 |
| $ |
— |
| $ |
717 |
| $ |
3,922 |
| $ |
— |
|
Securities
With Limited Marketability.
As a matter of current operating policy, the Core Municipal Bond Fund may invest
in the aggregate up to 10% of its net assets in securities that are not readily
marketable, including: participation interests that are not subject to demand
features; floating and variable rate obligations as to which the Fund cannot
exercise the related demand feature and as to which there is no secondary
market; repurchase agreements not terminable within seven days, and lease
obligations for which there is no secondary market. This policy is not
fundamental for the Fund and may be changed by the Board of Trustees without
shareholder approval.
Senior
Securities.
Senior securities may include any obligation or instrument issued by a Fund
evidencing indebtedness. The 1940 Act generally prohibits funds from issuing
senior securities, although it does not treat certain transactions as senior
securities, such as certain borrowings, and firm commitment agreements and
standby commitments, with appropriate earmarking or segregation of assets to
cover such obligation. As further outlined in the “Derivatives” subsection, the
SEC adopted the “Derivatives Rule” on October 28, 2020, and in doing so
announced it would rescind SEC releases, guidance and no-action letters related
to funds' coverage and asset segregation practices. Funds were required to
comply with the Derivatives Rule requirements by August 19, 2022.
Short
Sales.
In a short sale, a Fund sells a security, which it does not own, in anticipation
of a decline in the market value of the security. To complete the sale, the Fund
must borrow the security (generally from the broker through which the short sale
is made) in order to make delivery to the buyer. The Fund must replace the
security borrowed by purchasing it at the market price at the time of
replacement. The Fund is said to have a “short position” in the securities sold
until it delivers them to the broker. The period during which the Fund has a
short position can range from one day to more than a year. Until the Fund
replaces the security, the proceeds of the short sale are retained by the
broker, and the Fund must pay to the broker a negotiated portion of any
dividends or interest, which accrue during the period of the loan. A short sale
is “against the box” if at all times during which the short position is open, a
Fund 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 Fund with respect to the securities that are sold
short. The lending of securities is considered a form of leverage that is
included in a lending Fund’s investment limitation related to borrowings. See
“Investment Limitations” below.
To
the extent a Fund engages in short sales, such transactions will comply
with the Derivatives Rule requirements set forth in the "Derivatives"
subsection. Further, if other short positions of the same security are closed
out at the same time, a “short squeeze” can occur where demand exceeds the
supply for the security sold short. A short squeeze makes it more likely that
the Fund will need to replace the borrowed security at an unfavorable
price.
Sovereign
Debt.
Investment in sovereign debt can involve a high degree of risk. The governmental
entity that controls the repayment of sovereign debt may not be able or willing
to repay the principal or interest when due in accordance with the terms of such
debt. A governmental entity’s willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the governmental entity’s
policy towards the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies
and others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on the implementation of economic reforms or
economic performance and the timely service of such debtor’s obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due may result in the cancellation of such
third parties’ commitments to lend funds to the governmental entity, which may
further impair such debtor’s ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign
debt.
Holders
of sovereign debt may be requested to participate in the rescheduling of such
debt and to extend further loans to governmental entities. In the event of a
default by a governmental entity, there may be few or no effective legal
remedies for collecting on such debt.
Stand-By
Commitments.
When a Fund purchases municipal obligations, it may also acquire stand-by
commitments from banks and broker-dealers with respect to such municipal
obligations. A stand-by commitment is the equivalent of a put option acquired by
a Fund with respect to a particular municipal obligation held in its portfolio.
A stand-by commitment is a security independent of the municipal obligation to
which it relates. The amount payable by a bank or dealer during the time a
stand-by commitment is exercisable, absent unusual circumstances relating to a
change in market value, would be substantially the same as the value of the
underlying municipal obligation. A stand-by commitment might not be transferable
by a Fund, although it could sell the underlying municipal obligation to a
third-party at any time.
Each
Fund expects that stand-by commitments generally will be available without the
payment of direct or indirect consideration. However, if necessary and
advisable, a Fund may pay for stand-by commitments either separately in cash or
by paying a higher price for portfolio securities which are acquired subject to
such a commitment (thus reducing the yield to maturity otherwise available for
the same securities). The total amount paid in either manner for outstanding
stand-by commitments held by a Fund will not exceed 10% of the value of a Fund’s
total assets calculated immediately after each stand-by commitment is acquired.
A Fund will enter into stand-by commitments only with banks and broker-dealers
that, in the judgment of the Advisor or sub-advisor, as the case may be, present
minimal credit risks.
Step
Coupon Bonds (“STEPS”).
A Fund may invest in STEPS, which pay interest at a series of different rates
(including 0%) in accordance with a stated schedule for a series of periods. In
addition to the risks associated with the credit rating of the issuers, these
securities may be subject to more volatility risk than fixed rate debt
securities.
Structured
Investments.
Structured investments are derivatives in the form of a unit or units
representing an undivided interest(s) in assets held in a trust that is not an
investment company as defined in the 1940 Act. A trust unit pays a return based
on the total return of securities and other investments held by the trust and
the trust may enter into one or more swaps to achieve its goal. For example, a
trust may purchase a basket of securities and agree to exchange the return
generated by those securities for the return generated by another basket or
index of securities. The Funds will purchase structured investments in trusts
that engage in such swaps only where the counterparties are approved by the
Advisor or sub-advisor, as the case may be.
Structured
Notes.
A Fund may invest in structured notes, including “total rate of return swaps,”
with rates of return determined by reference to the total rate of return on one
or more loans referenced in such notes. The rate of return on the structured
note may be determined by applying a multiplier to the rate of total return on
the referenced loan or loans. Application of a multiplier is comparable to the
use of leverage, which magnifies the risk of loss, because a relatively small
decline in the value of a referenced note could result in a relatively large
loss in value.
Swap
Agreements.
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the cash
flows are based on agreed-upon prices, rates, indices, etc. The nominal amount
on which the cash flows are calculated is called the notional amount. Swaps are
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors, such as interest rates,
foreign currency rates, mortgage securities, corporate borrowing rates, security
prices, indexes or inflation rates.
Swap
agreements may increase or decrease the overall volatility of the investments of
a Fund and its share price. The performance of swap agreements may be affected
by a change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from a Fund. If a swap agreement
calls for payments by a Fund, a Fund must be prepared to make such payments when
due. In addition, if the counter-party’s creditworthiness declines, the value of
a swap agreement would be likely to decline, potentially resulting in
losses.
Generally,
swap agreements have a fixed maturity date that will be agreed upon by the
parties. The agreement can be terminated before the maturity date only under
limited circumstances, such as default by one of the parties or insolvency,
among others, and can be transferred by a party only with the prior written
consent of the other party. A Fund may be able to
eliminate
its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counter-party is unable to meet
its obligations under the contract, declares bankruptcy, defaults or becomes
insolvent, a Fund may not be able to recover the money it expected to receive
under the contract.
A
swap agreement can be a form of leverage, which can magnify a Fund’s gains or
losses. A Fund will only enter into a swap agreement subject to the regulatory
limitations outlined in the “Derivatives” subsection.
Equity
Swaps.
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can gain
exposure to stocks making up the index of securities without actually purchasing
those stocks. Equity index swaps involve not only the risk associated with
investment in the securities represented in the index, but also the risk that
the performance of such securities, including dividends, will not exceed the
return on the interest rate that a Fund will be committed to pay.
Interest
Rate Swaps.
Interest rate swaps are financial instruments that involve the exchange of one
type of interest rate for another type of interest rate cash flow on specified
dates in the future. Some of the different types of interest rate swaps are
“fixed-for floating-rate swaps,” “termed basis swaps” and “index amortizing
swaps.” Fixed-for floating-rate swaps involve the exchange of fixed interest
rate cash flows for floating-rate cash flows. Termed basis swaps entail cash
flows to both parties based on floating interest rates, where the interest rate
indices are different. Index amortizing swaps are typically fixed-for floating
swaps where the notional amount changes if certain conditions are
met.
Like
a traditional investment in a debt security, a Fund could lose money by
investing in an interest rate swap if interest rates change adversely. For
example, if a Fund enters into a swap where it agrees to exchange a
floating-rate of interest for a fixed rate of interest, a Fund may have to pay
more money than it receives. Similarly, if a Fund enters into a swap where it
agrees to exchange a fixed rate of interest for a floating-rate of interest, a
Fund may receive less money than it has agreed to pay.
Currency
Swaps.
A currency swap is an agreement between two parties in which one party agrees to
make interest rate payments in one currency and the other promises to make
interest rate payments in another currency. A Fund may enter into a currency
swap when it has one currency and desires a different currency. Typically the
interest rates that determine the currency swap payments are fixed, although
occasionally one or both parties may pay a floating-rate of interest. Unlike an
interest rate swap, however, the principal amounts are exchanged at the
beginning of the contract and returned at the end of the contract. Changes in
foreign exchange rates and changes in interest rates, as described above, may
negatively affect currency swaps.
Credit
Default Swaps (“CDSs”).
A CDS is an agreement between a Fund and a counterparty that enables the Fund to
buy or sell protection against a credit event related to a referenced debt
obligation. One party, acting as a “protection buyer,” makes periodic payments
to the other party, a “protection seller,” in exchange for a promise by the
protection seller to make a payment to the protection buyer if a negative credit
event (such as a delinquent payment or default) occurs with respect to a
referenced bond or group of bonds. Acting as a protection seller allows a Fund
to create an investment exposure similar to owning a bond. Acting as a
protection buyer allows a Fund potentially to reduce its credit exposure to a
bond it owns or to take a “short” position in a bond it does not
own.
As
the protection buyer in a CDS, a Fund may pay a premium (by means of periodic
payments) in return for the right to deliver specified bonds or loans to the
protection seller and receive the par (or other agreed-upon) value upon default
or similar events by the issuer of the underlying reference obligation. If no
default occurs, the protection seller would keep the stream of payments and
would have no further obligations to the Fund. As the protection buyer, the Fund
bears the risk that the investment might expire worthless or that the protection
seller may fail to satisfy its payment obligations to the Fund in the event of a
default or similar event. In addition, when the Fund is a protection buyer, the
Fund’s investment would only generate income in the event of an actual default
or similar event by the issuer of the underlying reference
obligation.
A
Fund may also use credit default swaps for investment purposes by selling a CDS,
in which case, the Fund, as the protection seller, would be required to pay the
par (or other agreed-upon) value of a referenced debt obligation to the
protection buyer in the event of a default or similar event by the third-party
issuer of the underlying reference obligation. In return for its obligation, the
Fund would receive from the protection buyer a periodic stream of payments over
the term of the contract. If no credit event occurs, the Fund would keep the
stream of payments and would have no payment obligations. As the protection
seller in a CDS, the Fund effectively adds economic leverage to its portfolio
because, in addition to its total net assets, the Fund is subject to investment
exposure on the notional amount of the swap.
In
addition to the risks applicable to derivatives generally, CDSs involve special
risks because they may be difficult to value, are highly susceptible to
liquidity and credit risk, and generally pay a return to the party that has paid
the premium only in the
event
of an actual default by the issuer of the underlying obligation (as opposed to a
credit downgrade or other indication of financial difficulty).
Options
on Swap Agreements (“swaptions”).
A Fund also may enter into swaptions. A swaption is a contract that gives a
counterparty the right (but not the obligation) to enter into a new swap
agreement or to shorten, extend, cancel or otherwise modify an existing swap
agreement, at some designated future time on specified terms. A Fund may write
(sell) and purchase put and call swaptions. Depending on the terms of the
particular swaption, a Fund will generally incur a greater degree of risk when
it writes a swaption than it will incur when it purchases a swaption. When a
Fund purchases a swaption, it risks losing only the amount of the premium it has
paid should it decide to let the option expire unexercised. However, when a Fund
writes a swaption, upon exercise of the option by the buyer of the option, the
Fund will become obligated according to the terms of the underlying swap
agreement.
Whether
a Fund’s use of swap agreements or swaptions will be successful in furthering
its investment goals will depend on the sub-advisors’ ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty.
Total
Return Swaps.
Total return swaps are contracts in which one party agrees to make periodic
payments to the other party based on change in market value of the assets
underlying the contract in exchange for periodic payments based on a fixed or
variable interest rate or the total return from other underlying assets. The
return of the assets underlying the contract includes both the income generated
by the asset and the change in market value of the asset. The asset underlying
the contract may include a specified security, basket of securities or
securities indices.
Total
return swaps may be used to obtain exposure to a security or market without
owning or taking physical custody of such security or investing directly in such
market. Upon entering into a total return swap, the Fund is required to deposit
initial margin but the parties do not exchange the notional amount. As a result,
total return swaps may effectively add leverage to the Fund’s portfolio because
the Fund would be subject to investment exposure on the notional amount of the
swap. A Fund will only enter into a swap agreement subject to the regulatory
limitations outlined in the “Derivatives” subsection.
Total
return swaps are subject to the same risks noted above under "Swap
Agreements."
Other
Types of Financial Instruments.
If other types of financial instruments, including other types of options,
futures contracts, or futures options are traded in the future, the Funds may
also use those instruments, provided that such instruments are consistent with
the Funds’ investment goals.
Temporary
Defensive Investments.
A Fund may, for temporary defensive purposes, invest up to 100% of its total
assets in money market instruments (including U.S. government securities, bank
obligations, commercial paper rated in the highest rating category by an NRSRO
and repurchase agreements involving the foregoing securities), shares of money
market investment companies (to the extent permitted by applicable law and
subject to certain restrictions) and cash. When a Fund invests in defensive
investments, it may not achieve its investment goal.
Tender
Option Bonds.
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third-party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security’s fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax exempt rate. The
Advisor or sub-advisor as the case may be, will consider on an ongoing basis the
creditworthiness of the issuer of the underlying municipal securities, of any
custodian, and of the third-party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal of interest on the underlying
municipal securities and for other reasons.
Time
Deposits.
Time deposits are non-negotiable receipts issued by a bank in exchange for the
deposit of funds. Like a certificate of deposit, it earns a specified rate of
interest over a definite period of time; however, it cannot be traded in the
secondary market. Time deposits with a withdrawal penalty are considered to be
illiquid securities.
Trust
Preferred Securities.
Trust preferred securities are issued by a special purpose trust subsidiary
backed by subordinated debt of the corporate parent. Trust preferred securities
currently permit the issuing entity to treat the interest payments as a
tax-deductible cost. These securities, which have no voting rights, have a final
stated maturity date and a fixed schedule for periodic payments. In addition,
these securities have provisions which afford preference over common and
preferred stock upon liquidation, although the securities are subordinated to
other, more senior debt securities of the same issuer. The issuers of these
securities have the right to defer interest payments for a period of up to five
years, although interest continues to accrue cumulatively. The deferral of
payments may not exceed the stated maturity date of the securities themselves.
The non-payment of deferred interest at the end of the permissible period will
be treated as an event of default. At the present time, the Internal Revenue
Service ("IRS") treats trust preferred securities as debt.
U.S.
Government Securities.
U.S. government securities are obligations issued or guaranteed by the U.S.
government, its agencies, authorities or instrumentalities. Some U.S. government
securities, such as U.S. Treasury bills, U.S. Treasury notes, U.S. Treasury
bonds and securities of Ginnie Mae, which differ only in their interest rates,
maturities and times of issuance, are supported by the full faith and credit of
the United States. Others are supported by: (i) the right of the issuer to
borrow from the U.S. Treasury, such as securities of the Federal Home Loan
Banks; (ii) the discretionary authority of the U.S. government to purchase the
agency’s obligations, such as securities of Fannie Mae or Freddie Mac; or (iii)
only the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. government will provide
financial support in the future to U.S. government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities
guaranteed as to principal and interest by the U.S. government, its agencies,
authorities or instrumentalities include: (i) securities for which the payment
of principal and interest is backed by an irrevocable letter of credit issued by
the U.S. government or any of its agencies, authorities or instrumentalities;
and (ii) participation interests in loans made to foreign governments or other
entities that are so guaranteed. The secondary market for certain of these
participation interests is limited and, therefore, may be regarded as
illiquid.
U.S.
Treasury Obligations.
U.S. Treasury Obligations are bills, notes and bonds issued by the U.S.
Treasury, and separately traded interest and principal component parts of such
obligations that are transferable through the federal book-entry system known as
separately traded registered interest and principal securities (“STRIPS”) and
coupons under book entry safekeeping (“CUBES”). They also include U.S. Treasury
inflation-protection securities (“TIPS”).
Variable-
and Floating-Rate Instruments.
Certain obligations may carry variable or floating rates of interest, and may
involve a conditional or unconditional demand feature. Such instruments bear
interest at rates which are not fixed, but which vary with changes in specified
market rates or indices. The interest rates on these securities may be reset
daily, weekly, quarterly or some other reset period, and may have a floor or
ceiling on interest rate changes. 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.
Warrants
and Rights.
Warrants are instruments giving holders the right, but not the obligation, to
buy equity or fixed income securities of a company at a given price during a
specified period. Rights are similar to warrants but normally have a short life
span to expiration. The purchase of warrants or rights involves the risk that a
Fund could lose the purchase value of a warrant or right if the right to
subscribe to additional shares is not exercised prior to the warrants’ and
rights’ expiration. Also, the purchase of warrants and/or rights involves the
risk that the effective price paid for the warrants and/or rights added to the
subscription price of the related security may exceed the value of the
subscribed security’s market price such as when there is no movement in the
level of the underlying security. Buying a warrant does not make a Fund a
shareholder of the underlying stock. The warrant holder has no voting or
dividend rights with respect to the underlying stock. A warrant does not carry
any right to assets of the issuer, and for this reason investment in warrants
may be more speculative than other equity-based investments.
When-Issued,
Delayed Delivery Securities, and Forward Commitment Transactions.
A Fund may purchase securities on a when-issued or delayed-delivery basis, in
which case delivery of the securities occurs beyond the normal settlement
period; payment for or delivery of the securities would be made prior to the
reciprocal delivery or payment by the other party to the transaction.
When-issued or delayed delivery securities are subject to market fluctuations
due to changes in market interest rates and it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed. Although a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring the securities for its investment portfolio, a
Fund may dispose of a when-issued security or forward commitment prior to
settlement if it deems appropriate.
Yankee
Obligations.
Yankee obligations (“Yankees”) are U.S. dollar-denominated instruments of
foreign issuers who either register with the SEC or issue securities under Rule
144A of the 1933 Act. These consist of debt securities (including preferred or
preference stock of non-governmental issuers), certificates of deposit, fixed
time deposits and bankers’ 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 obligations, as obligations of foreign issuers, are subject
to the same types of risks discussed above in “Foreign Securities.” The Yankee
obligations selected for the Funds will adhere to the same credit quality
standards as those utilized for the selection of domestic debt
obligations.
Zero
Coupon Securities.
A Fund may invest in zero coupon bonds of governmental or private issuers that
generally pay no interest to their holders prior to maturity. Since zero coupon
bonds do not make regular interest payments, they allow an issuer to avoid the
need to generate cash to meet current interest payments and may involve greater
credit risks than bonds paying interest currently. The Code requires that a Fund
accrue interest income on zero coupon bonds for each taxable year, even though
no cash has been paid on the bonds, and generally requires a Fund to distribute
such income (net of deductible expenses, if any) to avoid being subject to
federal income tax and to continue to maintain its status as a regulated
investment company under the Code. Because no cash is generally received at the
time of accrual, a Fund may be required to sell investments (even if such sales
are not advantageous) to obtain sufficient cash to satisfy the distribution
requirements applicable to a Fund under the Code. See “Federal Income Taxes,”
for more information.
Fundamental
Investment Limitations
Below
are each Fund’s fundamental investment limitations (or policies), which it
cannot change without the consent of the holders of a majority of that Fund’s
outstanding shares. The term “majority of the outstanding shares” means the vote
of (i) 67% or more of a Fund’s shares present at a meeting, if more than
50% of the outstanding shares of that Fund are present or represented by proxy,
or (ii) more than 50% of a Fund’s outstanding shares, whichever is
less.
For
the borrowing fundamental policies, which contain percentage limits, the Fund
must meet these percentage limits at all times, regardless of whether a
portfolio transaction is occurring or the changes are caused by market
conditions or other circumstances beyond the Fund’s control. For all other
fundamental policies with a percentage limit (collectively, the “Other
Policies”), a Fund must apply each policy to each proposed portfolio
transaction. For example, both the initial purchase of a security and each
subsequent addition to that position must satisfy the Other Policies. However,
if the Fund satisfies the Other Policies at the time of a transaction, then
later changes in percentages resulting from market conditions or other
circumstances beyond the Fund’s control will not violate those policies; but the
Fund would not be able to make subsequent additions to that position and other
similar positions until the Other Policies are satisfied.
Several
of these fundamental investment limitations include the defined term “1940 Act
Laws, Interpretations and Exemptions.” This term means the 1940 Act and the
rules and regulations promulgated thereunder, as such statutes,
rules and regulations are amended from time to time or are interpreted from
time to time by the staff of the SEC and any exemptive order or similar relief
applicable to a Fund.
Each
Fund's investment restrictions are subject to, and may be impacted and limited
by, the federal securities laws, rules and regulations, including the Investment
Company Act of 1940 and Rule 18f-4 thereunder.
All
Funds' Fundamental Investment Limitations (except Core Municipal Bond
Fund)
1.
Diversification. Each
Fund, other than the Large Cap Focused Fund and the Large Company Growth Fund,
is a “diversified company” as defined in the 1940 Act. This means that a Fund
will not purchase the securities of any issuer if, as a result, a Fund would
fail to be a diversified company within the meaning of the 1940 Act
Laws, Interpretations and Exemptions. This restriction does not prevent a
Fund from purchasing the securities of other investment companies to the extent
permitted by the 1940 Act Laws, Interpretations and
Exemptions.
Please
refer to number 1 of the “Non-Fundamental Investment Limitations” section for
further information.
2.
Borrowing Money. A
Fund may not borrow money or issue senior securities, except as permitted by the
1940 Act Laws, Interpretations and Exemptions.
Please
refer to number 2 of the “Non-Fundamental Investment Limitations” section for
further information.
3.
Underwriting. A
Fund may not underwrite the securities of other issuers. This restriction does
not prevent a Fund from engaging in transactions involving the acquisition,
disposition or resale of its portfolio securities, regardless of whether a Fund
may be considered to be an underwriter under the Securities Act of 1933, as
amended.
4.
Concentration. A
Fund will not make investments that will result in the concentration (as that
term may be defined or interpreted by the 1940 Act, Laws, Interpretations
and Exemptions) of its investments in the securities of issuers primarily
engaged in the same industry. This restriction does not limit a Fund’s
investments in (i) obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, (ii) tax-exempt obligations issued by
governments or political subdivisions of governments or (iii) repurchase
agreements collateralized by such obligations.
5.
Real Estate. A
Fund may not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments. This restriction does not prevent
a Fund from investing in issuers that invest, deal or otherwise engage in
transactions in real estate or interests therein, or investing in securities
that are secured by real estate or interests therein.
6.
Commodities. A
Fund may not purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments. This restriction does not
prevent a Fund from engaging in transactions involving futures contracts and
options thereon or investing in securities that are secured by physical
commodities.
7.
Loans. A
Fund may not make personal loans or loans of its assets to persons who control
or are under common control with the Fund, except to the extent permitted by the
1940 Act Laws, Interpretations and Exemptions. This restriction does not
prevent a Fund from, among other things, purchasing debt obligations, entering
repurchase agreements, lending portfolio securities or investing in loans,
including assignments and participation interests.
Please
refer to number 3 of the “Non-Fundamental Investment Limitations” section for
further information.
Core
Municipal Bond Fund Fundamental Investment Limitations
For
the purpose of these investment limitations, the identification of the "issuer"
of municipal obligations which are not general obligation bonds is made by the
sub-advisor on the basis of the characteristics of the obligation, the most
significant of which is the source of funds for the payment of principal of and
interest on such obligation.
1.
Borrowing Money.
The Fund may not engage in borrowing except as permitted by the 1940 Act, any
rule, regulation or order under the 1940 Act or any SEC staff interpretation of
the 1940 Act.
2.
Underwriting.
The Fund may not underwrite securities issued by other persons, except to the
extent that, in connection with the sale or disposition of portfolio securities,
the Fund may be deemed to be an underwriter under certain federal securities
laws or in connection with investments in other investment
companies.
3.
Loans.
The Fund may not make loans to other persons except that the Fund may
(1) engage in repurchase agreements, (2) lend portfolio securities,
(3) purchase debt securities, (4) purchase commercial paper, and
(5) enter into any other lending arrangement permitted by the 1940 Act, any
rule, regulation or order under the 1940 Act or any SEC staff interpretation of
the 1940 Act.
4.
Real Estate.
The Fund may not purchase or sell real estate except that the Fund may
(1) hold and sell real estate acquired as a result of the Fund's ownership
of securities or other instruments, (2) purchase or sell securities or
other instruments backed by real estate or interests in real estate, and
(3) purchase or sell securities of entities or investment vehicles,
including real estate investment trusts, that invest, deal or otherwise engage
in transactions in real estate or interests in real estate.
5.
Commodities.
The Fund may not purchase or sell physical commodities except that the Fund may
(1) hold and sell physical commodities acquired as a result of the Fund's
ownership of securities or other instruments, (2) purchase or sell
securities or other instruments backed by physical commodities,
(3) purchase or sell options, and (4) purchase or sell futures
contracts. This limitation is not applicable to the extent that the tax-exempt
obligations, U.S. government obligations and other securities in which the Fund
may otherwise invest would be considered to be such commodities, contracts or
investments.
6.
Concentration.
The Fund may not purchase the securities of an issuer (other than securities
issued or guaranteed by the United States government, its agencies or its
instrumentalities) if, as a result, more than 25% of the Fund's total assets
would be invested in the securities of companies whose principal business
activities are in the same industry.
7.
Senior Securities.
The Fund may not issue senior securities except as permitted by the 1940 Act,
any rule, regulation or order under the 1940 Act or any SEC staff interpretation
of the 1940 Act.
8.
Tax-Exempt Status. The
Fund has a fundamental investment policy that under normal circumstances at
least 80% of the income it distributes will be exempt from federal income tax,
including the federal alternative minimum tax.
Except
for temporary defensive purposes, the assets of the Fund will be invested so
that no more than 20% of the annual income of the Fund will be subject to
federal income tax. Under normal market conditions, the Fund anticipates that
not more than 5% of its net assets will be invested in any one type of taxable
obligation. (See the paragraph entitled "Temporary defensive investments" under
the section "Permitted Investments and Risk Factors".)
Additional
Information Regarding Investment Limitations
1.Borrowing.
The 1940 Act allows the fund to borrow from any bank (including pledging,
mortgaging or hypothecating assets) in an amount up to 331/3%
of its total assets (not including temporary borrowings not in excess of 5% of
its total assets).
2.Underwriting.
Under the 1940 Act, underwriting securities involves the fund 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.
3.Lending.
Under the 1940 Act, the fund may only make loans if expressly permitted by its
investment policies. The Fund’s current investment policy on lending is as
follows: the Fund may not make loans if, as a result, more than 331/3%
of its total assets would be lent to other parties, except that the Fund may:
(i) purchase or hold debt instruments in accordance with its investment
objective and policies; (ii) enter into repurchase agreements; and
(iii) engage in securities lending as described in its Statement of
Additional Information.
4.Senior
Securities.
Senior securities may include any obligation or instrument issued by the fund
evidencing indebtedness. The 1940 Act generally prohibits funds from issuing
senior securities, although it does not treat certain transactions as senior
securities.
Non-Fundamental
Investment Limitations
Each
Fund also has adopted certain non-fundamental investment limitations. A
non-fundamental investment limitation may be amended by the Board without a vote
of shareholders upon 60 day's notice to shareholders. The non-fundamental
investment limitations listed below are in addition to other non-fundamental
investment limitations disclosed elsewhere in this SAI and the
prospectus.
All
Funds - Non-Fundamental Investment Limitations (except Core Municipal Bond
Fund)
80%
Investment Policy.
The International Equity Fund, Large Cap Focused Fund, Large Cap Fund, Large
Company Growth Fund, and Small Company Fund have adopted a policy to invest,
under normal circumstances, at least 80% of its “assets” in certain types of
investments as suggested by its name (the “80% policy”). Shareholders will be
provided with at least 60-days’ prior notice of any change in a Fund’s 80%
investment policy.
The
following non-fundamental investment limitations apply to each
Fund:
1.In
complying with the fundamental investment restriction regarding issuer
diversification, a Fund will not, with respect to 75% of its total assets,
purchase securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities), if, as a
result, (i) more than 5% of the Fund’s total assets would be invested in
the securities of that issuer, or (ii) a Fund would hold more than 10% of
the outstanding voting securities of that issuer. This limitation does not apply
to the Large Cap Focused Fund, the Large Company Growth Fund or the Large Cap
Fund.
2.In
complying with the fundamental investment restriction regarding borrowing and
issuing senior securities, a Fund may borrow money in an amount not exceeding
331/3%
of its total assets (including the amount borrowed) less liabilities (other than
borrowings).
3.In
complying with the fundamental investment restriction with regard to making
loans, a Fund may not make loans if, as a result, more than 331/3%
of its total assets would be lent to other parties, except that a Fund may:
(i) purchase or hold debt instruments in accordance with its investment
objective and policies; (ii) enter into repurchase agreements; and
(iii) engage in securities lending as described in the Prospectus or
Statement of Additional Information.
4.The
Funds will not invest in any illiquid investment if, immediately after such
acquisition, the Fund would have invested more than 15% of its net assets in
illiquid investments that are assets.
Core
Municipal Bond Fund - Non-Fundamental Investment Limitations
For
the illiquid securities policy, which contains percentage limits, the Fund must
meet these percentage limits at all times, regardless of whether a portfolio
transaction is occurring or the changes are caused by market conditions or other
circumstances beyond the Fund’s control. For all other non-fundamental policies
with a percentage limit (collectively, the “Other Policies”), a Fund must apply
each policy to each proposed portfolio transaction. For example, both the
initial purchase of a security and each subsequent addition to that position
must satisfy the Other Policies. However, if the Fund satisfies the Other
Policies at the time of a transaction, then later changes in percentages
resulting from market conditions or other circumstances beyond the Fund’s
control will not violate those policies; but the Fund would not be able to make
subsequent additions to that position and other similar positions until the
Other Policies are satisfied.
The
Fund may not:
1.Pledge,
mortgage, or hypothecate assets except to secure borrowings (not to exceed 33
1/3% of the Fund's assets) permitted by the Fund's fundamental limitation on
borrowing.
2.Purchase
securities for which there are legal or contractual restrictions on resale if,
as a result thereof, more than 10% of the value of the Fund's net assets would
be invested in such securities.
3.Sell
any securities short or sell put and call options, except to the extent that
sales by the Fund of tax-exempt obligations with puts attached or sales by the
Fund of other securities in which the Fund may otherwise invest would be
considered to be sales of options.
4.Invest
in any illiquid investment if, immediately after such acquisition, the Fund
would have invested more than 15% of its net assets in illiquid investments that
are assets.
A
Fund will determine compliance with the fundamental and non-fundamental
investment restriction percentages above (with the exception of the restriction
relating to borrowing) and other investment restrictions in this SAI immediately
after and as a result of its acquisition of such security or other asset.
Accordingly, a Fund will not consider changes in values, net assets, or other
circumstances when determining whether the investment complies with its
investment restrictions.
The
following is a list of the Trustees and executive officers of the Trust, the
length of time served, principal occupations for the past 5 years, and, for the
Trustees, number of funds overseen in the Touchstone Fund Complex and other
directorships held. All funds managed by the Advisor, the "Touchstone Funds",
are part of the “Touchstone Fund Complex.” The Touchstone Fund Complex consists
of the Trust, Touchstone ETF Trust, Touchstone Funds Group Trust and Touchstone
Variable Series Trust. The Trustees who are not interested persons of the
Trust, as defined in the 1940 Act, are referred to as “Independent
Trustees.”
Interested
Trustees(1):
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Name Address Year of Birth |
| Position Held with Trust |
| Term
of Office And Length of Time Served |
| Principal Occupation(s) During Past 5 Years |
|
Number
of Funds
Overseen
in the
Touchstone
Fund
Complex(2) |
|
Other
Directorships
Held During the
Past 5
Years(3) |
Jill
T. McGruder
Touchstone Advisors, Inc. 303
Broadway Suite 1100 Cincinnati, Ohio 45202
Year
of Birth: 1955 |
| Trustee |
| Until
retirement at age 75 or until she resigns or is
removed Trustee since 1999 |
| President
of Touchstone Funds from 1999 to 2020; Director and CEO of IFS Financial
Services, Inc. (a holding company) since 1999; and Senior Vice President
and Chief Marketing Officer of Western & Southern Financial Group,
Inc. (a financial services company) since 2016. |
| 40 |
| Director,
Integrity Life Insurance Co. and National Integrity Life Insurance Co.
since 2005; Director, Touchstone Securities (the Distributor) since
1999; Director, Touchstone Advisors (the Advisor) since 1999; Director,
W&S Brokerage Services, Inc. since 1999; Director, W&S Financial
Group Distributors, Inc. since 1999; Director, Insurance Profillment
Solutions LLC since 2014; Director, Columbus Life Insurance Co. since
2016; Director, The Lafayette Life Insurance Co. since 2016; Director,
Gerber Life Insurance Company since 2019; Director, Western & Southern
Agency, Inc. since 2018; and Director, LL Global, Inc. (not-for-profit
trade organization with operating divisions LIMRA and LOMA) since
2016. |
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E.
Blake Moore, Jr.
Touchstone
Advisors, Inc.
303
Broadway
Suite 1100
Cincinnati,
Ohio
45202
Year
of Birth: 1958 |
| President
and Trustee |
| Until
retirement at age 75 or until he resigns or is removed
Trustee
since 2021 |
| President,
Touchstone Funds since 2021; Chief Executive Officer of Touchstone
Advisors, Inc. and Touchstone Securities, Inc. since 2020; President,
Foresters Investment Management Company, Inc. from 2018 to 2020;
President, North American Asset Management at Foresters Financial from
2018 to 2020; Managing Director, Head of Americas at UBS Asset Management
from 2015 to 2017; and Executive Vice President, Head of Distribution at
Mackenzie Investments from 2011 to 2014. |
| 40 |
| Trustee,
College of Wooster since 2008; and Director, UBS Funds from 2015 to
2017. |
Independent
Trustees:
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Name Address Year of Birth |
| Position Held with Trust |
|
Term of
Office
And
Length of
Time
Served |
| Principal Occupation(s) During Past 5 Years |
|
Number
of Funds
Overseen in
the
Touchstone
Fund
Complex(2) |
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Other
Directorships
Held During the
Past 5
Years(3) |
Karen
Carnahan
c/o
Touchstone Advisors, Inc. 303 Broadway Suite
1100 Cincinnati, Ohio 45202
Year
of Birth: 1954 |
| Trustee |
| Until
retirement at age 75 or until she resigns or is
removed Trustee since 2019 |
| Retired;
formerly Chief Operating Officer of Shred-it (a business services company)
from 2014 to 2015; formerly President & Chief Operating Officer of the
document management division of Cintas Corporation (a business services
company) from 2008 to 2014. |
| 40 |
| Director,
Cintas Corporation since 2019; Director, Boys & Girls Club of West
Chester/Liberty since 2016; and Board of Advisors, Best Upon Request from
2020 to 2021. |
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William
C. Gale
c/o
Touchstone Advisors, Inc. 303
Broadway Suite 1100 Cincinnati, Ohio 45202
Year
of Birth: 1952 |
| Trustee |
| Until
retirement at age 75 or until he resigns or is
removed Trustee since 2013 |
| Retired;
formerly Senior Vice President and Chief Financial Officer of Cintas
Corporation (a business services company) from 1995 to 2015. |
| 40 |
| None. |
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Susan
J. Hickenlooper, CFA(4)
c/o
Touchstone Advisors, Inc.
303
Broadway
Suite 1100
Cincinnati,
Ohio
45202
Year
of Birth: 1946 |
| Trustee |
| Until
retirement at age 75 or until she resigns or is removed
Trustee
since 2009 |
| Retired
from investment management. |
| 40 |
| Trustee,
Episcopal Diocese of Southern Ohio from 2014 to 2018. |
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Susan
M. King
c/o
Touchstone Advisors, Inc.
303
Broadway
Suite
1100
Cincinnati,
Ohio
45202
Year
of Birth: 1963 |
| Trustee |
| Until
retirement at age 75 or until she resigns or is removed
Trustee
since 2021 |
| Formerly,
Partner of ID Fund LLC (2020 to 2021); formerly, Senior Vice President,
Head of Product and Marketing Strategy of Foresters Financial (2018 to
2020); formerly, Managing Director, Head of Sales Strategy and Marketing,
Americas of UBS Asset Management (2015 to 2017); formerly, Director,
Allianz Funds, Allianz Funds Multi-Strategy Trust and AllianzGI
Institutional Multi-Series Trust (2014 to 2015); and formerly, Director,
Alliance Capital Cash Management Offshore Funds (2003 to 2005). |
| 40 |
| Trustee,
Claremont McKenna College since 2017; Trustee, Israel Cancer Research Fund
since 2019; and Board Member of WHAM! (Women's Health Access Matters)
since 2021. |
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Name Address Year of Birth |
| Position Held with Trust |
|
Term of
Office
And
Length of
Time
Served |
| Principal Occupation(s) During Past 5 Years |
|
Number
of Funds
Overseen in
the
Touchstone
Fund
Complex(2) |
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Other
Directorships
Held During the
Past 5
Years(3) |
Kevin
A. Robie
c/o
Touchstone Advisors, Inc. 303
Broadway Suite 1100 Cincinnati, Ohio 45202
Year
of Birth: 1956 |
| Trustee |
| Until
retirement at age 75 or until he resigns or is
removed Trustee since 2013 |
| Retired;
formerly Vice President of Portfolio Management at Soin LLC (private
multinational holding company and family office) from 2004 to
2020. |
| 40 |
| Director,
SaverSystems, Inc. since 2015; Director, Buckeye EcoCare, Inc. from 2013
to 2018; Director, Turner Property Services Group, Inc. since 2017;
Trustee, Dayton Region New Market Fund, LLC (private fund) since 2010; and
Trustee, Entrepreneurs Center, Inc. (business incubator) since
2006. |
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William
H. Zimmer III
c/o
Touchstone Advisors, Inc. 303
Broadway Suite 1100 Cincinnati, Ohio 45202
Year
of Birth: 1953
|
| Trustee
|
| Until
retirement at age 75 or until he resigns or is
removed Trustee since 2019 |
| Independent
Treasury Consultant since 2014. |
| 40 |
| Director,
Deaconess Associations, Inc. (healthcare) since 2001; Trustee, Huntington
Funds (mutual funds) from 2006 to 2015; and Director, National Association
of Corporate Treasurers from 2011 to
2015. |
(1) Ms. McGruder,
as a director of the Advisor and the Distributor, and an officer of affiliates
of the Advisor and the Distributor, is an “interested person” of the Trust
within the meaning of Section 2(a)(19) of the 1940 Act. Mr. Moore, as an
officer of the Advisor and the Distributor, is an “interested person” of the
Trust within the meaning of Section 2(a)(19) of the 1940 Act.
(2) As
of September 30, 2022, the Touchstone Fund Complex consisted of 19 series
of the Trust, 4 series of Touchstone ETF Trust, 13 series of Touchstone Funds
Group Trust and 4 variable annuity series of Touchstone Variable
Series Trust.
(3) Each
Trustee is also a Trustee of Touchstone ETF Trust, Touchstone Funds Group Trust
and Touchstone Variable Series Trust.
(4)
Upon
the recommendation of the Governance Committee, the Board extended the mandatory
retirement age for Ms. Hickenlooper for a one-year period to allow her to remain
a Trustee of the Trust through December 31, 2022.
Principal
Officers:
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Name Address Year of Birth |
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Position Held
with Trust(1) |
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Term of Office and Length of Time Served |
|
Principal Occupation(s) During Past 5 Years |
E.
Blake Moore, Jr. Touchstone Advisors, Inc. 303 Broadway,
Suite 1100 Cincinnati, Ohio 45202 Year of Birth:
1958 |
|
President
and Trustee |
|
Until
resignation, removal or disqualification President since
January 2021 |
|
See
biography above. |
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Timothy
D. Paulin Touchstone Advisors, Inc. 303
Broadway Suite 1100 Cincinnati, Ohio 45202 Year of
Birth: 1963 |
| Vice
President |
| Until
resignation, removal or disqualification Vice President since
2010 |
| Senior
Vice President of Investment Research and Product Management of Touchstone
Advisors, Inc. |
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Timothy
S. Stearns Touchstone Advisors, Inc. 303
Broadway Suite 1100 Cincinnati, Ohio 45202 Year of
Birth: 1963 |
| Chief
Compliance Officer |
| Until
resignation, removal or disqualification Chief Compliance
Officer since 2013 |
| Chief
Compliance Officer of Touchstone Advisors, Inc. and Touchstone
Securities, Inc. |
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Terrie
A. Wiedenheft Touchstone Advisors, Inc. 303
Broadway Suite 1100 Cincinnati, Ohio 45202 Year of
Birth: 1962 |
| Controller
and Treasurer |
| Until
resignation, removal or disqualification Controller and
Treasurer since 2006 |
|
Senior
Vice President and Chief Administration Officer within the Office of the
Chief Marketing Officer of Western & Southern Financial Group (since
2021); and Senior Vice President, Chief Financial Officer, and Chief
Operations Officer of IFS Financial Services, Inc. (a holding
company). |
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Meredyth
A. Whitford-Schultz Western & Southern Financial
Group 400 Broadway Cincinnati, Ohio 45202 Year of
Birth: 1981 |
| Secretary |
| Until
resignation, removal or disqualification Secretary since
2018 |
| Senior
Counsel - Securities/Registered Funds of Western & Southern Financial
Group (2015 to present); Associate at Morgan Lewis & Bockius LLP (law
firm) (2014 to 2015); Associate at Bingham McCutchen LLP (law firm) (2008
to 2014). |
(1)
Each
officer also holds the same office with Touchstone ETF Trust, Touchstone Funds
Group Trust and Touchstone Variable Series Trust.
Additional
Information about the Trustees
The
Board believes that each Trustee’s experience, qualifications, attributes, or
skills on an individual basis and in combination with those of the other
Trustees lead to the conclusion that the Trustees possess the requisite
experience, qualifications, attributes, and skills to serve on the Board. The
Board believes that the Trustees’ ability to review critically, evaluate,
question, and discuss information provided to them; to interact effectively with
the Advisor, sub-advisors, other service providers, counsel and independent
auditors; and to exercise effective business judgment in the performance of
their duties, support this conclusion. The Board has also considered the
contributions that each Trustee can make to the Board and the
Funds.
In
addition, the following specific experience, qualifications, attributes and
skills apply as to the Trustees: Ms. McGruder has experience as a chief
executive officer of a financial services company and director of various other
businesses, as well as executive and leadership roles within the Advisor; Mr.
Moore has experience as a managing director and president of global financial
services firms, as well as executive and leadership roles within the Advisor;
Ms. Carnahan has experience as a president and chief operating officer of a
division of a global company and as treasurer of a global company; Mr. Gale
has experience as a chief financial officer, an internal auditor of various
global companies, and has accounting experience as a manager at a major
accounting firm; Ms. Hickenlooper has executive and board experience at
various businesses, foundations and charitable organizations; Ms. King has
experience as a senior sales and marketing executive at global financial
services firms; Mr. Robie has portfolio management experience at a private
multinational holding company; and Mr. Zimmer has experience as a chief
executive officer, chief financial officer, and treasurer of various financial
services, telecommunications and technology companies.
In
its periodic self-assessment of its effectiveness, the Board considers the
complementary individual skills and experience of the individual Trustees
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 Funds. References to the
qualifications, attributes and skills of Trustees are pursuant to requirements
of the SEC, do not constitute holding out the Board or any Trustee as having any
special expertise or experience, and shall not impose any greater responsibility
on any Trustee or on the Board by reason thereof.
Board
Structure
The
Board is composed of six Independent Trustees and two Interested Trustees: Jill
T. McGruder, who is Chairperson of the Board, and E. Blake Moore, Jr. The
Independent Trustees have appointed William C. Gale to serve as the Lead
Independent Trustee. Ms. McGruder oversees the day-to-day business affairs
of the Trust and communicates with Mr. Gale regularly on various Trust
issues, as appropriate. Mr. Gale, among other things, chairs meetings of
the Independent Trustees, serves as a spokesperson for the Independent Trustees,
and serves as a liaison between the Independent Trustees and the Trust’s
management between Board meetings. Except for any duties specified, the
designation of Lead Independent Trustee does not impose on such Independent
Trustee any duties, obligations, or liability that is greater than the duties,
obligations, or liability imposed on such person as a member of the Board,
generally. The Independent Trustees are advised at these meetings, as well as at
other times, by separate, independent legal counsel.
The
Board holds four regular meetings each year to consider and address matters
involving the Trust and its Funds. The Board also may hold special meetings to
address matters arising between regular meetings. The Independent Trustees also
regularly meet outside the presence of management and are advised by independent
legal counsel. These meetings may take place in-person or by
telephone.
The
Board has established a committee structure that includes an Audit Committee and
a Governance Committee (discussed in more detail below). The Board conducts much
of its work through these Committees. Each Committee is comprised entirely of
Independent Trustees, which ensures that the Funds have effective and
independent governance and oversight.
The
Board reviews its structure regularly and believes that its leadership
structure, including having a super-majority of Independent Trustees, coupled
with an Interested Chairperson and a Lead Independent Trustee, is appropriate
and in the best interests of the Trust because it allows the Board to exercise
informed and independent judgment over matters under its purview, and it
allocates areas of responsibility among the Committees and the full Board in a
manner that enhances effective oversight. The Board believes that having an
Interested Chairperson is appropriate and in the best interests of the Trust
given: (1) the extensive oversight provided by the Trust’s Advisor over the
affiliated and unaffiliated sub-advisors that conduct the day-to-day management
of the Funds of the Trust; (2) the extent to which the work of the Board is
conducted through the standing Committees; (3) the extent to which the
Independent Trustees meet regularly, together with independent legal counsel, in
the absence of the Interested Chairperson; and (4) the Interested
Chairperson’s additional roles as a director of the Advisor and the Distributor
and senior executive of IFS Financial Services, Inc., the Advisor’s parent
company, and of other affiliates of
the
Advisor, which enhance the Board’s understanding of the operations of the
Advisor and the role of the Trust and the Advisor within Western &
Southern Financial Group, Inc. The Board also believes that the role of the
Lead Independent Trustee within the leadership structure is integral to
promoting independent oversight of the Funds’ operations and meaningful
representation of the shareholders’ interests. In addition, the Board believes
its leadership structure facilitates the orderly and efficient flow of
information to the Independent Trustees from the Trust’s
management.
Board
Oversight of Risk
Consistent
with its responsibilities for oversight of the Trust and its Funds, the Board,
among other things, oversees risk management of each Fund’s investment program
and business affairs directly and through the committee structure that it has
established. Risks to the Funds include, among others, investment risk, credit
risk, liquidity risk, valuation risk and operational risk, as well as the
overall business risk relating to the Funds. The Board has adopted, and
periodically reviews, policies and procedures designed to address these risks.
Under the overall oversight of the Board, the Advisor, sub-advisors, and other
key service providers to the Funds, including the administrator, the
distributor, the transfer agent, the custodian, and the independent auditors,
have also implemented a variety of processes, procedures and controls to address
these risks. Different processes, procedures and controls are employed with
respect to different types of risks. These processes include those that are
embedded in the conduct of regular business by the Board and in the
responsibilities of officers of the Trust and other service
providers.
The
Board requires senior officers of the Trust, including the Chief Compliance
Officer (“CCO”), to report to the Board on a variety of matters at regular and
special meetings of the Board, including matters relating to risk management.
The Board and the Audit Committee receive regular reports from the Trust’s
independent auditors on internal control and financial reporting matters. On at
least a quarterly basis, the Board meets with the Trust’s CCO, including
meetings in executive sessions, to discuss issues related to portfolio
compliance and, on at least an annual basis, receives a report from the CCO
regarding the effectiveness of the Trust’s compliance program. In addition,
the Board also receives reports from the Advisor on the investments and
securities trading of the Funds, including their investment performance and
asset weightings compared to appropriate benchmarks, as well as reports
regarding the valuation of those investments. The Board also receives reports
from the Trust’s primary service providers on a periodic or regular basis,
including the sub-advisors to the Funds.
Standing
Committees of the Board
The
Board is responsible for overseeing the operations of the Trust in accordance
with the provisions of the 1940 Act and other applicable laws and the Trust’s
Declaration of Trust. The Board has established the following Committees to
assist in its oversight functions. Each Committee is composed entirely of
Independent Trustees.
Audit
Committee.
All of the Independent Trustees are members of the Audit Committee. The Audit
Committee is responsible for overseeing the Trust’s accounting and financial
reporting policies, practices and internal controls. Ms. Carnahan is the
Chair of the Audit Committee. During the fiscal year ended June 30, 2022,
the Audit Committee held four meetings.
Governance
Committee.
All of the Independent Trustees are members of the Governance Committee. The
Governance Committee is responsible for overseeing the Trust’s compliance
program and compliance issues, procedures for valuing securities and responding
to any pricing issues. Ms. Hickenlooper is the Chair of the Governance
Committee. The Governance Committee held four meetings during the fiscal year
ended June 30, 2022.
In
addition, the Governance Committee is responsible for recommending candidates to
serve on the Board. The Governance Committee will consider shareholder
recommendations for nomination to the Board only in the event that there is a
vacancy on the Board. Shareholders who wish to submit recommendations for
nominations to the Board to fill the vacancy must submit their recommendations
in writing to Ms. Susan J. Hickenlooper, Chair of the Governance Committee,
c/o Touchstone Funds, 303 Broadway, Suite 1100, Cincinnati, Ohio 45202.
Shareholders should include appropriate information on the background and
qualifications of any person recommended to the Governance Committee (e.g., a
resume), as well as the candidate’s contact information and a written consent
from the candidate to serve if nominated and elected. Shareholder
recommendations for nominations to the Board will be accepted on an ongoing
basis and such recommendations will be kept on file for consideration in the
event of a future vacancy on the Board.
Trustee
Ownership in the Touchstone Fund Complex
The
following table reflects the Trustees’ beneficial ownership in the Funds (i.e.,
dollar range of securities held in each Fund) and the Touchstone Fund Complex as
of December 31, 2021.
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| Trustees |
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| Interested Trustee |
| Independent Trustees |
Funds |
| Jill T. McGruder |
|
E.
Blake Moore, Jr. |
| Karen
Carnahan |
|
Susan
M. King |
| William C.Gale |
|
Susan J. Hickenlooper |
|
Kevin A. Robie |
|
William
H. Zimmer III |
Balanced
Fund |
| None |
| None |
| None |
| None |
| None
|
| None |
| None |
| None |
Core
Municipal Bond Fund |
| None |
| None |
| None |
| None |
| None
|
| None |
| None |
| None |
International
Equity Fund |
| $1-$10,000 |
| None |
| None |
| None |
| None |
| None |
| None |
| None |
International
Growth Fund |
| None |
| None |
| None |
| None |
| None
|
|
$10,001- $50,000 |
|
None
|
|
None |
Large
Cap Focused Fund |
| None |
| None |
| None |
| None |
| None
|
|
None |
|
None
|
|
None |
Large
Cap Fund |
| None
|
| None |
| None |
| None |
| None
|
|
None
|
|
None
|
|
None |
Large
Company Growth Fund |
| None |
| None |
| None |
| None |
| None
|
| Over
$100,000 |
| None |
| None |
Small
Company Fund |
| None |
| None |
| None |
| None |
| None
|
|
None
|
|
$50,001-$100,000 |
|
None |
Value
Fund |
| None |
| Over
$100,000 |
| None |
| None |
| None
|
|
None
|
|
$10,001- $50,000 |
|
None |
Aggregate
Dollar Range of Securities in the Touchstone Fund Complex(1) |
| Over
$100,000 |
| Over
$100,000 |
| $50,001-$100,000 |
| $50,001-$100,000 |
| $50,001-$100,000 |
|
Over
$100,000 |
|
Over
$100,000 |
|
Over
$100,000 |
(1) As
of September 30, 2022, the Touchstone Fund Complex consisted of 19 series of the
Trust, 4 series of the Touchstone ETF Trust, 13 series of Touchstone Funds Group
Trust and 4 variable annuity series of Touchstone Variable
Series Trust.
Trustee
Compensation
The
following table shows the compensation paid to the Trustees by the Trust and the
aggregate compensation paid by the Touchstone Fund Complex during the fiscal
year ended June 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name |
| Compensation from the Trust |
|
Aggregate Compensation from the Touchstone Fund Complex(1) |
Interested
Trustee |
| |
| |
Jill
T. McGruder |
| $ |
0 |
|
| $ |
0 |
|
E.
Blake Moore, Jr.(2) |
| $ |
0 |
|
| $ |
0 |
|
Independent
Trustees(3) |
|
|
| |
Karen
Carnahan |
| $ |
87,129 |
|
| $ |
164,000 |
|
William
C. Gale |
| $ |
93,507 |
|
| $ |
176,000 |
|
Susan
J. Hickenlooper |
| $ |
87,129 |
|
| $ |
164,000 |
|
Susan
M. King(2) |
| $ |
60,958 |
|
| $ |
115,500 |
|
Kevin
A. Robie |
| $ |
79,958 |
|
| $ |
150,500 |
|
William
H. Zimmer III |
| $ |
79,958 |
|
| $ |
150,500 |
|
(1)
As of September 30, 2022, the Touchstone Fund Complex consisted of 19
series of the Trust, 4 series of the Touchstone ETF Trust, 13 series of
Touchstone Funds Group Trust and 4 variable annuity series of Touchstone
Variable Series Trust.
(2)
Ms.
King and Mr. Moore each became Trustees of the Trust on August 27, 2021.
(3)
The
Independent Trustees are eligible to participate in the Touchstone Trustee
Deferred Compensation Plan which allows them to defer payment of a specific
amount of their Trustee compensation, subject to a minimum quarterly reduction
of $1,000. The total amount of deferred compensation accrued by the Independent
Trustees from the Touchstone Fund Complex during the fiscal year ended
June 30, 2022 was $60,000.
The
following table shows the Trustee quarterly compensation schedule through
December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Retainer |
| Governance Committee
Attendance Fees |
| Audit Committee
Attendance Fees |
| Board Meeting Fees
Attendance Fees |
Retainer
and Meeting Attendance Fees |
| $21,000 |
|
$4,500 |
|
$4,500 |
|
$5,000 |
|
|
|
|
|
|
|
| |
Lead
Independent Trustee Fees |
|
$6,000 |
|
|
|
|
| |
|
|
|
|
|
|
|
| |
Committee
Chair Fees |
|
$1,000 |
|
$2,000 |
|
$2,000 |
| |
Telephonic
Meeting Attendance Fee = $1,500
The
following table shows the Trustee quarterly compensation schedule beginning
January 1, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Retainer |
| Governance Committee
Meeting Attendance Fees |
| Audit Committee
Meeting Attendance Fees |
| Board Meeting Attendance
Fees |
Retainer
and Meeting Attendance Fees |
| $ |
23,250 |
|
| $ |
5,500 |
|
| $ |
5,500 |
|
| $ |
6,000 |
|
|
|
|
|
|
|
|
| |
Lead
Independent Trustee Fees |
| $ |
6,750 |
|
| |
| |
| |
|
|
|
|
|
|
|
| |
Committee
Chair Fees |
| $ |
1,250 |
|
| $ |
2,500 |
|
| $ |
2,500 |
|
| |
|
|
|
|
|
|
|
| |
Telephonic/Virtual
Meeting Attendance Fee = $2,500 |
|
|
|
|
|
|
| |
Limited
items in-person meeting = $3,500 |
|
|
|
|
|
|
| |
Independent
Trustee compensation and Trustee and officer expenses are typically divided
equally among the series comprising the Touchstone Fund Complex.
Touchstone
Advisors, Inc. (previously defined as the “Advisor” or “Touchstone
Advisors”), is the Funds’ investment advisor under the terms of an advisory
agreement (the “Advisory Agreement”) dated May 1, 2020, as amended. Under
the Advisory Agreement, the Advisor reviews, supervises, and administers the
Funds’ investment program, subject to the oversight of, and policies established
by, the Board of the Trust (the “Trustees”). The Advisor determines the
appropriate allocation of assets to each Fund’s sub-advisor(s).
The
Advisory Agreement provides that the Advisor shall not be liable for any error
of judgment or mistake of law or for any loss arising out of any investment or
for any act or omission in carrying out its duties, but shall not be protected
against any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith, or gross negligence on its part in the performance of
its duties or from reckless disregard of its obligations or duties.
The
continuance of the Advisory Agreement as to the Funds after the first two years
must be specifically approved at least annually (i) by the vote of the
Board or by a vote of the shareholders of the Fund, and, in either case,
(ii) by the vote of a majority of the Board who are not parties to the
Advisory Agreement or “interested persons” (as defined in 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, and is terminable at any time with respect to any Fund(s),
without payment of any penalty, by the Trust’s Board of Trustees or by a vote of
the majority of the outstanding voting securities of the affected Fund(s) upon
60 days’ prior written notice to the Advisor and by the Advisor upon 60 days’
prior written notice to the Trust.
The
Advisor is a wholly-owned subsidiary of IFS Financial Services, Inc., which
is a wholly-owned subsidiary of Western-Southern Life Assurance Company.
Western-Southern Life Assurance Company is a wholly-owned subsidiary of The
Western and Southern Life Insurance Company, which is a wholly-owned subsidiary
of Western & Southern Financial Group, Inc. Western &
Southern Financial Group Inc. is a wholly-owned subsidiary of Western &
Southern Mutual Holding Company (“Western & Southern”).
Western & Southern is located at 400 Broadway, Cincinnati, Ohio 45202.
Ms. Jill T. McGruder may be deemed to be an affiliate of the Advisor
because she is a Director of the Advisor and an officer of affiliates of the
Advisor. Mr. E. Blake Moore Jr. may be deemed an affiliate of the Advisor
because he is an officer of the Advisor. Ms. McGruder and Mr. Moore, by
reason of these affiliations, may directly or indirectly receive benefits from
the advisory fees paid to the Advisor.
Manager-of-Managers
Structure
The
SEC has granted an exemptive order that permits the Trust or the Advisor, under
certain circumstances, to select or change unaffiliated sub-advisors, enter into
new sub-advisory agreements or amend existing sub-advisory agreements without
first obtaining shareholder approval (a “manager-of-managers structure”). The
Trust, on behalf of each Fund, seeks to achieve its investment goal by using a
“manager-of-managers” structure. Under a manager-of-managers structure, the
Advisor acts as investment advisor, subject to direction from and oversight by
the Board, to allocate and reallocate the Fund’s assets among sub-advisors, and
to recommend that the Trustees hire, terminate or replace unaffiliated
sub-advisors without shareholder approval. By reducing the number of shareholder
meetings that may have to be held to approve new or additional sub-advisors for
the Fund, the Trust anticipates that there will be substantial potential cost
savings, as well as the opportunity to achieve certain management efficiencies,
with respect to any Fund in which the manager-of-managers approach is chosen.
Shareholders of a Fund will be notified of a change in its
sub-advisor.
Fees
Paid to the Advisor
For
its services, the Advisor is entitled to receive an investment advisory fee from
each Fund at an annualized rate, based on the average daily net assets of the
Fund, as set forth below. Each Fund’s advisory fee is accrued daily and paid
monthly, based on the Fund’s average net assets during the current
month.
|
|
|
|
|
|
|
| |
Fund |
| Annual Advisory Fee Rate |
Balanced
Fund |
| 0.55%
on the first $200 million; 0.50% on the next $200 million; 0.45% on
the next $600 million; 0.40% on the next $1 billion; and 0.35% on
assets in excess of $2 billion |
Core
Municipal Bond Fund* |
| 0.40%
on the first $300 million; and 0.30% on assets in excess of $300
million |
International
Equity Fund |
| 0.70%
on the first $500 million; 0.65% on the next $300 million; 0.60%
on the next $200 million; 0.50% on the next $1 billion; and 0.40%
on assets in excess of $2 billion |
International
Growth Fund |
| 0.80%
on the first $1 billion; 0.75% on the next $500 million; 0.70% on
the next $500 million; and 0.65% on assets in excess of $2
billion |
Large
Cap Focused Fund |
| 0.70%
on the first $500 million; 0.65% on the next $300 million; 0.60%
on the next $200 million; 0.50% on the next $1 billion; and 0.40%
on assets in excess of $2 billion |
Large
Cap Fund |
| 0.60%
on the first $500 million; 0.54% on the next $500 million; and 0.50%
on assets in excess of $1 billion |
Large
Company Growth Fund |
| 0.60%
on all assets |
Small
Company Fund |
| 0.70%
on the first $500 million; 0.65% on the next $300 million; 0.60%
on the next $200 million; 0.50% on the next $1 billion; and 0.40%
on assets in excess of $2 billion |
Value
Fund** |
| 0.65%
on the first $200 million; and 0.55% on assets in excess of $200
million. |
*Prior
to October 28, 2021, the Fund's investment advisory fee rate was 0.50% up to
$100 million; 0.45% on the next $100 million; 0.40% on the next $100 million;
and 0.375% on assets over $300 million.
**Prior
to September 1, 2021, the Fund paid the Advisor an advisory fee at an annualized
rate of 0.65% on all assets.
Each
Fund shall pay the expenses of its operation, including but not limited to the
following: (i) charges and expenses for Fund accounting, pricing and
appraisal services and related overhead; (ii) the charges and expenses of
the Fund’s auditors; (iii) the charges and expenses of any custodian,
transfer agent, plan agent, dividend disbursing agent and registrar appointed by
the Trust with respect to the Fund; (iv) brokers’ commissions, and issue
and transfer taxes, chargeable to the Fund in connection with securities
transactions to which the Fund is a party; (v) insurance premiums, interest
charges, dues and fees for
membership
in trade associations and all taxes and fees payable to federal, state or other
governmental agencies; (vi) fees and expenses involved in registering and
maintaining registrations of the Fund and/or shares of the Fund with the SEC,
state or blue sky securities agencies and foreign countries, including the
preparation of Prospectuses and Statements of Additional Information for filing
with the SEC; (vii) all expenses of meetings of Trustees and of
shareholders of the Fund and of preparing, printing and distributing
prospectuses, notices, proxy statements and all reports to shareholders and to
governmental agencies; (viii) charges and expenses of legal counsel to the
Trust and the Independent Trustees; (ix) compensation of Independent
Trustees of the Trust; and (x) interest on borrowed money, if any. The
compensation and expenses of any officer, Trustee or employee of the Trust who
is an affiliated person of the Advisor are paid by the Advisor, except with
respect to certain compensation of the Trust's Chief Compliance Officer, which
is paid by the Funds. Each class of shares of a Fund pays its respective pro
rata portion of the advisory fee payable by the Fund.
Expense
Limitation Agreement.
Touchstone Advisors has contractually agreed to waive fees and reimburse
expenses to the extent necessary to ensure each Fund’s total annual operating
expenses do not exceed the contractual limits set forth in the Fund’s Fees and
Expenses table in the Summary section of the Prospectus. Expenses that are not
waived or reimbursed by the Advisor include dividend and interest expenses
relating to short sales; interest; taxes; brokerage commissions and other
transaction costs; portfolio transaction and investment related expenses,
including expenses associated with the Funds' liquidity provider; other
expenditures which are capitalized in accordance with U.S. generally accepted
accounting principles; the cost of “Acquired Fund Fees and Expenses,” if any,
and other extraordinary expenses not incurred in the ordinary course of business
(“Excluded Expenses”). The Fund bears the costs of these Excluded Expenses. The
contractual limits set forth in each Fund's Fees and Expenses table in the
Summary section of the Prospectus have been adjusted to include the effect of
Rule 12b-1 fees, shareholder servicing fees and other anticipated class
specific expenses, if applicable. Fee waivers or expense reimbursements are
calculated and applied monthly, based on the Fund’s average net assets during
the month. The terms of Touchstone Advisors’ contractual expense limitation
agreement provide that Touchstone Advisors is entitled to recoup, subject to
approval by the Fund’s Board, such amounts waived or reimbursed for a period of
up to three years from the date on which Touchstone Advisors reduced its
compensation or assumed expenses for the Fund. No recoupment will occur unless
the Fund’s operating expenses are below the expense limitation amount in effect
at the time of the waiver or reimbursement. The Fund will make repayments to the
Advisor only if such repayment does not cause the annual Fund operating expenses
(after the repayment is taken into account) to exceed both (1) the expense cap
in place when such amounts were waived or reimbursed and (2) the Fund’s current
expense limitation.
Advisory
Fees and Fee Waivers or Reimbursements.
For the three most recent fiscal years (or periods) the Funds paid advisory fees
and received waivers and/or reimbursements as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Date
of Fiscal Period End |
| Gross
Advisory Fee Paid |
| Fees
Waived/Recouped |
|
Balanced
Fund |
6/30/2020 |
| $ |
1,887,829 |
|
| $ |
240,184 |
| |
6/30/2021 |
| $ |
2,514,118 |
|
| $ |
70,152 |
| |
6/30/2022 |
| $ |
4,379,676 |
|
| $ |
(77,557) |
|
(3) |
Core
Municipal Bond Fund |
6/30/2020 |
| $ |
245,618 |
|
| $ |
185,516 |
| |
6/30/2021 |
| $ |
249,521 |
|
| $ |
162,223 |
| |
6/30/2022 |
| $ |
280,517 |
|
| $ |
182,428 |
| |
International
Equity Fund |
6/30/2020 |
| $ |
943,728 |
|
| $ |
178,164 |
| |
6/30/2021 |
| $ |
858,156 |
|
| $ |
88,739 |
| |
6/30/2022 |
| $ |
884,634 |
|
| $ |
125,153 |
| |
International
Growth Fund(1) |
6/30/2020 |
| $ |
1,256,743 |
|
| $ |
248,131 |
| |
6/30/2021 |
| $ |
705,551 |
|
| $ |
271,383 |
| |
6/30/2022 |
| $ |
663,906 |
|
| $ |
316,924 |
| |
Large
Cap Focused Fund |
6/30/2020 |
| $ |
10,024,992 |
|
| $ |
1,862,662 |
| |
6/30/2021 |
| $ |
11,499,650 |
|
| $ |
1,325,081 |
| |
6/30/2022 |
| $ |
15,751,675 |
|
| $ |
413,437 |
| |
Large
Cap Fund |
6/30/2020 |
| $ |
1,730,730 |
|
| $ |
414,100 |
| |
6/30/2021 |
| $ |
1,952,831 |
|
| $ |
358,756 |
| |
6/30/2022 |
| $ |
2,118,536 |
|
| $ |
345,465 |
| |
Large
Company Growth Fund(2) |
6/30/2020 |
| $ |
1,308,574 |
|
| $ |
334,988 |
| |
6/30/2021 |
| $ |
1,517,931 |
|
| $ |
370,348 |
| |
6/30/2022 |
| $ |
1,420,452 |
|
| $ |
321,996 |
| |
Small
Company Fund |
6/30/2020 |
| $ |
5,948,726 |
|
| $ |
828,925 |
| |
6/30/2021 |
| $ |
5,738,784 |
|
| $ |
281,047 |
| |
6/30/2022 |
| $ |
6,300,401 |
|
| $ |
241,834 |
| |
Value
Fund |
6/30/2020 |
| $ |
2,018,396 |
|
| $ |
627,311 |
| |
6/30/2021 |
| $ |
2,077,411 |
|
| $ |
571,844 |
| |
6/30/2022 |
| $ |
3,391,345 |
|
| $ |
591,195 |
| |
(1)The
Fund's advisory fee was reduced, effective September 12, 2020. Prior to
September 12, 2020, the International Growth Fund's advisory fee was: 0.95% on
the first $300 million; 0.90% on the next $200 million; 0.85% on the next $250
million; 0.80% on the next $250 million; 0.75% on the next $500 million; 0.70%
on the next $500 million; and 0.65% on assets over $2 billion.
(2)
The Fund's advisory fee was reduced on September 1, 2019. Effective September 1,
2019, the Fund's investment advisory fee was contractually reduced from 0.75% on
the first $500 million; 0.725% on the next $1.5 billion; and 0.70% on assets in
excess of $2 billion
to
0.60% on the Fund's average daily net assets.
(3)
Gross waivers were $4,428 offset with the amount recouped by the Advisor of
$81,985.
The
Advisor has selected sub-advisors (each a "Sub-Advisor" or collectively the
“Sub-Advisors”) to manage all or a portion of a Fund’s assets, as allocated by
the Advisor. The Sub-Advisors make the investment decisions for the Fund assets
allocated to them, and continuously review, supervise and administer a separate
investment program, subject to the oversight of, and policies established by,
the Board.
Each
sub-advisory agreement provides that a Sub-Advisor shall not be protected
against any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties, or from reckless disregard of its obligations or duties
thereunder.
For
their respective services, each Sub-Advisor receives a fee from the Advisor with
respect to each Fund that it sub-advises. As described in the prospectus, each
Sub-Advisor receives sub-advisory fees with respect to each Fund that it
sub-advises. Each Sub-Advisor’s fee with respect to each Fund is accrued daily
and paid monthly, based on the Fund’s average net assets allocated to the
Sub-Advisor during the current month.
The
Advisor pays sub-advisory fees to the Sub-Advisor from its advisory fee. The
compensation of any officer, director, or employee of the Sub-Advisor who is
rendering services to a Fund is paid by the Sub-Advisor. For the three most
recent fiscal years (or periods) the Advisor paid the following sub–advisory
fees with respect to each Fund:
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Date
of Fiscal Period End |
| Sub-Advisory
Fees Paid |
Balanced
Fund |
6/30/2020 |
| $ |
944,971 |
|
6/30/2021 |
| $ |
1,258,643 |
|
6/30/2022 |
| $ |
2,189,838 |
|
Core
Municipal Bond Fund* |
6/30/2020 |
| $ |
98,360 |
|
6/30/2021 |
| $ |
99,944 |
|
6/30/2022 |
| $ |
107,912 |
|
International
Equity Fund |
6/30/2020 |
| $ |
472,451 |
|
6/30/2021 |
| $ |
429,655 |
|
6/30/2022 |
| $ |
442,317 |
|
International
Growth Fund |
6/30/2020 |
| $ |
641,082 |
|
6/30/2021 |
| $ |
331,480 |
|
6/30/2022 |
| $ |
331,953 |
|
Large
Cap Focused Fund |
6/30/2020 |
| $ |
5,018,384 |
|
6/30/2021 |
| $ |
5,757,283 |
|
6/30/2022 |
| $ |
7,875,838 |
|
Large
Cap Fund |
6/30/2020 |
| $ |
866,399 |
|
6/30/2021 |
| $ |
977,644 |
|
6/30/2022 |
| $ |
1,059,268 |
|
Large
Company Growth Fund |
6/30/2020 |
| $ |
698,792 |
|
6/30/2021 |
| $ |
809,216 |
|
6/30/2022 |
| $ |
755,740 |
|
Small
Company Fund |
6/30/2020 |
| $ |
2,978,774 |
|
6/30/2021 |
| $ |
2,872,716 |
|
6/30/2022 |
| $ |
3,150,917 |
|
Value
Fund |
6/30/2020 |
| $ |
932,758 |
|
6/30/2021 |
| $ |
959,852 |
|
6/30/2022 |
| $ |
1,553,283 |
|
*Effective
October 28, 2021, the Fund changed its sub-advisor to Sage. Sage has agreed to
waive certain sub-advisory fees received until Fund assets reach a certain
threshold. The sub-advisory fees paid for the fiscal year ended June 30, 2022 is
net of sub-advisory fee waivers of $21,480.
Sub-Advisor
Control.
This section presents the Sub-Advisor’s control persons.
•DSM
Capital Partners LLC ("DSM") is primarily controlled by Daniel Strickberger and
Stephen Memishian. Mr. Memishian retired on December 31, 2020.
•Fort
Washington Investment Advisors, Inc. ("Fort Washington") is a wholly owned
subsidiary of Western & Southern and is therefore an affiliate of Touchstone
Advisors and Touchstone Securities. Ms. McGruder and Mr. Moore may be deemed to
be an affiliate of Fort Washington.
•London
Company of Virginia, doing business as The London Company (“The London
Company”), is an SEC-registered investment advisor. TLC Holdings owns
approximately 75% of The London Company. Stephen Goddard owns 95% of TLC
Holdings. Stephen Goddard is deemed a control person for The London Company
based on his ownership of TLC Holdings.
•Barrow,
Hanley, Mewhinney & Strauss, LLC doing business as Barrow Hanley Global
Investors ("Barrow Hanley") is majority owned by Perpetual Limited (“Perpetual”)
(ASX:PPT), an Australian financial services company. Perpetual has a 75.1%
ownership interest in Barrow Hanley, while Barrow Hanley employees retain their
24.9% interests. Barrow Hanley retains its brand autonomy and its investment
teams continue to operate independently.
•Sage
Advisory Services, Ltd. Co. (“Sage”) is an SEC-registered investment adviser
that provides investment management services for a variety of institutions and
high net worth individuals. Sage is 100% employee-owned.
The
following charts list for each of the Funds’ portfolio managers (i) the number
of their other managed accounts per investment category, (ii) the number of and
total assets of such other investment accounts managed where the advisory fee is
based on the performance of the account, and (iii) their beneficial ownership in
their managed Fund(s) at the end of the June 30, 2022 fiscal year. Listed
below the charts applicable to each Sub-Advisor's group of portfolio managers is
(i) a description of each portfolio manager’s compensation structure as of
June 30, 2022, and (ii) a description of any material conflicts that may
arise in connection with each portfolio manager’s management of the Fund’s
investments and the investments of the other accounts included in the chart and
any material conflicts in allocation of investment opportunities between the
Fund and other accounts managed by each portfolio manager as of June 30,
2022.
International
Growth Fund and Large Company Growth Fund
Sub-Advisor:
DSM Capital Partners LLC
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| |
Portfolio Manager/Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
Daniel
Strickberger |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 3 |
| $429.0 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 14 |
| $789.0 |
| 0 |
| $0 |
Other
Accounts |
| 1,645 |
| $5,387.0 |
| 6 |
| $1,022.0 |
David
McVey |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 3 |
| $429.0 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 14 |
| $789.0 |
| 0 |
| $0 |
Other
Accounts |
| 1,645 |
| $5,387.0 |
| 6 |
| $1,022.0 |
Eric
Woodworth, CFA |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 3 |
| $429.0 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 14 |
| $789.0 |
| 0 |
| $0 |
Other
Accounts |
| 1,645 |
| $5,387.0 |
| 6 |
| $1,022.0 |
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund.
The following table indicates for the Fund, the dollar range of shares
beneficially owned by the portfolio managers as of June 30,
2022:
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|
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| |
|
| Dollar Range of Fund Shares Owned |
|
Portfolio Manager |
| International
Growth Fund |
Large
Company Growth Fund |
|
Daniel
Strickberger |
| None |
None |
|
David
McVey |
|
$50,000-$100,000 |
$100,000
- $500,000 |
|
Eric
Woodworth, CFA |
| $100,001–$500,000 |
$500,001-$1,000,000 |
|
Compensation. The
portfolio manager receives a base salary commensurate with his level of
experience. DSM’s goal is to maintain base salaries and bonus compensation
competitive with the broad investment industry (including alternative investment
firms). Bonus compensation, which is a multiple of base salary, is based on an
employee’s long-term performance. The portfolio manager’s contribution to
fundamental research, valuation work and portfolio management is considered,
both within and beyond the portfolio. Collaboration is expected and rewarded.
Importantly, the entire investment team, as well as other employees of the firm,
are also shareholders of DSM. This compensation and ownership structure provides
incentive to attract and retain highly qualified people, as each member of the
firm has the opportunity to share directly in the accomplishments of the
business.
Material
Conflicts of Interest. Because
DSM performs investment advisory services for many types of clients, in general,
various conflicts of interest could arise. For instance, DSM may give advice and
take action with respect to its other clients that may differ from advice given
or the timing or nature of action taken with respect to the Fund. DSM does not
have an obligation to purchase or sell for a Fund, or to recommend for purchase
or sale by a Fund, any security that DSM, its principals, its affiliates, or its
employees may purchase for themselves or for their clients at the same time or
at the same price.
DSM
has adopted a Code of Ethics describing its commitment to integrity and high
ethical standards. The Code of Ethics is based upon the principle that DSM and
its employees owe a fiduciary duty to clients to conduct their affairs,
including their personal securities transactions, in such a manner as to avoid
any actual or potential conflict of interests. DSM’s Code of Ethics contains
provisions relating to the prohibition against trading on material, non-public
information. The Code of Ethics also describes permissible personal securities
transactions, permissible gifts and entertainment, and permissible outside
business activities as well as protecting the confidentiality of client
information. All employees of DSM must acknowledge the terms of the Code of
Ethics annually and as amended.
To
align the interests of its employees with its clients, DSM encourages its
employees to personally invest in the same portfolios and securities as its
clients. This may cause a conflict as DSM, its employees and their related
accounts may invest in the same securities, and at the same times, that it
purchases and sells for clients. Moreover, DSM may purchase or sell securities
for clients in which DSM, its employees, and their immediate family members have
an interest. For instance, DSM may recommend that a client invest in a pooled
investment vehicle that it advises or in which its employees are invested. This
also presents a conflict of interests.
To
address these, and other potential conflicts, DSM’s employees and their
immediate family members are required to follow DSM’s Code of Ethics. Under the
Code of Ethics, employees of DSM and their immediate family members must obtain
pre-clearance for certain securities transactions. Approval of an employee or
employee-related transaction is based upon a careful review by DSM’s Chief
Compliance Officer. Certain classes of securities have been designated as
exempt, not needing pre-clearance, based upon a determination that these would
not materially interfere with the best interest of DSM’s clients. Account
statements of employees of DSM and their immediate family members are also
reviewed periodically by the Chief Compliance Officer of DSM. Nonetheless,
because the Code of Ethics permits employees and immediate family member to
invest in the same securities as clients, there is a possibility that employees
and immediate family members might benefit from market activity resulting from a
client transaction. Employee accounts and accounts of their immediate family
members that trade in the same securities as clients are aggregated. These
accounts and the client accounts will share commission costs, be allocated on a
pro rata basis, and receive securities at the same average price. DSM retains
records of the pre-allocation trade order (specifying each participating
account) and its allocation, which will be completed prior to the entry of the
aggregated order. Completed orders will be allocated as specified in the trade
order. Partially filled orders will typically be allocated on a pro rata basis.
Any exceptions will be documented.
Value
Fund
Sub-Advisor:
Barrow, Hanley, Mewhinney & Strauss, LLC, d/b/a Barrow Hanley Global
Investors
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| |
Portfolio
Manager/Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
David
Ganucheau, CFA(1) |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 3 |
| $1,311.4 |
| 1 |
| $85.1 |
Other
Pooled Investment Vehicles |
| 1 |
| $351.9 |
| 0 |
| $0 |
Other
Accounts |
| 18 |
| $2,711.1 |
| 0 |
| $0 |
Mark
Giambrone(2) |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 8 |
| $4,336.4 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 1 |
| $179.1 |
| 0 |
| $0 |
Other
Accounts |
| 31 |
| $5,353.0 |
| 0 |
| $0 |
Lewis
Ropp(3) |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 2 |
| $680.6 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 1 |
| $184.9 |
| 0 |
| $0 |
Other
Accounts |
| 36 |
| $4,433.1 |
| 1 |
| $334.2 |
(1)Mr.Ganucheau
is a member of various teams managing 36 other accounts and $10.9 billion in
assets.
(2)Mr.Giambrone
is a member of various teams managing 48 other accounts and $11.0 billion in
assets
(3)Mr.Ropp
is a member of various teams managing 44 other accounts and $6.5 billion in
assets.
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund.
The following table indicates for the Fund, the dollar range of shares
beneficially owned by the portfolio managers as of June 30,
2022:
|
|
|
|
|
|
|
| |
Portfolio Manager |
| Dollar Range of
Beneficial Ownership |
David
Ganucheau, CFA |
| None |
Mark
Giambrone |
| None |
Lewis
Ropp |
| None |
Material
Conflicts of Interest.
Actual or potential conflicts of interest may arise when a Portfolio Manager has
management responsibilities for more than one account including mutual fund,
CLO, or private commingled fund accounts. When one client has a relationship or
fee arrangement with Barrow Hanley that is more valuable or could accelerate the
fees due to Barrow Hanley than another client's, Barrow Hanley might have an
incentive to favor that client when allocating investment opportunities among
multiple client accounts. Barrow Hanley manages potential conflicts between
funds, CLOs, and/or types of accounts through trade allocation policies and
procedures, internal review processes, and oversight by the CCO, directors, and
independent third parties. The Firm’s investment management and trading policies
are designed to address potential conflicts in situations where two or more
funds, CLOs, or accounts participate in investment decisions involving the same
securities or issuer.
Potential
conflicts may arise when:
•Clients
elect to participate in securities lending arrangements; in such cases, the
votes follow the shares, and because Barrow Hanley has no information about
clients’ shares on loan, the proxies for those shares may not be
voted.
•Barrow
Hanley invests in equity securities of corporations who are also clients of the
Firm; in such cases, Barrow Hanley seeks to mitigate potential conflicts
by:
◦Making
voting decisions for the benefit of the shareholder(s), our
clients;
◦Uniformly
voting every proxy based on Barrow Hanley’s internal research and consideration
of Glass Lewis’ recommendations; and
◦Documenting
the votes of companies who are also clients of the Firm.
If
a material conflict of interest exists, members from the Proxy Voting and
Oversight Committees will determine if the affected clients should have an
opportunity to vote their proxies themselves, or whether Barrow Hanley will
address the specific voting issue through other objective means, such as voting
the proxies in a manner consistent with a predetermined voting policy or
accepting the voting recommendation of Glass Lewis.
Compensation.
The compensation of our investment professionals is tied to their overall
contribution to the success of Barrow Hanley. In addition to a competitive base
salary, all portfolio managers and analysts are eligible to participate in a
bonus pool. The amount of bonus compensation is based on quantitative and
qualitative factors and may be substantially higher than an investment
professional’s base compensation. Portfolio managers and analysts are rated on
their value added to the overall investment process and to performance, as well
as their contributions in other areas, such as meetings with clients and
consultants. Compensation is not tied to a published benchmark/stock market
index or private composite. Bonus compensation for analysts is directly tied to
their investment recommendations, which are evaluated every six months against
the appropriate industry group/sector performance based on trailing one-year and
three-year relative performance. Barrow Hanley reviews gender-neutral industry
compensation assessments to ensure its employees are fairly
compensated.
The
final key component of compensation that is shared by most of our key employees,
including all portfolio managers and the majority of our analysts, is economic
ownership in Barrow Hanley through a limited partnership that owns a 24.9%
equity interest in Barrow Hanley LLC. Equity owners receive, on a quarterly
basis, a share of the Firm’s profits, which are, to a great extent, related to
the performance of the entire investment team.
Large
Cap Fund
Sub-Advisor:
London Company of Virginia d/b/a The London Company.
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| |
Portfolio
Manager/Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
| |
Stephen
Goddard, CFA |
|
|
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 4 |
| $6,037.0 |
| 0 |
| 0 |
| |
Other
Pooled Investment Vehicles |
| 0 |
| $0 |
| 0 |
| 0 |
| |
Other
Accounts |
| 661 |
| $7,831.0 |
| 2 |
| 7 |
| |
J.
Brian Campbell, CFA |
|
|
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 4 |
| $6,037.0 |
| 0 |
| 0 |
| |
Other
Pooled Investment Vehicles |
| 0 |
| $0 |
| 0 |
| 0 |
| |
Other
Accounts |
| 661 |
| $7,831.0 |
| 0 |
| 0 |
| |
Mark
DeVaul, CFA, CPA |
|
|
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 4 |
| $6,037.0 |
| 0 |
| 0 |
| |
Other
Pooled Investment Vehicles |
| 0 |
| $0 |
| 0 |
| 0 |
| |
Other
Accounts |
| 661 |
| $7,831.0 |
| 0 |
| 0 |
| |
Jonathan
Moody, CFA |
|
|
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 4 |
| $6,037.0 |
| 0 |
| 0 |
| |
Other
Pooled Investment Vehicles |
| 0 |
| $0 |
| 0 |
| 0 |
| |
Other
Accounts |
| 661 |
| $7,831.0 |
| 0 |
| 0 |
| |
Sam
Hutchings, CFA |
|
|
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 4 |
| $6,037.0 |
| 0 |
| 0 |
| |
Other
Pooled Investment Vehicles |
| 0 |
| $0 |
| 0 |
| 0 |
| |
Other
Accounts |
| 661 |
| $7,831.0 |
| 0 |
| 0 |
| |
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund.
The following table indicates for the Fund, the dollar range of shares
beneficially owned by the portfolio managers as of June 30, 2022:
|
|
|
|
|
|
|
| |
Portfolio Manager |
|
Dollar Range of Fund
Shares Owned |
Stephen
Goddard, CFA |
|
Over
$1,000,000 |
J.
Brian Campbell, CFA |
| None |
Mark
E. DeVaul, CFA, CPA |
| None |
Jonathan
Moody, CFA |
| $500,001
- $1,000,000 |
Sam
Hutchings, CFA |
| $10,001
- $50,000 |
Material
Conflicts of Interest.
Actual or potential conflicts of interest may arise when the portfolio manager
has management responsibilities for more than one client account including and
not limited to the execution and allocation of investment opportunities, use of
soft dollars and other brokerage practices, and personal securities trading. The
London Company has adopted policies and procedures it believes are reasonably
designed to address such conflicts.
Compensation.
Portfolio managers are compensated through salary and bonus. In addition to base
salaries, portfolio managers are eligible to receive bonus compensation based on
their individual contribution to the research effort as well as client
retention, sales and overall firm performance. They also have a potential for
ownership after a reasonable tenure with the firm.
Core
Municipal Bond Fund
Sub-Advisor:
Sage
Advisory Services, Ltd. Co.
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|
|
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| |
Portfolio
Manager/Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
Robert
G. Smith, AIF®, CIMC |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 0 |
| $0.0 |
| 0 |
| 0 |
Other
Pooled Investment Vehicles |
| 7 |
| $176.0 |
| 0 |
| 0 |
Other
Accounts |
| 719 |
| $16,237.0 |
| 0 |
| 0 |
Jeffery
S. Timlin, CFA, CMT |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 0 |
| $0.0 |
| 0 |
| 0 |
Other
Pooled Investment Vehicles |
| 7 |
| $176.0 |
| 0 |
| 0 |
Other
Accounts |
| 719 |
| $16,237.0 |
| 0 |
| 0 |
Thomas
H. Urano, CFA |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 0 |
| $0.0 |
| 0 |
| 0 |
Other
Pooled Investment Vehicles |
| 7 |
| $176.0 |
| 0 |
| 0 |
Other
Accounts |
| 719 |
| $16,237.0 |
| 0 |
| 0 |
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund. As of June 30, 2022 no portfolio manager owned any shares
of the Fund.
Material
Conflicts of Interest.
The portfolio managers’ management of “other accounts” may give rise to
potential conflicts of interest in connection with their management of the
Fund’s investments, on the one hand, and the investments of the other accounts,
on the other. The other accounts may have the same investment objective as the
Fund they manage. Therefore, a potential conflict of interest may arise as a
result of the identical investment objectives, whereby the portfolio managers
could favor one account over another. Another potential conflict could include
the portfolio managers’ knowledge about the size, timing and possible market
impact of Fund trades, whereby a portfolio manager could use this information to
the advantage of other accounts and to the disadvantage of the Fund. The
portfolio managers, the Sub-Advisor, and related parties may engage in a broad
spectrum of activities. In the ordinary course of their business activities, the
portfolio managers, the Sub-Advisor, and those related parties may engage in
activities where the interests of certain divisions of the Sub-Advisor and their
related parties or the interests of their clients may conflict with the
interests of the shareholders of the Fund. However, the Sub-Advisor has
established policies and procedures to ensure that the purchase and sale of
securities among all accounts the Sub-Advisor manages are fairly and equitably
allocated.
Compensation.
The portfolio managers are compensated by the Sub-Advisor and do not receive any
compensation directly from the Fund or the Advisor. The Sub-Advisor pays its
portfolio managers a salary plus a discretionary bonus. The discretionary bonus
is based on accomplishment of personal, team, and enterprise objectives. Since
the portfolio managers are also principals of the Sub- Advisor, each receives
partnership distributions in addition to his salary and discretionary
bonus.
Balanced
Fund, International Equity Fund, Large Cap Focused Fund and Small Company
Fund
Sub-Advisor:
Fort Washington Investment Advisors, Inc.
Balanced
Fund
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|
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|
|
|
|
|
|
| |
Portfolio
Manager/ Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory
Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
Daniel
J. Carter, CFA |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 3 |
| $457.1 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 4 |
| $1,498.0 |
| 0 |
| $0 |
Other
Accounts |
| 51 |
| $2,888.6 |
| 0 |
| $0 |
James
Wilhelm |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 5 |
| $6,732.1 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 1 |
| $491.7 |
| 0 |
| $0 |
Other
Accounts |
| 21 |
| $708.8 |
| 0 |
| $0 |
Austin
R. Kummer, CFA |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 4 |
| $3,444.8 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 3 |
| $1,279.1 |
| 0 |
| $0 |
Other
Accounts |
| 67 |
| $4,251.9 |
| 0 |
| $0 |
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund.
The following table indicates for the Fund, the dollar range of shares
beneficially owned by the portfolio managers as of June 30, 2022:
|
|
|
|
|
|
|
| |
Portfolio
Manager |
| Dollar Range of Beneficial Ownership |
Daniel
J. Carter, CFA |
| None |
James
Wilhelm |
| None |
Austin
R. Kummer, CFA |
| None |
International
Equity Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Portfolio
Manager/ Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory
Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
Andrew
Boczek |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 0 |
| $0 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 0 |
| $0 |
| 0 |
| $0 |
Other
Accounts |
| 1 |
| $4,412.0 |
| 0 |
| $0 |
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund.
The following table indicates for the Fund, the dollar range of shares
beneficially owned by the portfolio managers as of June 30, 2022:
|
|
|
|
|
|
|
| |
Portfolio
Manager |
| Dollar Range of Beneficial Ownership |
Andrew
Boczek |
| $10,001
- $50,000 |
Large
Cap Focused Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Portfolio
Manager/ Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory
Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
James
Wilhelm |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 5 |
| $4,980.2 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 1 |
| $491.7 |
| 0 |
| $0 |
Other
Accounts |
| 21 |
| $708.8 |
| 0 |
| $0 |
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund.
The following table indicates for the Fund, the dollar range of shares
beneficially owned by the portfolio managers as of June 30, 2022:
|
|
|
|
|
|
|
| |
Portfolio
Manager |
| Dollar Range of Beneficial Ownership |
James
Wilhelm |
| $1
- 10,000 |
Small
Company Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Portfolio
Manager/ Types of Accounts |
| Total Number of Other Accounts Managed |
| Total Other Assets (million) |
| Number of Other Accounts Managed subject to a Performance Based Advisory
Fee |
| Total Other Assets Managed subject to a Performance Based Advisory Fee (million) |
Jason
Ronovech, CFA |
|
|
|
|
|
|
| |
Registered
Investment Companies |
| 1 |
| $57.2 |
| 0 |
| $0 |
Other
Pooled Investment Vehicles |
| 0 |
| $0 |
| 0 |
| $0 |
Other
Accounts |
| 7 |
| $109.7 |
| 0 |
| $0 |
The
information in the table above is dated June 30, 2022.
Ownership
of Shares of the Fund.
The following table indicates for the Fund, the dollar range of shares
beneficially owned by the portfolio managers as of June 30, 2022:
|
|
|
|
|
|
|
| |
Portfolio
Manager |
| Dollar Range of Beneficial Ownership |
Jason
Ronovech, CFA |
| $500,001
- $1,000,000 |
Material
Conflicts of Interest.
Actual or potential conflicts of interest may arise when a portfolio manager has
management responsibilities to more than one account (including the Fund). This
would include devotion of unequal time and attention to the management of the
accounts, inability to allocate limited investment opportunities across a broad
array of accounts and incentive to allocate opportunities to an account where
the portfolio manager has a greater financial incentive, such as allocation
opportunities for performance based accounts. Fort Washington has adopted
policies and procedures to address such conflicts.
Compensation.
All of Fort Washington's portfolio managers receive a fixed base salary and
annual performance bonuses. Bonuses are based primarily on the overall
performance of Fort Washington as well as the pre-tax performance (relative to
the appropriate benchmark) of their respective asset category over a one-year
and a three-year time horizon. Secondarily, portfolio managers are also assessed
on their ability to retain clients and attract new clients. Additionally, a
long-term retention plan was instituted in 2000, whereby certain investment
professionals are periodically granted participation units with a 7-year cliff
vesting schedule. The structure includes long-term vesting provisions. The
percentage of compensation allocated to performance bonuses, asset-increase
incentives and long-term incentive compensation is determined annually by the
firm's president and approved by the Board of Directors.
Fort
Washington's parent company also provides all personnel a defined benefit
retirement plan, which provides a lifetime annuity upon retirement that is based
on a percentage of final average pay and years of service under the
plan.
Associates
are also eligible to participate in a 401(k) plan. The 401(k) company
match is 50% of the first 4% of earnings saved. In years where Western &
Southern Financial Group, Inc. exceeds its business goals, the company may
increase its match to as much as 50% of the first 6% of earnings
saved.
The
Advisor entered into an Administration Agreement with the Trust, whereby the
Advisor is responsible for: supplying executive and regulatory compliance
services; supervising the preparation of tax returns; coordinating the
preparation of reports to shareholders and reports to, and filings with, the
Securities and Exchange Commission and state securities authorities, as well as
materials for meetings of the Board of Trustees; calculating the daily NAV per
share; and maintaining the financial books and records of each
Fund.
For
its services the Advisor’s annual administrative fee is:
0.145%
on the first $20 billion of the aggregate average daily net assets;
0.11%
on the next $10 billion of aggregate average daily net assets;
0.09%
on the next $10 billion of aggregate average daily net assets; and
0.07%
on the aggregate average daily net assets over $40 billion.
The
fee is computed and allocated among the Touchstone Fund Complex on the basis of
relative daily net assets.
The
Advisor has engaged BNY Mellon as the sub-administrative and transfer agent to
the Trust. BNY Mellon provides administrative, accounting, and transfer agent
services to the Trust and is compensated directly by the Advisor, not the Trust.
(See “Transfer and Sub-Administrative Agent” in this SAI.)
The
following table shows administration fees incurred by the Funds listed below for
the three most recent fiscal years (or periods) ended June 30:
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Date
of Fiscal Period End |
| Administration
Fees Paid |
Balanced
Fund |
6/30/2020 |
| $ |
518,471 |
|
6/30/2021 |
| $ |
683,053 |
|
6/30/2022 |
| $ |
1,176,158 |
|
Core
Municipal Bond Fund |
6/30/2020 |
| $ |
71,229 |
|
6/30/2021 |
| $ |
69,508 |
|
6/30/2022 |
| $ |
83,978 |
|
International
Equity Fund |
6/30/2020 |
| $ |
195,487 |
|
6/30/2021 |
| $ |
170,659 |
|
6/30/2022 |
| $ |
163,913 |
|
International
Growth Fund |
6/30/2020 |
| $ |
191,819 |
|
6/30/2021 |
| $ |
122,040 |
|
6/30/2022 |
| $ |
107,484 |
|
Large
Cap Focused Fund |
6/30/2020 |
| $ |
2,428,748 |
|
6/30/2021 |
| $ |
2,758,537 |
|
6/30/2022 |
| $ |
3,925,334 |
|
Large
Cap Fund |
6/30/2020 |
| $ |
418,260 |
|
6/30/2021 |
| $ |
452,251 |
|
6/30/2022 |
| $ |
458,025 |
|
Large
Company Growth Fund |
6/30/2020 |
| $ |
302,427 |
|
6/30/2021 |
| $ |
351,855 |
|
6/30/2022 |
| $ |
306,409 |
|
Small
Company Fund |
6/30/2020 |
| $ |
1,288,115 |
|
6/30/2021 |
| $ |
1,180,064 |
|
6/30/2022 |
| $ |
1,223,024 |
|
Value
Fund |
6/30/2020 |
| $ |
450,258 |
|
6/30/2021 |
| $ |
443,012 |
|
6/30/2022 |
| $ |
739,648 |
|
Touchstone
Securities, Inc. (“Touchstone Securities” or the “Distributor”), and the
Trust are parties to a distribution agreement (“Distribution Agreement”) with
respect to the Funds. The Distributor’s principal place of business is 303
Broadway, Suite 1100, Cincinnati, Ohio 45202. The Distributor is a
registered broker-dealer, and an affiliate of the Advisor by reason of common
ownership. The Distributor is obligated to sell shares on a best efforts basis
only against purchase orders for the shares. Shares of each Fund are offered to
the public on a continuous basis. The Distributor currently allows concessions
to dealers who sell shares of the Funds. The Distributor retains that portion of
the sales charge that is not re-allowed to dealers who sell shares of a Fund.
The Distributor retains the entire sales charge on all direct initial
investments in a Fund and on all investments in accounts with no designated
dealer of record.
The
table below sets forth the aggregate underwriting commissions on sales of the
Funds and the amounts of underwriting commissions retained by the Distributor
for the three most recent fiscal years ended June 30.
The
Distributor retains the contingent deferred sales charge ("CDSC") on redemptions
of shares of the Funds that are subject to such CDSC. The following table shows
the amounts retained from CDSCs for the three most recent fiscal years (or
periods) ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Date
of Fiscal Period End |
| Aggregate
Underwriting Commissions on Sales |
| Amount
Retained in Underwriting Commissions |
| CDSC
Retained by Distributor |
Balanced
Fund |
6/30/2020 |
| $ |
278,015 |
|
| $ |
24,041 |
|
| Class
A |
| $ |
27 |
|
|
| Class
C |
| $ |
3,273 |
|
6/30/2021 |
| $ |
447,350 |
|
| $ |
33,135 |
|
| Class
A |
| $ |
0 |
|
|
| Class
C |
| $ |
293 |
|
6/30/2022 |
| $ |
595,009 |
|
| $ |
48,801 |
|
| Class
A |
| $ |
285 |
|
|
| Class
C |
| $ |
2,935 |
|
Core
Municipal Bond Fund |
6/30/2020 |
| $ |
1,262 |
|
| $ |
180 |
|
| Class
C |
| $ |
0 |
|
6/30/2021 |
| $ |
5,318 |
|
| $ |
363 |
|
| Class
C |
| $ |
3 |
|
6/30/2022 |
| $ |
3,345 |
|
| $ |
244 |
|
| Class
C |
| $ |
0 |
|
International
Equity Fund |
6/30/2020 |
| $ |
25,404 |
|
| $ |
2,216 |
|
| Class
A |
| $ |
55 |
|
|
| Class
C |
| $ |
85 |
|
6/30/2021 |
| $ |
29,565 |
|
| $ |
2,674 |
|
| Class
A |
| $ |
0 |
|
|
| Class
C |
| $ |
29 |
|
6/30/2022 |
| $ |
36,495 |
|
| $ |
3,359 |
|
| Class
A |
| $ |
0 |
|
|
| Class
C |
| $ |
44 |
|
International
Growth Fund |
6/30/2020 |
| $ |
2,037 |
|
| $ |
142 |
|
| Class
C |
| $ |
30 |
|
6/30/2021 |
| $ |
4,222 |
|
| $ |
358 |
|
| Class
C |
| $ |
0 |
|
6/30/2022 |
| $ |
3,826 |
|
| $ |
328 |
|
| Class
C |
| $ |
0 |
|
Large
Cap Focused Fund |
6/30/2020 |
| $ |
156,605 |
|
| $ |
13,278 |
|
| Class
A |
| $ |
189 |
|
| Class
C |
| $ |
504 |
|
6/30/2021 |
| $ |
258,998 |
|
| $ |
22,522 |
|
| Class
A |
| $ |
50 |
|
| Class
C |
| $ |
549 |
|
6/30/2022 |
| $ |
434,622 |
|
| $ |
37,294 |
|
| Class
A |
| $ |
350 |
|
|
| Class
C |
| $ |
1,057 |
|
Large
Cap Fund |
6/30/2020 |
| $ |
8,449 |
|
| $ |
657 |
|
| Class
C |
| $ |
0 |
|
6/30/2021 |
| $ |
1,419 |
|
| $ |
124 |
|
| Class
C |
| $ |
0 |
|
6/30/2022 |
| $ |
4,012 |
|
| $ |
366 |
|
| Class
C |
| $ |
0 |
|
Large
Company Growth Fund |
6/30/2020 |
| $ |
8,767 |
|
| $ |
764 |
|
| Class
C |
| $ |
0 |
|
6/30/2021 |
| $ |
5,486 |
|
| $ |
474 |
|
| Class
C |
| $ |
0 |
|
6/30/2022 |
| $ |
11,124 |
|
| $ |
856 |
|
| Class
C |
| $ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Small
Company Fund |
6/30/2020 |
| $ |
111,304 |
|
| $ |
9,520 |
|
| Class
A |
| $ |
180 |
|
| Class
C |
| $ |
662 |
|
6/30/2021 |
| $ |
124,671 |
|
| $ |
10,979 |
|
| Class
A |
| $ |
45 |
|
| Class
C |
| $ |
176 |
|
6/30/2022 |
| $ |
167,448 |
|
| $ |
13,857 |
|
| Class
A |
| $ |
119 |
|
|
| Class
C |
| $ |
63 |
|
Value
Fund |
6/30/2020 |
| $ |
18,015 |
|
| $ |
1,626 |
|
| Class
C |
| $ |
2,015 |
|
6/30/2021 |
| $ |
15,769 |
|
| $ |
1,423 |
|
| Class
C |
| $ |
298 |
|
6/30/2022 |
| $ |
62,288 |
|
| $ |
5,437 |
|
| Class
C |
| $ |
80 |
|
Ms. McGruder
may be deemed to be an affiliate of the Distributor because she is a Director of
the Distributor and an officer of affiliates of the Distributor. Mr. Moore may
be deemed to be an affiliate of the Distributor because he is an officer of the
Distributor. Ms. McGruder and Mr. Moore, by reason of such affiliations,
may directly or indirectly be deemed to receive benefits from the underwriting
fees paid to the Distributor.
The
Distribution Agreement shall remain in effect for a period of two years after
the effective date of the agreement and is renewable annually thereafter. The
Distribution Agreement may be terminated as to any Fund at any time by
(i) the Trust, (a) by the vote of a majority of the Trustees of the
Trust who are not “interested persons” of the Trust or the Distributor,
(b) by vote of the Board of the Trust, or (c) by the “vote of majority
of the outstanding voting securities” of the Fund, or (ii) by the
Distributor, in any case without payment of any penalty on not more than 60
days’ nor less than 30 days’ written notice to the other party. The Distribution
Agreement shall also automatically terminate in the event of its
assignment.
Touchstone
Securities may pay from its own resources cash bonuses or other incentives to
selected dealers in connection with the sale of shares of the Funds. On some
occasions, such bonuses or incentives may be conditioned upon the sale of a
specified minimum dollar amount of the shares of the Funds or other funds in the
Touchstone Fund Complex during a specific period of time. Such bonuses or
incentives may include financial assistance to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and other dealer-sponsored programs or
events. The Advisor, at its expense, may also provide additional compensation to
certain affiliated and unaffiliated dealers, financial intermediaries or service
providers for distribution, administrative or shareholder servicing activities.
The Advisor may also reimburse the Distributor for making these
payments.
Touchstone
Securities, at its expense, may provide additional compensation to financial
intermediaries which sell or arrange for the sale of shares of the Touchstone
Funds. Other compensation may be offered to the extent not prohibited by federal
or state laws or any self-regulatory agency, such as the Financial Industry
Regulatory Authority (“FINRA”).
Touchstone
Securities makes payments for entertainment events it deems appropriate, subject
to its guidelines and applicable law. These payments may vary depending upon the
nature of the event or the relationship. As of September 30, 2022, the
Distributor anticipates that the following broker-dealers or their affiliates
will receive additional payments as described in the Funds' prospectus and SAI:
|
| |
Name of Broker-Dealer |
American
Enterprise Investment Services, Inc. |
Equity
Services Inc. |
Great
West Life & Annuity Insurance Company |
Janney
Montgomery Scott LLC |
LPL
Financial Corporation |
Merrill
Lynch, Pierce, Fenner & Smith Inc. |
Morgan
Stanley Wealth Management |
National
Financial Services LLC |
Pershing
LLC |
PNC
Investments, LLC |
Principal
Life Insurance Company |
Raymond
James & Associates, Inc. |
RBC
Capital Markets Corporation |
UBS
Financial Services, Inc. |
Waddell
& Reed, Inc. |
Wells
Fargo Clearing Services, LLC |
Touchstone
Securities is motivated to make payments to the broker-dealers described above
because they promote the sale of Fund shares and the retention of those
investments by clients of financial advisors. To the extent financial advisors
sell more shares of the Funds or retain shares of the Funds in their clients’
accounts, the Advisor benefits from the incremental management and other fees
paid to the Advisor by the Funds with respect to those assets.
Your
financial intermediary may charge you additional fees or commissions other than
those disclosed in this SAI. You can ask your financial intermediary about any
payments it receives from Touchstone Securities or the Funds, as well as about
fees or commissions it charges. You should consult disclosures made by your
financial advisor at the time of purchase.
The
Funds may compensate dealers, including the Distributor and its affiliates,
based on the average balance of all accounts in the Funds for which the dealer
is designated as the party responsible for the account.
The
Advisor recommends and the Funds utilize the Dreyfus Government Cash Management
Fund - Institutional Shares (the “Dreyfus Fund”) as the cash sweep vehicle for
the excess cash of the Funds. Touchstone Securities receives a fee based on a
percentage of average daily net assets of the Touchstone Funds invested in the
Dreyfus Fund from BNY Mellon Securities Corporation, the distributor of the
Dreyfus Fund, for providing certain support services, including monitoring and
due diligence. The payment of compensation by BNY Mellon Securities Corporation
creates a conflict of interest because the Advisor is incentivized to recommend
the Dreyfus Fund over other investment options for which it or its affiliates
are not similarly compensated.
Certain
Funds have adopted a distribution or shareholder-servicing plan for certain
classes of shares which permits a Fund to pay for expenses incurred in the
distribution and promotion of its shares pursuant to Rule 12b-1 under the
1940 Act as well as account maintenance and other shareholder services in
connection with maintaining such an account. Touchstone Securities may provide
those services itself or enter into arrangements under which third parties
provide such services and are compensated by the Distributor.
Class A
Shares.
With respect to its Class A shares, each Fund has adopted a plan of
distribution and shareholder service (the “Class A Plan”) under which the
Distributor is paid up to, but not exceeding, twenty-five basis points (0.25%)
for distribution payments. Of the total compensation authorized, the Fund may
pay for shareholder services in an amount up to 0.25%.
Class C
Shares.
With respect to its Class C shares, each Fund has adopted a plan of
distribution and shareholder service (the “Class C Plan” and, together with
the Class A Plan, the "Plans") under which the Distributor is paid up to,
but not exceeding, one hundred basis points (1.00%) in the aggregate, with up to
twenty-five basis points (0.25%) for shareholder service fees and up to
seventy-five basis points (0.75%) for distribution payments.
General
Information.
In connection with the distribution of shares, the Distributor may use the
payments for: (i) compensation for its services in distribution assistance;
or (ii) payments to financial institutions and intermediaries such as
banks, savings and loan associations, insurance companies, 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.
In
addition, the Distributor may use payments to provide or enter into written
agreements with service providers who will provide shareholder services,
including: (i) maintaining accounts relating to shareholders that invest in
shares; (ii) arranging for bank wires; (iii) responding to client
inquiries relating to the services performed by the Distributor or service
providers; (iv) responding to inquiries from shareholders concerning their
investment in shares; (v) assisting shareholders in changing dividend
options, account designations and addresses; (vi) providing information
periodically to shareholders showing their position in shares;
(vii) forwarding shareholder communications from the Funds such as proxies,
shareholder reports, annual reports, dividend distribution and tax notices to
shareholders; (viii) processing purchase, exchange and redemption requests
from shareholders and placing orders with the Funds or the service providers;
(ix) processing dividend payments from the Funds on behalf of shareholders;
and (x) providing such other similar services as a Fund may reasonably
request.
Agreements
implementing the Plans (the “Implementation Agreements”), including agreements
with dealers wherein such dealers agree for a fee to act as agents for the sale
of the Funds’ shares, are in writing and have been approved by the Board. All
payments made pursuant to the Plans are made in accordance with written
Implementation Agreements. Some financial intermediaries charge fees in excess
of the amounts available under the Plans, in which case the Advisor pays the
additional fees.
The
continuance of the Plans and the Implementation Agreements must be specifically
approved at least annually by a vote of the Board and by a vote of the
Independent Trustees who have no direct or indirect financial interest in the
Plans or any Implementation Agreement at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time by a vote of a
majority of the Independent Trustees or by a vote of the holders of a majority
of the outstanding shares of a Fund or the applicable class of a Fund. In the
event a Plan is terminated in accordance with its terms, the affected Fund (or
class) will not be required to make any payments for expenses incurred by the
Distributor after the termination date. Each Implementation Agreement terminates
automatically in the event of its assignment and may be terminated at any time
by a vote of a majority of the Independent Trustees or by a vote of the holders
of a majority of the outstanding shares of a Fund (or the applicable class) on
not more than 60 days’ written notice to any other party to the Implementation
Agreement. The Plans may not be amended to increase materially the amount to be
spent for distribution without shareholder approval. All material amendments to
the Plans must be approved by a vote of the Trust’s Board and by a vote of the
Independent Trustees.
In
approving the Plans, the Trustees determined, in the exercise of their business
judgment and in light of their fiduciary duties as Trustees, that there is a
reasonable likelihood that the Plans will benefit the Funds and their
shareholders. The Board believes that expenditure of the Funds’ assets for
distribution expenses under the Plans should assist in the growth of the Funds,
which will benefit each Fund and its shareholders through increased economies of
scale, greater investment flexibility, greater portfolio diversification, and
less chance of disruption of planned investment strategies. The Plans will be
renewed only if the Trustees make a similar determination for each subsequent
year of the Plans. There can be no assurance that the benefits anticipated from
the expenditure of the Funds’ assets for distribution will be realized. While
the Plans are in effect, all amounts spent by the Funds pursuant to the Plans
and the purposes for which such expenditures were made must be reported
quarterly to the Board for its review. Distribution expenses attributable to the
sale of more than one class of shares of a Fund will be allocated at least
annually to each class of shares based upon the ratio in which the sales of each
class of shares bears to the sales of all the shares of the Fund. In addition,
the selection and nomination of those Trustees who are not interested persons of
the Trust are committed to the discretion of the Independent Trustees during
such period.
Jill
T. McGruder and E.Blake Moore, Jr., as interested persons of the Trust, may be
deemed to have a financial interest in the operation of the Plans and the
Implementation Agreements.
The
Funds paid the following in distribution and shareholder servicing fees for the
fiscal year ended June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| 12b-1 Plan Expenses |
Fund |
| Printing and Mailing |
| Distribution Services |
| Compensation
to Broker Dealers |
| Compensation
to Sales Personnel |
| Service Providers |
| Total |
Balanced
Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
828 |
|
| $ |
436,980 |
|
| $ |
951,975 |
|
| $ |
128,747 |
|
| $ |
— |
|
| $ |
1,518,530 |
|
Class C |
| $ |
147 |
|
| $ |
314,234 |
|
| $ |
500,575 |
|
| $ |
22,408 |
|
| $ |
— |
|
| $ |
837,364 |
|
Core
Municipal Bond Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class
A |
| $ |
34 |
|
| $ |
18,466 |
|
| $ |
39,632 |
|
| $ |
14,100 |
|
| $ |
— |
|
| $ |
72,232 |
|
Class
C |
| $ |
2 |
|
| $ |
3,581 |
|
| $ |
7,273 |
|
| $ |
660 |
|
| $ |
— |
|
| $ |
11,516 |
|
International
Equity Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
160 |
|
| $ |
72,302 |
|
| $ |
155,953 |
|
| $ |
10,515 |
|
| $ |
— |
|
| $ |
238,930 |
|
Class C |
| $ |
5 |
|
| $ |
7,451 |
|
| $ |
23,606 |
|
| $ |
346 |
|
| $ |
— |
|
| $ |
31,408 |
|
International
Growth Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
2 |
|
| $ |
2,134 |
|
| $ |
2,110 |
|
| $ |
21 |
|
| $ |
— |
|
| $ |
4,267 |
|
Class C |
| $ |
2 |
|
| $ |
2,464 |
|
| $ |
8,041 |
|
| $ |
18 |
|
| $ |
— |
|
| $ |
10,525 |
|
Large
Cap Focused Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
3,198 |
|
| $ |
1,548,899 |
|
| $ |
3,357,205 |
|
| $ |
353,471 |
|
| $ |
— |
|
| $ |
5,262,773 |
|
Class C |
| $ |
108 |
|
| $ |
171,473 |
|
| $ |
425,551 |
|
| $ |
11,964 |
|
| $ |
— |
|
| $ |
609,096 |
|
Large
Cap Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
5 |
|
| $ |
5,497 |
|
| $ |
5,985 |
|
| $ |
429 |
|
| $ |
— |
|
| $ |
11,916 |
|
Class C |
| $ |
6 |
|
| $ |
6,489 |
|
| $ |
30,717 |
|
| $ |
511 |
|
| $ |
— |
|
| $ |
37,723 |
|
Large
Company Growth Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
6 |
|
| $ |
2,127 |
|
| $ |
6,508 |
|
| $ |
382 |
|
| $ |
— |
|
| $ |
9,023 |
|
Class C |
| $ |
1 |
|
| $ |
573 |
|
| $ |
3,275 |
|
| $ |
48 |
|
| $ |
— |
|
| $ |
3,897 |
|
Small
Company Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
830 |
|
| $ |
401,576 |
|
| $ |
949,011 |
|
| $ |
68,002 |
|
| $ |
— |
|
| $ |
1,419,419 |
|
Class C |
| $ |
42 |
|
| $ |
42,111 |
|
| $ |
182,582 |
|
| $ |
3,405 |
|
| $ |
— |
|
| $ |
228,140 |
|
Value
Fund |
|
|
|
|
|
|
|
|
|
|
| |
Class A |
| $ |
246 |
|
| $ |
123,108 |
|
| $ |
288,594 |
|
| $ |
12,908 |
|
| $ |
— |
|
| $ |
424,856 |
|
Class C |
| $ |
10 |
|
| $ |
11,278 |
|
| $ |
45,053 |
|
| $ |
529 |
|
| $ |
— |
|
| $ |
56,870 |
|
Decisions
to buy and sell securities for the Funds and the placing of the Funds’
securities transactions and negotiation of commission rates where applicable are
made by the Sub-Advisors and are subject to oversight by the Advisor and the
Board. In the purchase and sale of portfolio securities, the sub-advisor’s
primary objective will be to obtain the most favorable price and execution for a
Fund, taking into account such factors as the overall direct net economic result
to a Fund (including commissions, which may not be the lowest available but
ordinarily should not be higher than the generally prevailing competitive
range), the financial strength and stability of the broker, the efficiency with
which the transaction will be effected, the ability to effect the transaction at
all where a large block is involved and the availability of the broker or dealer
to stand ready to execute possibly difficult transactions in the
future.
Each
sub-advisor is specifically authorized, subject to certain limitations, to pay a
trading commission to a broker who provides research services that is higher
than the amount of trading commission another broker would have charged for the
same transaction. This excess commission recognizes the additional research
services rendered by the broker, but only if the sub-advisor determines in good
faith that the excess commission is reasonable in relation to the value of the
research services provided and that a Fund derives or will derive a reasonably
significant benefit from such research services.
Research
services include securities and economic analyses, reports on issuers’ financial
conditions and future business prospects, newsletters and opinions relating to
interest trends, general advice on the relative merits of possible investment
securities for the Funds and statistical services and information with respect
to the availability of securities or purchasers or sellers of securities.
Although this information is useful to the Funds and the sub-advisors, it is not
possible to place a dollar
value
on it. Research services furnished by brokers through whom a Fund effects
securities transactions may be used by the sub-advisor in servicing all of its
accounts and not all such services may be used by the Sub-Advisor in connection
with a Fund.
The
Funds have no obligation to deal with any broker or dealer in the execution of
securities transactions. However, the Funds may execute securities transactions
on a national securities exchange or in the over-the-counter market conducted on
an agency basis. A Fund will not execute any brokerage transactions in its
portfolio securities with an affiliated broker if such transactions would be
unfair or unreasonable to its shareholders. Over-the-counter transactions will
be placed either directly with principal market makers or with broker-dealers.
Although the Funds do not anticipate any ongoing arrangements with other
brokerage firms, brokerage business may be transacted with other firms.
Affiliated broker-dealers of the Trust will not receive reciprocal brokerage
business as a result of the brokerage business transacted by the Funds with
other brokers. The Funds may direct transactions to certain brokers in order to
reduce brokerage commissions through a commission recapture program offered by
Frank Russell Securities, Inc. and Cowen and Company LLC.
In
certain instances, there may be securities that are suitable for a Fund as well
as for one or more of the respective sub-advisor’s other clients. The
sub-advisor makes investment decisions for a Fund and for its other clients to
achieve their respective investment objectives. The sub-advisor may buy or sell
a particular security for one client even though it is buying, selling, or
holding the same security for another client. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment advisor, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
sub-advisor will allocate the securities among clients in a fair and equitable
manner. This system may detrimentally affect the price of a security purchased,
sold, or held by the Fund, but this detrimental effect is offset by a Fund’s
ability to participate in volume transactions, which could lead to better
executions for the Fund.
The
following table shows the amount the Funds paid in aggregate brokerage
commissions on portfolio transactions and the amount of brokerage transactions
and related commissions the Funds directed to brokers in return for research
services for the most recent fiscal years (or periods):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Date
of Fiscal Period End |
| Brokerage
Commissions Paid |
|
Amount
of Transactions Directed to Brokers Providing Research(1) |
|
Brokerage
Commissions Related to Transactions Directed to Brokers Providing
Research(1) |
Balanced
Fund(1) |
6/30/2020 |
| $ |
72,154 |
|
| $ |
53,506,430 |
|
| $ |
7,950 |
|
| 6/30/2021 |
| $ |
61,311 |
|
| $ |
7,727,085 |
|
| $ |
3,021 |
|
| 6/30/2022 |
| $ |
111,654 |
|
| $ |
28,953,649 |
|
| $ |
7,385 |
|
Core
Municipal Bond Fund |
6/30/2020 |
| N/A |
| $ |
0 |
|
| $ |
0 |
|
| 6/30/2021 |
| N/A |
| $ |
0 |
|
| $ |
0 |
|
| 6/30/2022 |
| N/A |
| $ |
0 |
|
| $ |
0 |
|
International
Equity Fund |
6/30/2020 |
| $ |
288,287 |
|
| $ |
111,642,306 |
|
| $ |
221,441 |
|
| 6/30/2021 |
| $ |
196,798 |
|
| $ |
77,177,290 |
|
| $ |
156,597 |
|
| 6/30/2022 |
| $ |
190,508 |
|
| $ |
78,765,596 |
|
| $ |
152,381 |
|
International
Growth Fund |
6/30/2020 |
| $ |
323,622 |
|
| $ |
44,169,515 |
|
| $ |
40,635 |
|
| 6/30/2021 |
| $ |
135,557 |
|
| $ |
66,515,229 |
|
| $ |
63,123 |
|
| 6/30/2022 |
| $ |
61,939 |
|
| $ |
60,455,737 |
|
| $ |
48,488 |
|
Large
Cap Focused Fund |
6/30/2020 |
| $ |
294,822 |
|
| $ |
339,639,815 |
|
| $ |
64,004 |
|
| 6/30/2021 |
| $ |
194,654 |
|
| $ |
114,439,466 |
|
| $ |
35,038 |
|
| 6/30/2022 |
| $ |
311,193 |
|
| $ |
214,668,205 |
|
| $ |
63,988 |
|
Large
Cap Fund |
6/30/2020 |
| $ |
54,362 |
|
| $ |
40,774,733 |
|
| $ |
17,190 |
|
| 6/30/2021 |
| $ |
32,557 |
|
| $ |
80,244,885 |
|
| $ |
19,260 |
|
| 6/30/2022 |
| $ |
28,537 |
|
| $ |
67,210,368 |
|
| $ |
9,596 |
|
Large
Company Growth Fund |
6/30/2020 |
| $ |
57,599 |
|
| $ |
65,581,873 |
|
| $ |
31,251 |
|
| 6/30/2021 |
| $ |
56,618 |
|
| $ |
71,982,934 |
|
| $ |
26,390 |
|
| 6/30/2022 |
| $ |
52,256 |
|
| $ |
97,199,174 |
|
| $ |
32,345 |
|
Small
Company Fund |
6/30/2020 |
| $ |
1,281,353 |
|
| $ |
1,372,743,856 |
|
| $ |
270,641 |
|
| 6/30/2021 |
| $ |
868,656 |
|
| $ |
806,763,438 |
|
| $ |
600,074 |
|
| 6/30/2022 |
| $ |
697,296 |
|
| $ |
660,323,537 |
|
| $ |
438,427 |
|
Value
Fund |
6/30/2020 |
| $ |
181,694 |
|
| $ |
223,973,042 |
|
| $ |
135,247 |
|
| 6/30/2021 |
| $ |
83,313 |
|
| $ |
139,465,205 |
|
| $ |
61,781 |
|
| 6/30/2022 |
| $ |
200,259 |
|
| $ |
263,700,655 |
|
| $ |
122,031 |
|
(1)
Equity
trades only.
The
total amount of securities of regular broker-dealers held by each Fund for the
fiscal year ended June 30, 2022 was as follows:
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Broker/Dealer |
| Aggregate
Value |
Balanced
Fund |
Goldman
Sachs & Co. LLC |
| $16,998,120 |
| Wells
Fargo Securities, LLC |
| $422,825 |
Core
Municipal Bond Fund |
N/A |
| N/A |
International
Equity Fund |
N/A |
| N/A |
International
Growth Fund |
N/A |
| N/A |
Large
Cap Focused Fund |
Goldman
Sachs & Co. LLC |
| $69,808,017 |
Large
Cap Fund |
N/A |
| N/A |
Large
Company Growth Fund |
N/A |
| N/A |
Small
Company Fund |
N/A |
| N/A |
Value
Fund |
N/A |
| N/A |
Each
Fund has adopted the policies and procedures of its Sub-Advisor for voting
proxies relating to portfolio securities held by the Funds, including procedures
used when a vote presents a conflict between the interests of the Fund’s
shareholders and those of the Sub-Advisor or its affiliates. A copy or summary
of each Sub-Advisor’s proxy voting policies is included in Appendix B.
Information about how the Funds voted proxies relating to their portfolio
securities during the most recent year ending June 30 is available by
August 31st of
that year without charge, upon request, by calling toll-free 1.800.543.0407, on
the Touchstone website at TouchstoneInvestments.com and on the SEC’s website at
sec.gov. Each Fund's N-PX is available on the SEC’s website at sec.gov and on
the Touchstone website at TouchstoneInvestments.com.
The
Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940
Act. In addition, the Advisor, each Sub-Advisor and Distributor have adopted
Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the
personal investing activities of Trustees, officers, and certain employees
(“access persons”). Rule 17j-1 and the Codes of Ethics are designed to
prevent unlawful practices in connection with the purchase or sale of securities
by access persons. Under each Code of Ethics, access persons are permitted to
invest in securities (including securities that may be purchased or held by a
Fund), but are required to report their personal securities transactions for
monitoring purposes. In addition, certain access persons are required to obtain
approval before investing in initial public offerings or private placements.
Copies of these Codes of Ethics are on file with the SEC, and are available to
the public.
A
Fund’s portfolio turnover rate is calculated by dividing the lesser of purchases
or sales of portfolio securities for the fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the fiscal year.
High portfolio turnover involves correspondingly greater brokerage commissions
and other transaction costs, which will be borne directly by the Fund. High
turnover may result in a Fund recognizing greater amounts of income and capital
gains, which would increase the amount of taxes payable by shareholders and
increase the amount of commissions paid by the Fund. A 100% turnover rate would
occur if all of a Fund’s portfolio securities were replaced once within a
one-year period. The rate of portfolio turnover will depend upon market and
other conditions, and will not be a limiting factor when the Sub-Advisor
believes that portfolio changes are appropriate. A Fund may engage in active
trading to achieve its investment goals and, as a result, may have substantial
portfolio turnover.
During
the two most recent fiscal years ended June 30 (or periods), the portfolio
turnover rate for each Fund was as follows:
|
|
|
|
|
|
|
| |
| Date
of Fiscal Period End |
Portfolio
Turnover |
Balanced
Fund |
6/30/2021 |
60% |
6/30/2022 |
92%(1)(2) |
Core
Municipal Bond Fund* |
6/30/2021 |
21% |
6/30/2022 |
157% |
International
Equity Fund |
6/30/2021 |
31% |
6/30/2022 |
45%(3) |
International
Growth Fund** |
6/30/2021 |
116%
(4) |
6/30/2022 |
49% |
Large
Cap Focused Fund |
6/30/2021 |
16%(1) |
6/30/2022 |
27%(1)(5) |
Large
Cap Fund |
6/30/2021 |
15%(1) |
6/30/2022 |
12%(1) |
Large
Company Growth Fund |
6/30/2021 |
36%(1) |
6/30/2022 |
41%(1) |
Small
Company Fund |
6/30/2021 |
80%(1) |
6/30/2022 |
70%(1) |
Value
Fund |
6/30/2021 |
37% |
6/30/2022 |
63%(6) |
*On
October 28, 2021, the Fund changed its name, principal investment strategies,
and sub-advisor, as further described herein. The portfolio turnover rate is
higher for the most recent fiscal year as a result of these changes.
**On
September 11, 2020, the Touchstone International Growth Opportunities Fund was
reorganized into International Small Cap Fund.
Effective
September 12, 2020, the International Small Cap Fund changed its name to the
International Growth Fund and changed its
principal
investment strategies and sub-advisor to match those of the International Growth
Predecessor Fund. The portfolio turnover rate is higher for the prior fiscal
year as a result of these changes.
(1)
Portfolio
turnover excludes securities delivered from processing
redemptions-in-kind.
(2)
Portfolio
turnover excludes the purchases and sales of securities by the AIG Asset
Allocation Fund and AIG Multi-Asset Allocation Fund acquired on July 16, 2021.
If these transactions were included, portfolio turnover would have been
higher.
(3)
Portfolio turnover excludes the purchases and sales of securities by the AIG
International Dividend Strategy Fund acquired on July 16, 2021. If these
transactions were included, portfolio turnover would have been
higher.
(4)
Portfolio
turnover excludes the purchases and sales of securities of the International
Small Cap Fund acquired on September 11, 2020. If these transactions were
included, portfolio turnover would have been higher.
(5)
Portfolio
turnover excludes the purchases and sales of securities of the AIG Focused Alpha
Large-Cap Fund acquired on July 16, 2021. If these transactions were included,
portfolio turnover would have been higher.
(6)
Portfolio
turnover excludes the purchases and sales of securities of the AIG Strategic
Value Fund acquired on July 16, 2021. If these transactions were included,
portfolio turnover would have been higher.
The
Touchstone Funds have adopted policies and procedures for disclosing the Funds’
portfolio holdings to any person requesting this information. These policies and
procedures are monitored by the Board through periodic reporting by the Funds’
CCO. No compensation will be received by a Fund, the Advisor, any Sub-Advisor,
or any other party in connection with the disclosure of information about
portfolio securities.
The
procedures prohibit the disclosure of portfolio holdings except under the
following conditions:
1)A
request made by a Sub-Advisor for a Fund (or that portion of a Fund) that it
manages.
2)A
request by executive officers of the Advisor for routine oversight and
management purposes.
3)For
use in preparing and distributing routine shareholder reports, including
disclosure to the Funds’ independent registered public accounting firm,
typesetter, and printer. Routine shareholder reports are filed as of the end of
each fiscal quarter with the SEC within 60 days after the quarter end and
routine shareholder reports are distributed to shareholders within 60 days after
the applicable six-month semi-annual period. The Funds provide their full
holdings to their independent registered public accounting firm annually, as of
the end of their fiscal year, within one to ten business days after fiscal year
end. The Funds provide their full holdings to their typesetter at least 50 days
after the end of the calendar quarter. The Funds provide their full holdings to
their printer at least 50 days after the applicable six-month semi-annual
period.
4)A
request by service providers to fulfill their contractual duties relating to the
Fund, subject to approval by the CCO.
5)A
request by a newly hired sub-advisor or sub-advisor candidate prior to the
commencement of its duties to facilitate its transition as a new sub-advisor,
subject to the conditions set forth in Item 8.
6)A
request by a potential merger candidate for the purpose of conducting due
diligence, subject to the conditions set forth in Item 8.
7)A
request by a rating or ranking agency, subject to the conditions set forth in
Item 8.
Other
portfolio holdings disclosure policies of the Funds include:
•The
Funds provide their top ten holdings on their publicly available website and to
market data agencies monthly, as of the end of a calendar month, generally
within 15 days after month end.
•The Funds provide
their full holdings on their publicly available website and to market data
agencies quarterly, as of the end of a calendar quarter, generally within 30
days after quarter end.
•You
may access this portfolio holdings information via the Funds' public website at
TouchstoneInvestments.com.
8)The
CCO may authorize disclosing non-public portfolio holdings to third parties more
frequently or at different periods than as described above prior to when such
information is made public, provided that certain conditions are
met.
The third-party must (i) specifically request in writing the more current
non-public portfolio holdings, providing a reasonable basis for the
request; (ii) execute an agreement to keep such information confidential,
to only use the information for the authorized purpose, and not to use the
information for their personal benefit; (iii) agree not to trade on such
information, either directly or indirectly; and (iv) unless specifically
approved by the CCO in writing, the non-public portfolio holdings are subject to
a ten day time delay before dissemination. Any non-public portfolio holdings
that are disclosed will not include any material information about a Fund’s
trading strategies or pending portfolio transactions.
As
of September 30, 2022, one or more Touchstone Funds discloses portfolio
holdings information to the following parties based on ongoing
arrangements:
Bloomberg
LP
Morningstar, Inc.
Style
Analytics, Inc.
FactSet
Research Systems, Inc.
Employees
of the Advisor and the Funds’ Sub-Advisors that are access persons under the
Funds’ Code of Ethics have access to Fund holdings on a regular basis, but are
subject to confidentiality requirements and trading prohibitions in the Code of
Ethics. In addition, custodians of the Funds’ assets and the Funds’ accounting
services agent, each of whose agreements contains a confidentiality provision
(which includes a duty not to trade on non-public information), have access to
the current Fund holdings on a daily basis.
The
CCO is authorized to determine whether disclosure of a Fund’s portfolio
securities is for a legitimate business purpose and is in the best interests of
a Fund and its shareholders. Any conflict between the interests of shareholders
and the interests of the Advisor, Touchstone Securities, or any affiliates, will
be reported to the Board, which will make a determination that is in the best
interests of shareholders.
The
securities of each Fund are valued by the Advisor, which has been designated by
the Trustees as the valuation designee for the Funds pursuant to Rule 2a-5 under
the 1940 Act. The Advisor or its delegates may use independent pricing services
to obtain valuations of securities. The pricing services rely primarily on
prices of actual market transactions as well as on trade quotations obtained
from third parties. Prices are generally determined using readily available
market prices. If market prices are unavailable or believed to be unreliable,
the Sub-Administrative Agent will initiate a process by which the Advisor’s Fair
Value Committee will make a good faith determination as to the “fair value” of
the security using procedures approved by the Trustees. The pricing services may
use a matrix system to determine valuations of fixed income securities when
market prices are not readily available. This system considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at valuations. The procedures used
by any such pricing service and its valuation results are reviewed by the
Advisor, as the valuation designee. Some Funds may hold portfolio securities
that are listed on foreign exchanges. Under certain circumstances, these
investments may be valued under the Advisor’s fair value policies and
procedures, such as when U.S. exchanges are open but a foreign exchange is
closed.
Securities
with remaining maturities of 60 days or less may be valued by the amortized cost
method, which involves valuing a security at its cost on the date of purchase
and thereafter (absent unusual circumstances) assuming a constant amortization
of maturity of any discount or premium, provided such amount approximates market
value.
The
Trust’s Declaration of Trust authorizes the issuance of an unlimited number of
Funds and shares of each Fund. Each share of a Fund represents an equal
proportionate interest in that Fund with each other share. Upon liquidation,
shares are entitled to a pro
rata
share in the net assets of the Fund, after taking into account additional
distribution and shareholder servicing expenses attributable to the Class.
Shareholders have no preemptive rights. The Declaration of Trust provides that
the Trustees of the Trust may create additional series of shares or separate
classes of funds. All consideration received by the Trust for shares of any
portfolio or separate class and all assets in which such consideration is
invested would belong to that portfolio or separate class and would be subject
to the liabilities related thereto. Share certificates representing shares will
not be issued.
The
Trust is an entity of the type commonly known as a Massachusetts business trust.
The Trust’s Declaration of Trust states that neither the Trust nor the Trustees,
nor any officer, employee or agent of the Trust shall have any power to bind
personally any shareholder, nor, except as specifically provided therein, to
call upon any shareholder for the payment of any sum of money or assessment
whatsoever other than such as the shareholder may at any time personally agree
to pay.
The
Declaration of Trust provides that a Trustee shall be liable only for his or her
own willful misfeasance, bad faith, gross negligence or reckless disregard of
duties as a Trustee and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisors, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with the Trust
unless it is determined in the manner provided in the Declaration of Trust that
they have not acted in good faith in the reasonable belief that their actions
were in the best interests of the Trust. However, nothing in the Declaration of
Trust shall protect or indemnify a Trustee against any liability for his or her
willful misfeasance, bad faith, gross negligence or reckless disregard of his or
her duties.
Each
whole share shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional share shall be entitled to a proportionate
fractional vote. Shares issued by each Fund have no preemptive, conversion, or
subscription rights. Voting rights are not cumulative. Each Fund, as a separate
series of the Trust, votes separately on matters affecting only that Fund.
Shareholders of each Class of each Fund will vote separately on matters
pertaining solely to that Fund or that Class. The Trust is not required to hold
annual meetings of shareholders, but approval will be sought for certain changes
in the operation of the Trust and for the election of Trustees under certain
circumstances.
In
addition, a Trustee may be removed by the remaining Trustees or by shareholders
at a special meeting called upon written request of shareholders owning at least
10% of the outstanding shares of the Trust. In the event that such a meeting is
requested, the Trust will provide appropriate assistance and information to the
shareholders requesting the meeting.
Derivative
Claims of Shareholders
The
Trust’s Amended and Restated By-Laws (the “By-Laws”) contain provisions
regarding derivative claims of shareholders. Under these provisions, a
shareholder must make a pre-suit demand upon the Trustees to bring the subject
action unless an effort to cause the Trustees to bring such an action is not
likely to succeed. For purposes of the foregoing sentence, a demand on the
Trustees shall only be deemed not likely to succeed and therefore excused if a
majority of the Board, or a majority of any committee of the Board established
to consider the merits of such action, has a personal financial interest in the
transaction at issue, and a Trustee shall not be deemed interested in a
transaction or otherwise disqualified from ruling on the merits of a shareholder
demand by virtue of the fact that such Trustee receives remuneration for his
service on the Board or on the boards of one or more Trusts that are under
common management with or otherwise affiliated with the Trust.
Unless
a demand is not required under the foregoing paragraph, the Trustees must be
afforded a reasonable amount of time to consider such shareholder request and to
investigate the basis of such claim. The Trustees shall be entitled to retain
counsel or other advisors in considering the merits of the request and shall
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such advisors in the event that the Trustees
determine not to bring such action.
Forum
for Adjudication of Disputes
The
By-Laws provide that, unless the Trust consents in writing to the selection of
an alternative forum, the sole and exclusive forum for (i) any derivative action
or proceeding brought on behalf of the Trust, (ii) any action asserting a claim
of breach of a fiduciary duty owed by any Trustee, officer, or other employee of
the Trust to the Trust or the Trust’s shareholders, (iii) any action asserting a
claim arising pursuant to the laws of the Commonwealth of Massachusetts, the
Declaration of Trust or the By-Laws, (iv) any action to interpret, apply,
enforce or determine the validity of the Declaration of Trust or the By-Laws, or
(v) any action asserting a claim governed by the internal affairs doctrine shall
be the U.S. District Court for the District of Massachusetts or the Superior
Court of the Commonwealth of Massachusetts (each, a “Covered Action”). The
By-Laws further provide that if any Covered Action is filed in a court other
than the U.S. District Court for the District of Massachusetts or the Superior
Court of the Commonwealth of Massachusetts (a “Foreign Action”) in the name of
any shareholder, such shareholder shall be deemed to have consented to (i) the
personal jurisdiction of the U.S. District Court for the District of
Massachusetts or the Superior Court of the Commonwealth of Massachusetts in
connection with any action brought in any such courts to enforce the preceding
sentence (an “Enforcement Action”) and (ii) having service of process made upon
such shareholder in any such Enforcement Action by service upon such
shareholder’s counsel in the Foreign Action as agent for such
shareholder.
The
By-Laws provide that any person purchasing or otherwise acquiring or holding any
interest in shares of beneficial interest of the Trust shall be (i) deemed to
have notice of and consented to the provisions of the foregoing paragraph and
(ii) deemed to have waived any argument relating to the inconvenience of the
forums referenced above in connection with any action or proceeding described in
the foregoing paragraph.
This
forum selection provision may limit a shareholder’s ability to bring a claim in
a judicial forum that it finds favorable for disputes with Trustees, officers or
other agents of the Trust and its service providers, which may discourage such
lawsuits with respect to such claims. If a court were to find the forum
selection provision contained in the By-Laws to be inapplicable or unenforceable
in an action, the Trust may incur additional costs associated with resolving
such action in other jurisdictions.
Each
Fund offers the following classes of shares.
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Class A |
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Class C |
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Class Y |
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Institutional Class |
| Class
R6 |
Touchstone
Balanced Fund |
X |
| X |
| X |
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| X |
Touchstone
Core Municipal Bond Fund |
X |
| X |
| X |
| X |
| |
Touchstone
International Equity Fund |
X |
| X |
| X |
| X |
| |
Touchstone
International Growth Fund |
X |
|
X |
|
X |
|
X |
| |
Touchstone
Large Cap Focused Fund |
X |
| X |
| X |
| X |
| X |
Touchstone
Large Cap Fund |
X |
|
X |
|
X |
|
X |
| |
Touchstone
Large Company Growth Fund |
X |
| X |
| X |
| X |
| |
Touchstone
Small Company Fund |
X |
| X |
| X |
| X |
| X |
Touchstone
Value Fund |
X |
|
X |
|
X |
|
X |
| X |
The
Funds participate in fund “supermarket” arrangements. In such an arrangement, a
program is made available by a broker or other institution (a sponsor) that
allows investors to purchase and redeem shares of the Funds through the sponsor
of the fund supermarket. In connection with these supermarket arrangements, each
Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. In turn, the brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Funds’ behalf. As
such, a Fund will be deemed to have received a purchase or redemption order when
an authorized broker or, if applicable, a broker’s authorized designee, accepts
the order. The customer order will be priced at the Fund’s NAV next computed
after acceptance by an authorized broker or the broker’s authorized designee. In
addition, a broker may charge transaction fees on the purchase or sale of Fund
shares. Also in connection with fund supermarket arrangements, the performance
of a participating Fund may be compared in publications to the performance of
various indices and investments for which reliable performance data is available
and compared in publications to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services. The Funds’
annual report contains additional performance information and will be made
available to investors upon request and without charge.
The
Touchstone Funds are intended for sale to residents of the United States, and,
with very limited exceptions, are not registered or otherwise offered for sale
in other jurisdictions. The above restrictions are generally not applicable to
sales in United States territories of Guam, Puerto Rico, and the Virgin Islands
or to diplomatic staff members or members of the U.S. military with an APO or
FPO address outside of the U.S. Investors are responsible for compliance with
tax, securities, currency exchange or other regulations applicable to redemption
and purchase transactions in any state or jurisdiction to which they may be
subject. Investors should consult with their financial intermediary and
appropriate tax and legal advisors to obtain information on the
rules applicable to these transactions.
The
shares of the Funds may not be directly or indirectly offered or distributed in
any country outside of the United States. If an investor becomes a resident of
another jurisdiction after purchasing shares of the Touchstone Funds, the
investor will not be able to purchase any additional shares of the Funds (other
than reinvestment of dividends and capital gains) or exchange shares of the
Touchstone Funds for other U.S. registered Touchstone Funds.
Class A
Shares.
For initial purchases of Touchstone equity fund Class A shares of $1 million or
more and subsequent purchases further increasing the size of a purchaser’s
aggregate account value, participating dealers may receive compensation of up to
1.00% (an “Equity Fund Finder's Fee”) of such purchases from Touchstone
Securities according to the following schedule. For these purposes, the
following Funds are Touchstone equity funds: Balanced Fund, International Equity
Fund, International Growth Fund, Large Cap Focused Fund, Large Cap Fund, Large
Company Growth Fund, Small Company Fund, and Value Fund.
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| |
Amount of Investment |
Equity
Fund Finder's Fee |
$1
million but less than $5 million |
1.00 |
% |
$5
million but less than $25 million |
0.50 |
% |
$25
million or more |
0.25 |
% |
For
initial purchases of Touchstone fixed income fund Class A shares of $500,000 or
more and subsequent purchases further increasing the size of a purchaser’s
aggregate account value, participating dealers may receive compensation of up to
1.00% (a “Fixed Income Fund Finder's Fee” and together with the Equity Fund
Finder's Fee, the "Finder's Fee") of such purchases from
Touchstone
Securities according to the following schedule. For these purposes, the
following Fund is a Touchstone fixed income fund: Core Municipal Bond
Fund.
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| |
Amount of Investment |
Fixed
Income Fund Finder's Fee |
$500,000
but less than $3 million |
1.00% |
$3
million but less than $25 million |
0.50% |
$25
million or more |
0.25% |
The
Distributor does not have an annual reset for Finder’s Fees. In determining
a dealer’s eligibility for a Finder’s Fee, all purchases in the Touchstone Fund
Complex may be aggregated for that individual shareholder in accordance with a
Fund's Rights of Accumulation Program. Please see the "Choosing a Class of
Shares - Reduced Class A Sales Charge" and "Choosing a Class of Shares - Rights
of Accumulation Program" sections in the Funds' prospectus to determine whether
accounts may be aggregated for purposes of determining eligibility for a
Finder's Fee. If a Finder’s Fee was paid to a participating dealer, that dealer
is not eligible to receive 12b-1 fees on the shares that were used to generate
the Finder’s Fee until they have aged for a period of one year.
Additionally, if a Finder’s Fee was paid related to a purchase of equity fund
Class A shares and those shares are redeemed within a year of their
purchase, a contingent deferred sales charge (“CDSC”) of up to 1.00% will be
charged on the redemption. Dealers should contact the Distributor for more
information on the calculation of the dealer’s commission in the case of
combined purchases.
A
dealer is eligible for a Finder's Fee only if the dealer has not previously
received a Finder's Fee on the assets used to meet the required investment
amount. Similarly, an exchange from any other Touchstone Fund will not qualify
for a Finder's Fee unless the dealer did not receive any compensation on those
assets at the time of the initial investment. In all cases, Touchstone
Securities reserves the right to deny payment of a Finder's Fee if it reasonably
believes such a fee has already been paid on those assets.
Class
R6 Shares.
No dealer compensation is paid from the sale of Class R6 shares of the Fund.
Class R6 shares of the Fund are sold at NAV and do not pay a sales
charge, Rule 12b-1 fee, impose a CDSC, or make payments to financial
intermediaries/ broker dealers for assisting the Distributor in promoting the
sales of the Fund's shares. In addition, neither the Fund nor its affiliates
make any type of administrative, service, relationship, or revenue sharing
payments in connection with Class R6 shares. An investor transacting in Class R6
shares may be required to pay a commission to a broker for effecting such
transactions on an agency basis.
Exchanging
Your Shares.
Class A, Class C, and Class R6 shareholders who are eligible to invest
in Class Y shares or Institutional Class shares are eligible to
exchange their Class A shares, Class C shares, and/or Class R6 shares
for Class Y shares or Institutional Class shares of the same Fund, if
offered in their state and such an exchange can be accommodated by their
financial institution. Class Y shares may be available through
financial institutions that have appropriate selling agreements with Touchstone
Securities, or through “processing organizations” (e.g.,
mutual fund supermarkets) that purchase shares for their customers.
Additionally, Class C shareholders may exchange their Class C shares for Class A
shares of the same Fund, if offered in their state and such an exchange can be
accommodated by their financial institution. No front-end sales charges will
apply to any such exchange. However, if the Class A or Class C share assets
have been held less than 12 months and a 1% commission was paid to the broker at
the time of purchase, a CDSC of 1% may be assessed on the exchange transaction,
which may be processed as a liquidation and a purchase. Class Y shareholders
that meet the required minimum for Institutional Class Shares may exchange their
Class Y Shares for Institutional Class shares within the same Fund if offered in
their state and if such an exchange can be accommodated by their financial
institution.
For
federal income tax purposes, exchanges of one share class for a different
share class of the same fund (even if processed as a liquidation and a
purchase) should not result in the realization by the investor of a capital gain
or loss. There can be no assurance of any particular tax treatment, however, and
you are urged and advised to consult with your own tax advisor before entering
into a share class exchange.
Share
Class Conversions. Effective
June 30, 2020 (the “Effective Date”), Class C shares of each Fund automatically
convert into Class A shares of the same Fund after they have been held for eight
(8) years. The conversion is not considered a taxable event for federal income
tax purposes. These automatic conversions are executed without any sales charge
(including CDSCs), redemption or transaction fee, or other charge. After such a
conversion takes place, the shares will be subject to all features, rights and
expenses of Class A shares. If you hold Class C shares through certain financial
intermediaries, such as an omnibus account or group retirement recordkeeping
platform, your intermediary may not be able to track the amount of time you held
your Class C shares purchased before June 30, 2020. In that case, Class C shares
held prior to June 30, 2020 would convert to Class A shares eight (8) years
after the Effective Date of this policy. In addition, Class C shares held
through certain financial
intermediaries
may convert to Class A shares of the same Fund in a shorter time frame than
shares purchased directly from the Fund. Please contact your financial
intermediary for further information about its Class C shares to Class A shares
conversion policy.
Financial
intermediaries may convert shares in a customer or client’s account to a more
expensive share class if prior to the conversion the intermediary determines
that the higher priced share class is more suitable to the customer’s interests
and the intermediary discloses any additional compensation to the customer,
including revenue sharing arrangements with the Advisor or
Distributor.
If
a financial institution, processing organization or intermediary (a “converting
entity”) is initiating a share class conversion(s) for Touchstone Funds on
a platform, then the converting entity should contact Touchstone Securities at
least 60 days in advance and obtain Touchstone Securities’ approval of the share
class conversion.
Additional
Information on the CDSC.
The CDSC is waived under the following circumstances:
•Any
partial or complete redemption following death or disability (as defined in the
Code) of a shareholder (including one who owns the shares with his or her spouse
as a joint tenant with rights of survivorship) from an account in which the
deceased or disabled is named. Touchstone Securities may require documentation
prior to waiver of the charge, including death certificates, physicians’
certificates, etc.
•Redemptions
from a systematic withdrawal plan. If the systematic withdrawal plan is based on
a fixed dollar amount or number of shares, systematic withdrawal redemptions are
limited to no more than 10% of your account value or number of shares per year,
as of the date the transfer agent receives your request. If the systematic
withdrawal plan is based on a fixed percentage of your account value,
each redemption is limited to an amount that would not exceed 10% of your
annual account value at the time of withdrawal.
•Redemptions
from retirement plans qualified under Section 401 of the Code. The CDSC
will be waived for benefit payments made by Touchstone directly to plan
participants. Benefit payments will include, but are not limited to, payments
resulting from death, disability, retirement, separation from service, required
minimum distributions (as described under Section 401(a)(9) of the Code),
in-service distributions, hardships, loans and qualified domestic relations
orders. The CDSC waiver will not apply in the event of termination of the plan
or transfer of the plan to another financial institution.
•Redemptions
that are mandatory withdrawals from a traditional IRA account after reaching the
qualified age based on applicable IRS regulations.
Please
see Appendix A –
Intermediary-Specific Sales Charge Waivers and Discounts in
the prospectus for a description of variations in sales charges and waivers for
Fund shares purchased through Ameriprise Financial, Edward D. Jones & Co.,
Janney Montgomery Scott LLC, Merrill Lynch, Morgan Stanley, Oppenheimer &
Co. Inc., Raymond James and Robert W. Baird & Co. Incorporated.
General.
The above mentioned CDSC waivers do not apply to Class A share redemptions made
within one year of the date of purchase where a Finder's Fee was paid by
Touchstone Securities due to an investment in the Touchstone equity funds
totaling $1 million or more or an investment of $500,000 or more in the Core
Municipal Bond Fund. All sales charges imposed on redemptions are paid to the
Distributor. In determining whether the CDSC is payable, it is assumed that
shares not subject to the CDSC are the first redeemed followed by other shares
held for the longest period of time. The CDSC will not be imposed upon shares
representing reinvested dividends or capital gains distributions, or upon
amounts representing share appreciation.
CDSC
for Certain Redemptions of Class A Shares.
A CDSC is imposed upon certain redemptions of Class A shares of the Funds
(or shares into which such Class A shares were exchanged) purchased at NAV
due to an individual shareholder investment amount in the Touchstone Fund
Complex of $1 million or more where a Finder's Fee was paid by the Distributor
and the shares were redeemed within one year from the date of purchase. The CDSC
will be paid to the Distributor and will be equal to the commission percentage
paid at the time of purchase as applied to the lesser of (1) the NAV at the
time of purchase of the Class A shares being redeemed, or (2) the NAV
of such Class A shares at the time of redemption. If a purchase of
Class A shares is subject to the CDSC, you will be notified on the
confirmation you receive for your purchase. Redemptions of such Class A
shares of the Funds held for at least one year will not be subject to the
CDSC.
Examples.
The following example will illustrate the operation of the CDSC. Assume that you
open an account and purchase 1,000 shares at $10 per share and that six months
later the NAV per share is $12 and, during such time, you have acquired 50
additional
shares through reinvestment of distributions. If at such time you should redeem
450 shares (totaling proceeds of $5,400), then 50 shares will not be subject to
the charge because of dividend reinvestment. With respect to the remaining 400
shares, the charge is applied only to the original cost of $10 per share and not
to the increase in NAV to $12 per share. Therefore, $4,000 of the $5,400
redemption proceeds will pay the charge. At the rate of 1.00%, the CDSC would be
$40 for redemptions of Class C shares. In determining whether an
amount is available for redemption without incurring a deferred sales charge,
the purchase payments made for all shares in your account are
aggregated.
Waiver
of Minimum Investment Requirements.
The minimum and subsequent investment requirements for purchases in the Funds
may not apply to:
1.Any
director, officer or other employee* (and their immediate family members**) of
Western & Southern Financial Group, Inc. or any of its affiliates
or any portfolio advisor or service provider to the Trust.
2.Any
employee benefit plan that is provided administrative services by a third-party
administrator that has entered into a special service arrangement with
Touchstone Securities.
Class
R6 shares held on the Funds' records require a $50,000 minimum initial
investment and have a $50 subsequent investment minimum. Financial
intermediaries may set different minimum initial and additional investment
requirements, may impose other restrictions or may charge you fees for their
services.
In
addition, a Fund reserves the right to waive investment minimums in the case of
significant extenuating circumstances.
Waiver
of Class A Sales Charges***.
In addition to the categories of purchasers described in the prospectus for whom
the sales charge on purchases of Class A shares of the Funds may be waived,
Class A shares issued or purchased in the following transactions are not
subject to sales charges (and no concessions are paid by the Distributor on such
purchases):
1.
Purchases into a Fund by any director, officer, employee* (and their immediate
family members**, as defined below), or current separate account client of or
referral by a Sub-Advisor to that particular Fund;
2.
Purchases by any director, officer or other employee* (and their immediate
family members**, as defined below) of Western & Southern Financial
Group or any of its affiliates; and
3.
Purchases by any employees of BNY Mellon who provide services for the Touchstone
Funds, Touchstone Advisors, or Touchstone Securities.
Exemptions
must be qualified in advance by the Distributor. At the option of the Trust, the
front-end sales charge may be included on purchases by such persons in the
future.
*
The term “employee” is deemed to include current and retired
employees.
**
Immediate family members are defined as the parents, mother-in-law or
father-in-law, spouse, brother or sister, brother-in-law or sister-in-law,
son-in-law or daughter-in-law, nephew or niece and children of a registered
representative or employee, and any other individual to whom the registered
representative or employee provides material support.
***
Please see Appendix A – Intermediary-Specific Sales Charge Waivers and
Discounts in the prospectus for a description of variations in sales
charges and waivers for Fund shares purchased through Ameriprise Financial,
Edward D. Jones & Co., Janney Montgomery Scott LLC, Merrill Lynch, Morgan
Stanley, Oppenheimer & Co. Inc., Raymond James and Robert W. Baird & Co.
Incorporated.
Waiver
of Class A Sales Charge for Clients of Financial
Intermediaries.
Touchstone Securities has agreed to waive the Class A sales charge for clients
of financial intermediaries as defined in the Appendix to each Funds’
prospectus. In addition to those firms included in the Appendix to the
Prospectus, the following firms have entered into an agreement with Touchstone
Securities to offer shares to self-directed investment brokerage accounts that
may or may not charge a transaction fee to their customers:
•Merrill
Lynch
•RBC
Capital Markets Corporation
•JP
Morgan Securities
•Morgan
Stanley
•Ameriprise
Financial
•Oppenheimer
& Co. Inc.
•Raymond
James
•Robert
W. Baird & Co. Incorporated
Please
see Appendix A – Intermediary-Specific
Sales Charge Waivers and Discounts in
the prospectus for a description of variations in sales charges and waivers for
Fund shares purchased through Ameriprise Financial, Edward D. Jones & Co.,
Janney Montgomery Scott LLC, Merrill Lynch, Morgan Stanley, Oppenheimer &
Co. Inc., Raymond James and Robert W. Baird & Co. Incorporated.
Waiver
of Large Cap Growth Fund Class A Sales Charge for Former Navellier
Shareholders.
Effective October 6, 2003, sales charges do not apply to Class A
shares of the Large Cap Growth Fund purchased by former shareholders of the
Navellier Performance Large Cap Growth Portfolio who are purchasing additional
shares for their account or opening new accounts in the Large Cap Growth
Fund.
Waiver
of Class A Sales Charge for former Constellation Shareholders.
Shareholders who owned shares of the Trust as of November 17, 2006 who are
purchasing additional shares for their accounts or opening new accounts in any
Touchstone Fund are not subject to the front-end sales charge for purchases of
Class A shares. If you are purchasing shares through a financial
intermediary, you must notify the intermediary at the time of purchase that a
purchase qualifies for a sales load waiver and you may be required to provide
copies of account statements verifying your qualification.
Waiver
of Class A Sales Charge for former Bramwell Shareholders.
Former shareholders of the Bramwell Growth Fund or the Bramwell Focus Fund, each
a series of the Bramwell Funds, Inc., who in those funds' 2006 reorganization
received Class A shares of the Sentinel Capital Growth or Sentinel Growth
Leaders Funds who are purchasing additional shares for their accounts or opening
new accounts in any Touchstone Fund are not subject to the front–end sales
charge for purchases of Class A shares. If you are purchasing shares through a
financial intermediary, you must notify the intermediary at the time of purchase
that a purchase qualifies for a sales load waiver and you may be required to
provide copies of account statements verifying your qualification.
Waiver
of Class A Sales Charge for former Citizens Shareholders.
Former shareholders of the Citizens Funds, who in those funds' 2008
reorganization received shares of a Sentinel Fund who are purchasing additional
shares for their accounts or opening new accounts in any Touchstone Fund are not
subject to the front–end sales charge for purchases of Class A shares. If you
are purchasing shares through a financial intermediary, you must notify the
intermediary at the time of purchase that a purchase qualifies for a sales load
waiver and you may be required to provide copies of account statements verifying
your qualification.
Shareholders
who are eligible for the sales charge waivers listed above may open an account
with the Fund directly to receive the sales charge waiver.
Waiver
of Class A Sales Charge for Former Shareholders of Sentinel Group Funds, Inc.
Shareholders
who received Class A shares of Touchstone Funds pursuant to the October 27, 2017
reorganization of their respective Sentinel Funds and whose Sentinel Fund
account was established with a net asset value purchase privilege may purchase
additional Class A shares of Touchstone Funds at net asset value, provided that
such shareholders provide notice of such eligibility prior to or at the time of
purchase. Shareholders who are eligible for the sales charge waivers listed
above may open an account with the Fund directly to receive the sales charge
waiver.
Class Y
Shares
“Grandfather”
Clause.
New purchases of the Class Y shares are no longer available directly
through Touchstone Securities. Those shareholders who owned Class Y shares
purchased directly through Touchstone Securities prior to February 2, 2009,
or those former Old Mutual shareholders who owned Class Z shares which
became Class Y shares on April 16, 2012, or those former Fifth Third
Mutual Fund Shareholders who owned Institutional Class shares which became
Class Y shares on September 10, 2012 may continue to hold Class Y
shares of the corresponding Fund(s). In addition, those shareholders may
continue to make subsequent purchases into existing accounts of Class Y
shares of the Fund(s) they owned prior to February 2, 2009,
April 16, 2012, and September 10, 2012, respectively.
Purchases
in-Kind.
In limited circumstances and subject to the prior consent of the Fund, the Fund
may accept payment for shares in securities. Shares may be purchased by
tendering payment in-kind in the form of marketable securities, including but
not limited to shares of common stock, provided the acquisition of such
securities is consistent with the applicable Fund’s investment goal and is
otherwise acceptable to the Advisor. Transactions of this type are generally a
taxable transaction. Before
purchasing
shares by tendering payment in-kind, investors are urged and advised to consult
with their own tax advisor regarding the tax consequences of such a
transaction.
Redemptions
in-Kind.
Under unusual circumstances, when the Board deems it in the best interests of a
Fund’s shareholders, the Fund may make payment for shares repurchased or
redeemed in whole or in part in securities of the Fund taken at current value.
Should payment be made in securities, the redeeming shareholder will bear the
market risk until the securities are sold and the redeeming shareholder will
generally incur brokerage costs and other costs in converting such securities to
cash. Portfolio securities that are issued in an in-kind redemption will be
readily marketable. The Trust has filed an irrevocable election with the SEC
under Rule 18f-1 of the 1940 Act wherein the Funds are committed to pay
redemptions in cash, rather than in-kind, to any shareholder of record of a Fund
who redeems during any ninety-day period, the lesser of $250,000 or 1% of a
Fund’s NAV at the beginning of such period. Redemptions in-kind are taxable for
federal income tax purposes in the same manner as redemptions for cash. The
Funds may also use redemption in-kind for certain Fund shares held by
ReFlow.
Undeliverable
Checks.
Dividend and distribution checks issued from non-retirement accounts for less
than $25 will be automatically reinvested in the Fund that pays them. If your
redemption proceeds, dividend, or distribution check is returned as
“undeliverable”, your account will be considered a lost shareholder account,
correspondence will be sent to you requesting that you contact the Fund, and the
outstanding payment will be deposited into an account for potential escheatment
to your state of residence. If you contact the Fund and provide proper
documentation to update the address on the account, the Fund will no longer
consider your account to be a lost shareholder account, and your outstanding
payment will be reissued to your corrected address. Also, if your dividend or
distribution check is returned as "undeliverable", your cash election will be
changed automatically and future dividends will be reinvested in the Fund at the
per share NAV determined as of the payable date.
Uncashed
Checks.
All uncashed checks on your account will appear with your monthly or quarterly
statement for your convenience. If your redemption proceeds, dividend, or
distribution check from a non-retirement account is not cashed within six months
(an “outstanding payment”) and the account remains open, the outstanding payment
on your account will be cancelled and the proceeds will be reinvested in the
Fund at the per share NAV determined as of the date of cancellation, which may
be higher or lower than the NAV at which your shares were initially redeemed. In
addition, if the payment was for dividends or distributions, your cash election
will be automatically changed and future dividends and distributions will be
reinvested in the Fund at the per share NAV determined as of the payable date.
For outstanding payments in retirement accounts, no action will be
taken.
For
redemption checks returned as “undeliverable”, the check will be voided and
deposited into a lost shareholder account for the Fund. If the account holder
contacts the Fund and provides proper documentation to update the address on the
account, a check for the previously voided amount will be re-issued to the
shareholder and sent to the new address of record.
Fund
Shares Purchased by Check.
We may delay the processing and payment of a redemption request for shares you
recently purchased by check until your check clears, which may take up to 15
days. If you need your money sooner, you should purchase shares by bank
wire.
Low
Account Balances
(only applicable for shares held through Touchstone Securities
directly).
If your balance falls below the minimum amount required for your account, based
on actual amounts you have invested (as opposed to a reduction from market
changes), Touchstone Securities may sell your shares and send the proceeds to
you. Touchstone Securities will notify you if your shares are about to be sold
and you will have 30 days to increase your account balance to the minimum
amount.
Facilitated
Transfers.
In the event an existing Touchstone shareholder wishes to move money between
their Touchstone mutual fund account and a money market fund, Touchstone has
partnered with The BNY Mellon Securities Corporation to help facilitate this
type of transaction pursuant to certain limitations. Please contact Touchstone
Shareholder Services at 1.800.543.0407 for more information if you are
interested in pursuing this type of transaction.
A
Fund’s dividends and other distributions are taxable to shareholders (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional shares of the Fund, except in the case of the
Touchstone Core Municipal Bond Fund as discussed below. A dividend or
distribution paid by a Fund has the effect of reducing the NAV per share on the
ex-dividend date by the amount of the dividend or distribution. A dividend or
distribution declared shortly after a purchase of shares by an investor would,
therefore, represent, in substance, a return of capital to the shareholder with
respect to such shares even though it would be subject to federal income
taxes.
For
most shareholders, a statement will be sent to you within 45 days after the end
of each year detailing the federal income tax status of your distributions.
Please see “Federal Income Taxes” below for more information on the federal
income tax consequences of dividends and other distributions made by the
Funds.
The
following discussion summarizes certain U.S. federal income tax considerations
affecting the Funds and their shareholders. This discussion is for general
information only and does not purport to consider all aspects of U.S. federal
income taxation that might be relevant to beneficial owners of shares of the
Funds. Therefore, the summary discussion that follows may not be considered to
be individual tax advice and may not be relied upon by any shareholder. The
summary is based upon current provisions of the Code, applicable U.S. Treasury
Regulations (the “Regulations”), and administrative and judicial interpretations
thereof, all of which are subject to change, which change could be retroactive,
and may affect the conclusions expressed herein. The summary applies only to
beneficial owners of a Fund’s shares in whose hands such shares are capital
assets within the meaning of Section 1221 of the Code, and may not apply to
certain types of beneficial owners of a Fund’s shares, including, but not
limited to insurance companies, tax-exempt organizations, shareholders holding a
Fund’s shares through tax-advantaged accounts (such as an individual retirement
account (an “IRA”), a 401(k) plan account, or other qualified retirement
account), financial institutions, pass-through entities, broker-dealers,
entities that are not organized under the laws of the United States or a
political subdivision thereof, persons who are neither a citizen nor resident of
the United States, shareholders holding a Fund’s shares as part of a hedge,
straddle or conversion transaction, and shareholders who are subject to the
alternative minimum tax. Persons who may be subject to tax in more than one
country should consult the provisions of any applicable tax treaty to determine
the potential tax consequences to them.
No
Fund has requested nor will any Fund request an advance ruling from the IRS as
to the federal income tax matters described below. The IRS could adopt positions
contrary to those discussed below and such positions could be sustained. In
addition, the following discussion applicable to shareholders of a Fund
addresses only some of the federal income tax considerations generally affecting
investments in such Fund.
Shareholders
are advised to consult their own tax advisor with respect to the tax
consequences of the ownership, purchase and disposition of an investment in a
Fund including, but not limited to, the applicability of state, local, foreign,
and other tax laws affecting the particular shareholder and to possible effects
of changes in federal or other tax laws.
General.
For federal income tax purposes, each Fund is treated as a separate corporation.
Each Fund has elected, and intends to continue to qualify for, taxation as a
regulated investment company (a “RIC”) under the Code. By qualifying as a RIC, a
Fund (but not the shareholders) will not be subject to federal income tax on
that portion of its investment company taxable income and realized net capital
gains that it distributes to its shareholders.
Shareholders
should be aware that investments made by a Fund, some of which are described
below, may involve complex tax rules some of which may result in income or
gain recognition by the Fund without the concurrent receipt of cash. Although
each Fund seeks to avoid significant noncash income, such noncash income could
be recognized by a Fund, in which case it may distribute cash derived from other
sources in order to meet the minimum distribution requirements described below.
Cash to make the required minimum distributions may be obtained from sales
proceeds of securities held by a Fund (even if such sales are not advantageous)
or, if permitted by its governing documents and other regulatory restrictions,
through borrowing the amounts required to be distributed.
Qualification
As A Regulated Investment Company.
Qualification as a RIC under the Code requires, among other things, that each
Fund: (a) derive at least 90% of its gross income for each taxable year
from (i) dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies, and (ii) net income from interests
in qualified publicly traded partnerships (together with (i), the “Qualifying
Income Requirement”); (b) diversify its holdings so that, at the close of
each quarter of the taxable year: (i) at least 50% of the value of its
total assets is comprised of cash, cash items (including receivables), U.S.
government securities, securities of other RICs and other securities, with those
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of its total assets and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (ii) not
more than 25% of the value of its assets is invested in the securities (other
than U.S. government securities or securities of other RICs) of any one issuer
or the securities (other than the securities of other RICs) of two or more
issuers controlled by it and engaged in the same, similar or related trades or
businesses, or the securities of one or more “qualified publicly traded
partnerships” (together with (i) the “Diversification Requirement”); and
(c) distribute for each taxable year at least the sum of (i) 90% of
its investment company taxable income (which includes dividends, taxable
interest, taxable OID income, market discount income, income from securities
lending, net short-term capital gain in excess of net long-
term
capital loss, certain net realized foreign currency exchange gains, and any
other taxable income other than “net capital gain” as defined below and is
reduced by deductible expenses) determined without regard to any deduction for
dividends paid; and (ii) 90% of its tax-exempt interest, if any, net of
certain expenses allocable thereto (“net tax-exempt interest”).
Each
Fund may use “equalization payments” in determining the portion of its net
investment income and net realized capital gains that have been distributed. A
Fund that elects to use equalization payments will allocate a portion of its
investment income and capital gains to the amounts paid in redemption of Fund
shares, and such income and gains will be deemed to have been distributed by the
Fund for purposes of the distribution requirements described above. This may
have the effect of reducing the amount of income and gains that the Fund is
required to distribute to shareholders in order for the fund to avoid federal
income tax and excise tax and also may defer the recognition of taxable income
by shareholders. This process does not affect the tax treatment of redeeming
shareholders and, since the amount of any undistributed income and/or gains will
be reflected in the value of the Fund’s shares, the total return on a
shareholder’s investment will not be reduced as a result of the Fund’s
distribution policy. The IRS has not published any guidance concerning the
methods to be used in allocating investment income and capital gain to
redemptions of shares. In the event that the IRS determines that a Fund is using
an improper method of allocation and has under-distributed its net investment
income or net realized capital gains for any taxable year, such Fund may be
liable for additional federal income or excise tax or may jeopardize its
treatment as a RIC.
The
U.S. Treasury Department is authorized to promulgate regulations under which
gains from foreign currencies (and options, futures, and forward contracts on
foreign currency) would constitute qualifying income for purposes of the
Qualifying Income Requirement only if such gains are directly related to the
principal business of a Fund of investing in stock or securities or options and
futures with respect to stock or securities. To date, the U.S. Treasury
Department has not issued such regulations.
As
a RIC, a Fund generally will not be subject to U.S. federal income tax on the
portion of its income and capital gains that it distributes to its shareholders
in any taxable year for which it distributes, in compliance with the Code’s
timing and other requirements at least the sum of 90% of its investment company
taxable income (determined without regard to the deduction for dividends paid)
and 90% of its net tax-exempt interest. Each Fund may retain for investment all
or a portion of its net capital gain (i.e.,
the excess of its net long-term capital gain over its net short-term capital
loss). If a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, it may designate the retained
amount as undistributed net capital gain in a notice to its shareholders, who
will be (i) required to include in income for federal income tax purposes,
as long-term capital gain, their shares of such undistributed amount; and
(ii) entitled to credit their proportionate shares of tax paid by such Fund
against their federal income tax liabilities, if any, and to claim refunds to
the extent the credit exceeds such liabilities. For federal income tax purposes,
the tax basis of the shares owned by a shareholder of a Fund will be increased
by the amount of undistributed net capital gain included in the shareholder’s
gross income and decreased by the federal income tax paid by such Fund on that
amount of capital gain.
The
Qualifying Income Requirement and Diversification Requirement that must be met
under the Code in order for a Fund to qualify as a RIC, as described above, may
limit the extent to which it will be able to engage in derivative transactions.
Rules governing the federal income tax aspects of derivatives, including
swap agreements, are not entirely clear in certain respects, particularly in
light of two IRS revenue rulings issued in 2006. Revenue Ruling 2006-1 held that
income from a derivative contract with respect to a commodity index is not
qualifying income for a RIC. Subsequently, the IRS issued Revenue Ruling 2006-31
in which it stated that the holding in Revenue Ruling 2006-1 “was not intended
to preclude a conclusion that the income from certain instruments (such as
certain structured notes) that create a commodity exposure for the holder is
qualifying income.” Accordingly, the Qualifying Income Requirement may limit
each Fund’s ability to invest in commodity-related derivative transactions and
other derivative transactions. Each Fund will account for any investments in
commodity derivative transactions in a manner it deems to be appropriate; the
IRS, however, might not accept such treatment. If the IRS did not accept such
treatment, the status of such Fund as a RIC might be jeopardized.
In
general, for purposes of the Qualifying Income Requirement described above,
income derived from a partnership is treated as qualifying income only to the
extent such income is attributable to items of income of the partnership which
would be qualifying income if realized directly by the RIC. However, all of the
net income of a RIC derived from an interest in a qualified publicly traded
partnership (defined as a partnership (x) the interests in which are traded
on an established securities market or are readily tradable on a secondary
market or the substantial equivalent thereof, and (y) that meets certain
qualifying income requirements but derives less than 90% of its income from the
qualifying income described in clause (i) of the Qualifying Income
Requirement described above) will be treated as qualifying income. In general,
such entities will be treated as partnerships for federal income tax purposes if
they meet the passive income requirement under Section 7704(c)(2) of
the Code. 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.
For
purposes of the Diversification Requirement described above, the term
“outstanding voting securities of such issuer” will include the equity
securities of a qualified publicly traded partnership.
If
a Fund fails to satisfy the Qualifying Income Requirement or the Diversification
Requirement in any taxable year, such Fund 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. Additionally, relief is provided for certain de minimis failures
to satisfy the Diversification Requirements where the Fund corrects the failure
within a specified period of time. If the applicable relief provisions are not
available or cannot be met, such Fund will fail to qualify as a RIC and will be
subject to federal income tax in the same manner as an ordinary corporation at a
tax rate of 21% and all distributions from earnings and profits (as determined
under U.S. federal income tax principles) to its shareholders will be taxable as
ordinary dividend income eligible for the dividends-received deduction for
corporate shareholders and for qualified dividend income treatment for
non-corporate shareholders.
Excise
Tax.
If a Fund fails to distribute by December 31 of each calendar year an
amount equal to the sum of (1) at least 98% of its taxable ordinary income
(excluding capital gains and losses) for such year, (2) at least 98.2% of
the excess of its capital gains over its capital losses (as adjusted for certain
ordinary losses) for the twelve month period ending on October 31 of such
year, and (3) all taxable ordinary income and the excess of capital gains
over capital losses for the prior year that were not distributed during such
year and on which it did not pay federal income tax, such Fund will be subject
to a nondeductible 4% excise tax (the “Excise Tax”) on the undistributed
amounts. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by a Fund in October, November, or
December of that year to shareholders of record on a date in such month and
paid by it during January of the following year. Such distributions will be
taxable to shareholders (other than those not subject to federal income tax) in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. Each Fund generally
intends to actually distribute or be deemed to have distributed substantially
all of its net income and gain, if any, by the end of each calendar year in
compliance with these requirements so that it will generally not be required to
pay the Excise Tax. A Fund may in certain circumstances be required to liquidate
its investments in order to make sufficient distributions to avoid the Excise
Tax liability at a time when its Advisor might not otherwise have chosen to do
so. Liquidation of investments in such circumstances may affect the ability of a
Fund to satisfy the requirements for qualification as a RIC. However, no
assurances can be given that a Fund will not be subject to the Excise Tax and,
in fact, in certain instances if warranted, a Fund may choose to pay the Excise
Tax as opposed to making an additional distribution.
Capital
Loss Carryforwards. For
capital losses realized with respect to a tax year of a Fund that exceeds the
Fund's capital gains for such year, the Fund may carry such excess capital
losses forward indefinitely. The excess of the Fund’s net short–term capital
losses over its net long–term capital gain is treated as short–term capital
losses arising on the first day of the Fund’s next taxable year and the excess
of the Fund’s net long–term capital losses over its net short–term capital gain
is treated as long–term capital losses arising on the first day of the Fund’s
next taxable year. If carried forward capital losses offset future capital
gains, such future capital gains are not subject to Fund–level federal income
taxation, regardless of whether they are distributed to shareholders. The Fund
cannot carry back or carry forward any net operating losses.
Original
Issue Discount And Market Discount.
A Fund may acquire debt securities that are treated as having OID (generally a
debt obligation with a purchase price less than its principal amount, such as a
zero coupon bond). Generally, a Fund will be required to include the OID in
income over the term of the debt security, even though it will not receive cash
payments for such OID until a later time, usually when the debt security
matures. A Fund may make one or more of the elections applicable to debt
securities having OID which could affect the character and timing of recognition
of income. Inflation-protected bonds generally can be expected to produce OID
income as their principal amounts are adjusted upward for inflation. The IRS may
treat a portion of the OID includible in income with respect to certain
high-yield corporate debt securities as a dividend for federal income tax
purposes.
A
debt security acquired in the secondary market by a Fund may be treated as
having market discount if acquired at a price below redemption value or adjusted
issue price if issued with OID. The Fund’s market discount accrues ratably, on a
daily basis, over the period from the date of acquisition to the date of
maturity even though the Fund will not receive cash. Absent an election by a
Fund 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.
In
addition, pay-in-kind securities will give rise to income which is required to
be distributed and is taxable even though a Fund holding such securities
receives no interest payments in cash on such securities during the
year.
Each
Fund generally will be required to make distributions to shareholders
representing the income accruing on the securities, described above, that is
currently includable in income, even though cash representing such income may
not have been received
by
such Fund. Cash to pay these distributions may be obtained from sales proceeds
of securities held by a Fund (even if such sales are not advantageous) or, if
permitted by such Fund’s governing documents, through borrowing the amounts
required to be distributed. In the event a Fund realizes net capital gains from
such transactions, its shareholders may receive a larger capital gain
distribution, if any, than they would have in the absence of such
transactions.
Options,
Futures, And Forward Contracts.
The writing (selling) and purchasing of options and futures contracts and
entering into forward currency contracts, involves complex rules that will
determine for federal income tax purposes the amount, character and timing of
recognition of the gains and losses a Fund realizes in connection with such
transactions.
Gains
and losses on the sale, lapse, or other termination of options and futures
contracts, options thereon and certain forward contracts (except certain foreign
currency options, forward contracts and futures contracts) will generally be
treated as capital gains and losses. Some regulated futures contracts, certain
foreign currency contracts, and certain non-equity options (such as certain
listed options or options on broad based securities indexes) held by a Fund
(“Section 1256 contracts”), other than contracts on which it has made a
“mixed-straddle election”, will be required to be “marked-to-market” for federal
income tax purposes, that is, treated as having been sold at their market value
on the last day of such Fund’s taxable year. These provisions may require a Fund
to recognize income or gains without a concurrent receipt of cash. Any gain or
loss recognized on actual or deemed sales of Section 1256 contracts will be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss, although certain foreign currency gains and losses from such contracts may
be treated as ordinary income or loss as described below. Transactions that
qualify as designated hedges are exempt from the mark-to-market rule, but may
require a Fund to defer the recognition of losses on futures contracts, foreign
currency contracts and certain options to the extent of any unrecognized gains
on related positions held by it.
The
tax provisions described above applicable to options, futures and forward
contracts may affect the amount, timing, and character of a Fund’s distributions
to its shareholders. For example, the Section 1256 rules described
above may operate to increase the amount a Fund must distribute to satisfy the
minimum distribution requirement for the portion treated as short-term capital
gain which will be taxable to its shareholders as ordinary income, and to
increase the net capital gain it recognizes, without, in either case, increasing
the cash available to it. A Fund may elect to exclude certain transactions from
the operation of Section 1256, although doing so may have the effect of
increasing the relative proportion of net short-term capital gain (taxable as
ordinary income) and thus increasing the amount of dividends it must distribute.
Section 1256 contracts also may be marked-to-market for purposes of the
Excise Tax.
When
a covered call or put option written (sold) by a Fund expires such Fund will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a Fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less than (or exceeds) the premium received when it wrote the option. When a
covered call option written by a Fund is exercised, such Fund will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending upon the holding period of the underlying security and
whether the sum of the option price received upon the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.
Straddles.
Section 1092 deals with the taxation of straddles which also may affect the
taxation of options in which a Fund may invest. Offsetting positions held by a
Fund involving certain derivative instruments, such as options, futures and
forward currency contracts, may be considered, for federal income tax purposes,
to constitute “straddles.” Straddles are defined to include offsetting positions
in actively traded personal property. In certain circumstances, the
rules governing straddles override or modify the provisions of
Section 1256, described above. If a Fund is treated as entering into a
straddle and at least one (but not all) of its positions in derivative contracts
comprising a part of such straddle is governed by Section 1256, then such
straddle could be characterized as a “mixed straddle.” A Fund may make one or
more elections with respect to mixed straddles. Depending on which election is
made, if any, the results with respect to a Fund may differ. Generally, to the
extent the straddle rules apply to positions established by a Fund, losses
realized by it may be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle rules, short-term
capital loss on straddle positions may be characterized as long-term capital
loss, and long-term capital gain may be characterized as short-term capital
gain. In addition, the existence of a straddle may affect the holding period of
the offsetting positions and cause such sales to be subject to the “wash sale”
and “short sale” rules. As a result, the straddle rules could cause
distributions that would otherwise constitute “qualified dividend income” to
fail to satisfy the applicable holding period requirements, described below, and
therefore to be taxed as ordinary income. Further, a Fund may be required to
capitalize, rather than deduct currently, any interest expense and carrying
charges applicable to a position that is part of a straddle. Because the
application of the straddle rules may affect the character and timing of
gains and losses from affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to the situation where a Fund had not engaged in such
transactions.
In
circumstances where a Fund has invested in certain pass-through entities, the
amount of long-term capital gain that it may recognize from certain derivative
transactions with respect to interests in such pass-through entities is limited
under the Code’s constructive ownership rules. The amount of long-term capital
gain is limited to the amount of such gain a Fund would have had if it directly
invested in the pass-through entity during the term of the derivative contract.
Any gain in excess of this amount is treated as ordinary income. An interest
charge is imposed on the amount of gain that is treated as ordinary
income.
Swaps
And Derivatives.
As a result of entering into swap or derivative agreements, a Fund may make or
receive periodic net payments. A Fund may also make or receive a payment when a
swap or derivative is terminated prior to maturity through an assignment of the
swap or derivative or other closing transaction. Periodic net payments will
generally constitute ordinary income or deductions, while termination of a swap
or derivative will generally result in capital gain or loss (which will be a
long-term capital gain or loss if the Fund has been a party to a swap or
derivative for more than one year). With respect to certain types of swaps or
derivatives, a Fund may be required to currently recognize income or loss with
respect to future payments on such swaps or derivatives or may elect under
certain circumstances to mark such swaps or derivatives to market annually for
tax purposes as ordinary income or loss.
Rules governing
the tax aspects of swap or derivative agreements are not entirely clear in
certain respects, in particular whether income generated is Qualifying Income.
Accordingly, while each Fund intends to account for such transactions in a
manner it deems appropriate, the IRS might not accept such treatment. If the IRS
did not accept such treatment, the status of the Fund as a RIC might be
adversely affected. The Funds intend to monitor developments in this area.
Certain requirements that must be met under the Code in order for each Fund to
qualify as a RIC may limit the extent to which a Fund will be able to engage in
swap agreements and certain derivatives.
Constructive
Sales.
Certain rules may affect the timing and character of gain if a Fund engages
in transactions that reduce or eliminate its risk of loss with respect to
appreciated financial positions. If a Fund enters into certain transactions
(including a short sale, an offsetting notional principal contract, a futures or
forward contract, or other transactions identified in U.S. Treasury regulations)
in property while holding an appreciated financial position in substantially
identical property, it will be treated as if it had sold and immediately
repurchased the appreciated financial position and will be taxed on any gain
(but not loss) from the constructive sale. The character of gain from a
constructive sale will depend upon a Fund’s holding period in the appreciated
financial position. Loss from a constructive sale would be recognized when the
position was subsequently disposed of, and its character would depend on a
Fund’s holding period and the application of various loss deferral provisions of
the Code.
In
addition, if the appreciated financial position is itself a short sale,
acquisition of the underlying property or substantially identical property by a
Fund will be deemed a constructive sale. The foregoing will not apply, however,
to a Fund’s transaction during any taxable year that otherwise would be treated
as a constructive sale if the transaction is closed within 30 days after the end
of that year and such Fund holds the appreciated financial position unhedged for
60 days after that closing (i.e., at no time during that 60-day period is such
Fund’s risk of loss regarding the position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).
Wash
Sales.
A Fund may in certain circumstances be impacted by special rules relating
to “wash sales.” In general, the wash sale rules prevent the recognition of a
loss by a Fund from the disposition of stock or securities at a loss in a case
in which identical or substantially identical stock or securities (or an option
to acquire such property) is or has been acquired by it within 30 days before or
30 days after the sale.
Short
Sales.
A Fund may make short sales of securities. Short sales may increase the amount
of short-term capital gain realized by a Fund, which is taxed as ordinary income
when distributed to its shareholders. Short sales also may be subject to the
“Constructive Sales” rules, discussed above.
Tax
Credit Bonds.
If a Fund holds (directly or indirectly) one or more “tax credit bonds” (defined
below) on one or more specified dates during a Fund’s taxable year, and it
satisfies the minimum distribution requirement, it may elect for U.S. federal
income tax purposes to pass through to shareholders tax credits otherwise
allowable to it for that year with respect to such tax credit bonds. A tax
credit bond is defined in the Code as a “qualified tax credit bond” (which
includes a qualified forestry conservation bond, a new clean renewable energy
bond, a qualified energy conservation bond, or a qualified zone academy bond,
each of which must meet certain requirements specified in the Code), a “build
America bond” (which includes certain qualified bonds issued before
January 1, 2011) or certain other bonds specified in the Code. New tax
credit bonds may not be issued after December 31, 2017. If a Fund were to make
an election, a shareholder of such Fund would be required to include in gross
income an amount equal to such shareholder’s proportionate share of the interest
income attributable to such credits and
would
be entitled to claim as a tax credit an amount equal to a proportionate share of
such credits. Certain limitations may apply on the extent to which the credit
may be claimed.
Other
Regulated Investment Companies.
Generally, the character of the income or capital gains that a Fund receives
from another investment company will pass through to the Fund’s shareholders as
long as the Fund and the other investment company each qualify as RICs under the
Code. However, to the extent that another investment company that qualifies as a
RIC realizes net losses on its investments for a given taxable year, a Fund will
not be able to recognize its share of those losses until it disposes of shares
of such investment company. Moreover, even when a Fund does make such a
disposition, a portion of its loss may be recognized as a long-term capital
loss.
As
a result of the foregoing rules, and certain other special rules, it is possible
that the amounts of net investment income and net capital gains that a Fund will
be required to distribute to shareholders will be greater than such amounts
would have been had the Fund invested directly in the securities held by the
investment companies in which it invests, rather than investing in shares of the
investment companies. For similar reasons, the character of distributions from a
Fund (e.g., long-term capital gain, qualified dividend income, etc.) will
not necessarily be the same as it would have been had the Fund invested directly
in the securities held by the investment companies in which it
invests.
Passive
Foreign Investment Companies.
A Fund may invest in a non-U.S. corporation, which could be treated as a passive
foreign investment company (a “PFIC”) or become a PFIC under the Code. A PFIC is
generally defined as a foreign corporation that meets either of the following
tests: (1) at least 75% of its gross income for its taxable year is income
from passive sources (such as interest, dividends, certain rents and royalties,
or capital gains); or (2) an average of at least 50% of its assets produce,
or are held for the production of, such passive income. If a Fund acquires any
equity interest in a PFIC, such Fund could be subject to federal income tax and
interest charges on “excess distributions” received with respect to such PFIC
stock or on any gain from the sale of such PFIC stock (collectively “PFIC
income”), even if such Fund distributes the PFIC income as a taxable dividend to
its shareholders. The balance of the PFIC income will be included in such Fund’s
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders. A Fund’s
distributions of PFIC income will be taxable as ordinary income even though,
absent the application of the PFIC rules, some portion of the distributions may
have been classified as capital gain.
A
Fund will not be permitted to pass through to its shareholders any credit or
deduction for taxes and interest charges incurred with respect to a PFIC.
Payment of this tax would therefore reduce a Fund’s economic return from its
investment in PFIC shares. To the extent a Fund invests in a PFIC, it may elect
to treat the PFIC as a “qualified electing fund” (“QEF”), then instead of the
tax and interest obligation described above on excess distributions, such Fund
would be required to include in income each taxable year its pro rata share of
the QEF’s annual ordinary earnings and net capital gain. As a result of a QEF
election, a Fund would likely have to distribute to its shareholders an amount
equal to the QEF’s annual ordinary earnings and net capital gain to satisfy the
Code’s minimum distribution requirement described herein and avoid imposition of
the Excise Tax, even if the QEF did not distribute those earnings and gain to
such Fund. In most instances it will be very difficult, if not impossible, to
make this election because of certain requirements in making the
election.
A
Fund may elect to “mark-to-market” its stock in any PFIC. “Marking-to-market,”
in this context, means including in ordinary income each taxable year the
excess, if any, of the fair market value of the PFIC stock over such Fund’s
adjusted basis therein as of the end of that year. Pursuant to the election, a
Fund also may deduct (as an ordinary, not capital, loss) the excess, if any, of
its adjusted basis in the PFIC stock over the fair market value thereof as of
the taxable year-end, but only to the extent of any net mark-to-market gains
with respect to that stock it included in income for prior taxable years under
the election. A Fund’s adjusted basis in its PFIC stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder. In either case, a Fund may be required to recognize taxable income
or gain without the concurrent receipt of cash.
Foreign
Currency Transactions.
Foreign currency gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt instruments, certain
options, futures contracts, forward contracts, and similar instruments relating
to foreign currency, foreign currencies, and foreign currency-denominated
payables and receivables are subject to Section 988 of the Code, which
causes such gains and losses to be treated as ordinary income or loss and may
affect the amount and timing of recognition of such Fund’s income. In some cases
elections may be available that would alter this treatment, but such elections
could be detrimental to a Fund by creating current recognition of income without
the concurrent recognition of cash. If a foreign currency loss treated as an
ordinary loss under Section 988 were to exceed a Fund’s investment company
taxable income (computed without regard to such loss) for a taxable year the
resulting loss would not be deductible by it or its shareholders in future
years. The foreign currency income or loss will also increase or decrease a
Fund’s investment company income distributable to its shareholders.
Foreign
Taxation.
Income received by a Fund from sources within foreign countries may be subject
to foreign withholding and other taxes. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. If more than
50% of a Fund’s total assets at the close of any taxable year consist of stock
or securities of foreign corporations, or if a Fund is a qualified fund-of-funds
(i.e., a RIC that invests at least 50% of its total assets in other RICs at the
close of each quarter of its taxable year), and the Fund meets the distribution
requirements described above, such Fund may file an election (the “pass-through
election”) with the IRS pursuant to which shareholders of the Fund would be
required to (i) include in gross income (in addition to taxable dividends
actually received) their pro rata shares of foreign income taxes paid by the
Fund, or in the case of a qualified fund of funds, such taxes paid by an
underlying fund that has made the pass-through election, even though not
actually received by such shareholders; and (ii) treat such respective pro
rata portions as foreign income taxes paid by them. Each Fund will furnish its
shareholders with a written statement providing the amount of foreign taxes paid
by the Fund that will “pass-through” for the year, if any.
Generally,
a credit for foreign taxes is subject to the limitation that it may not exceed
the shareholder’s U.S. tax attributable to his or her total foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of a Fund’s income will flow through to shareholders. The limitation on
the foreign tax credit is applied separately to foreign source passive income,
and to certain other types of income. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by a Fund. Various limitations, including a minimum holding period
requirement, apply to limit the credit and deduction for foreign taxes for
purposes of regular federal income tax and alternative minimum tax.
REITs.
A Fund may invest in REITs. Investments in REIT equity securities may
require a Fund to accrue and distribute taxable income without the concurrent
receipt of cash. To generate sufficient cash to make the requisite
distributions, a Fund 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 Fund’s investments in REIT equity securities may at
other times result in its receipt of cash in excess of the REIT’s earnings; if
such Fund distributes these amounts, these distributions could constitute a
return of capital to its shareholders for federal income tax purposes.
For
taxable years beginning after December 31, 2017 and before January 1, 2026,
individuals, trusts, and estates owning REIT shares are eligible for a 20%
federal tax deduction for qualified REIT dividends (i.e., REIT dividends other
than capital gain dividends and portions of REIT dividends designated as
qualified dividend income). A Fund that receives qualified REIT dividends may
elect to pass the special character of this income through to its shareholders.
To be eligible to treat distributions from a Fund as qualified REIT dividends, a
shareholder must hold shares of the Fund for more than 45 days during the 91-day
period beginning on the date that is 45 days before the date on which the shares
become ex dividend with respect to such dividend and the shareholder must not be
under an obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property. If a Fund does not elect to pass the special character of this income
through to shareholders or if a shareholder does not satisfy the above holding
period requirements, the shareholder will not be entitled to the 20% deduction
for the shareholder's share of the Fund's qualified REIT dividend income) while
direct investors in REITs may be entitled to the deduction.
A
Fund may invest in REITs that hold residual interests in REMICs or taxable
mortgage pools ("TMPs"), or such REITs may themselves constitute
TMPs. Under an IRS notice, and U.S. Treasury regulations that have yet to
be issued but may apply retroactively, a portion of a Fund’s income from a REIT
that is attributable to the REIT’s residual interest in a REMIC or a TMP
(referred to in the Code as an “excess inclusion”) will be subject to federal
income tax in all events. This notice also provides, and the regulations
are expected to provide, that excess inclusion income of a RIC, such as the
Funds, will be allocated to shareholders of the RIC in proportion to the
dividends received by such shareholders, with the same consequences as if the
shareholders held the related REMIC residual interest or invested in the TMP
directly. Tax exempt-shareholders, including a qualified pension plan, an
individual retirement account, a 401(k) plan, a Keogh plan and other tax-exempt
entities should consider this before investing in a Fund. See “Tax-Exempt
Shareholders.”
MLPs.
A Fund may invest to a limited degree in MLPs that are treated as qualified
publicly traded partnerships for federal income tax purposes. Net income derived
from an interest in a qualified publicly traded partnership is included in the
sources of income that satisfy the Qualifying Income Requirement. However, under
the Diversification Requirement, no more than 25% of the value of a RIC’s total
assets at the end of each fiscal quarter may be invested in securities of
qualified publicly traded partnerships. If an MLP in which a Fund invests is
taxed as a partnership for federal income tax purposes, the Fund will be taxable
on its allocable share of the MLP’s income regardless of whether the Fund
receives any distribution from the MLP. Thus, the Fund may be required to sell
other securities in order to satisfy the distribution requirements to qualify as
a RIC and to avoid federal income tax and the Excise Tax. Distributions to a
Fund from an MLP that is taxed as a partnership for federal income tax purposes
will constitute a return of capital to the extent of the Fund’s basis in its
interest in the MLP. If a Fund’s basis is reduced to zero, distributions will
generally constitute capital gain for federal income tax purposes.
For
taxable years beginning after December 31, 2017 and before January 1, 2026,
individuals, trusts and estates are eligible for a 20% federal income tax
deduction for certain income from investments in MLPs that is included in the
"combined qualified business income amount." The Code currently does not contain
a provision permitting a RIC to pass the special character of this income
through to its shareholders. As a result, direct investors in MLPs may be
entitled to this deduction while investors that invest in a Fund that invests in
MLPs will not.
Distributions.
Distributions paid out of a Fund’s current and accumulated earnings and profits
(as determined at the end of the year), whether reinvested in additional shares
or paid in cash, are generally taxable (except in the case of the Touchstone
Core Municipal Bond Fund as discussed below) and must be reported by each
shareholder who is required to file a federal income tax return. Distributions
in excess of a Fund’s current and accumulated earnings and profits, as computed
for federal income tax purposes, will first be treated as a return of capital up
to the amount of a shareholder’s tax basis in his or her Fund shares and then as
capital gain.
For
federal income tax purposes, distributions of net investment income are
generally taxable as ordinary income, and distributions of gains from the sale
of investments that a Fund owned (or is treated as owning) for one year or less
will be taxable as ordinary income. Distributions designated by a Fund as
“capital gain dividends” (distributions from the excess of net long-term capital
gain over net short-term capital losses) will be taxable to shareholders as
long-term capital gain regardless of the length of time they have held their
shares of such Fund. Such dividends do not qualify as dividends for purposes of
the dividends received deduction or for qualified dividend income purposes as
described below.
Distributions
of “qualified dividend income” received by non-corporate shareholders of a Fund
may be eligible for the long-term capital gain rate. A Fund’s distribution will
be treated as qualified dividend income and therefore eligible for the long-term
capital gain rate to the extent the Fund receives dividend income from taxable
domestic corporations and certain qualified foreign corporations, provided that
certain holding period and other requirements are met. A corporate shareholder
of a Fund may be eligible for the dividends received deduction on such Fund’s
distributions attributable to dividends received by such Fund from domestic
corporations, which, if received directly by the corporate shareholder, would
qualify for such a deduction. For eligible corporate shareholders, the dividends
received deduction may be subject to certain reductions, and a distribution by a
Fund attributable to dividends of a domestic corporation will be eligible for
the deduction only if certain holding period and other requirements are
met.
Shareholders
may also be subject to a 3.8% Medicare contribution tax on net investment income
including interest (excluding tax-exempt interest), dividends, and capital gains
of U.S. individuals with income exceeding $200,000 ($250,000 if married and
filing jointly) and of estates and trusts.
Touchstone
Core Municipal Bond Fund expects to qualify to pay “exempt-interest dividends,”
as defined in the Code. To qualify to pay exempt-interest dividends, the Fund
must, at the close of each quarter of its taxable year, have at least 50% of the
value of its total assets invested in municipal securities, the interest on
which is excluded from gross income under Section 103(a) of the Code. If the
Fund satisfies the applicable requirements, dividends paid by the Fund that are
attributable to tax-exempt interest on municipal securities and reported in a
written statement by the fund as exempt-interest dividends to its shareholders
may be treated by shareholders as items of interest excludable from their gross
income under Section 103(a) of the Code.
Although
all or a substantial portion of the dividends paid by the Touchstone Core
Municipal Bond Fund may be excluded by the Fund’s shareholders from their gross
income for federal income tax purposes, the Fund may purchase specified private
activity bonds, the interest from which (including the Fund’s distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax on individuals. All exempt-interest dividends
from the Fund, whether or not attributable to private activity bond interest,
will be taken into account in determining the extent to which a shareholder’s
Social Security or certain railroad retirement benefits are
taxable.
Each
Fund will furnish a statement to shareholders providing the federal income tax
status of its dividends and distributions including the portion of such
dividends, if any, that qualifies as long-term capital gain.
Different
tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions, and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans.
Shareholders
are advised to consult their own tax advisors for more information.
Purchases
of Fund Shares.
Prior to purchasing shares in a Fund, the impact of dividends or distributions
which are expected to be or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase
of shares of a Fund prior to the record date will have the effect of reducing
the per share NAV by the per share amount of the dividend or distribution, and
to the extent the distribution consists of the Fund’s taxable income, the
purchasing shareholder will be taxed on the taxable portion of the dividend or
distribution received even though some or all of the amount distributed is
effectively a return of capital.
Sales,
Exchanges or Redemptions.
Upon the disposition of shares of a Fund (whether by redemption, sale or
exchange), a shareholder may realize a capital gain or loss. Such capital gain
or loss will be long-term or short-term depending upon the shareholder’s holding
period for the shares. The capital gain will be long-term if the shares were
held for more than 12 months and short-term if held for 12 months or less. If a
shareholder sells or exchanges Fund shares within 90 days of having acquired
such shares and if, before January 31 of the calendar year following the
calendar year of the sale or exchange, as a result of having initially acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or another Fund, the sales charge previously
incurred in acquiring the Fund’s shares generally shall not be taken into
account (to the extent the previous sales charges do not exceed the reduction in
sales charges on the new purchase) for the purpose of determining the amount of
gain or loss on the disposition, but generally will be treated as having been
incurred in the new purchase. Any loss realized on a disposition will be
disallowed under the “wash sale” rules to the extent that the shares
disposed of by the shareholder are replaced by the shareholder (including
through dividend reinvestment) within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on a disposition of shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of capital gain dividends received by the
shareholder and disallowed to the extent of any distributions of exempt-interest
dividends received by the shareholder with respect to such shares. Capital
losses are generally deductible only against capital gains except that
individuals may deduct up to $3,000 of capital losses against ordinary
income.
The
3.8% Medicare contribution tax (described above) will apply to gains from the
sale or exchange of a Fund’s shares.
Backup
Withholding.
Each Fund generally is required to withhold, and remit to the U.S. Treasury,
subject to certain exemptions, an amount equal to 24% of all distributions and
redemption proceeds paid or credited to a shareholder of such Fund if
(i) the shareholder fails to furnish such Fund with the correct taxpayer
identification number (“TIN”) certified under penalties of perjury,
(ii) the shareholder fails to provide a certified statement that the
shareholder is not subject to backup withholding, or (iii) the IRS or a
broker has notified such Fund that the number furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding as a result
of failure to report interest or dividend income. If the backup withholding
provisions are applicable, any such distributions or proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Backup withholding is not an additional tax. Any amounts withheld may
be credited against a shareholder’s U.S. federal income tax
liability.
State
And Local Taxes.
State and local laws often differ from federal income tax laws with respect to
the treatment of specific items of income, gain, loss, deduction and
credit.
Non-U.S.
Shareholders.
Distributions made to non-U.S. shareholders attributable to net investment
income generally are subject to U.S. federal income tax withholding at a 30%
rate (or such lower rate provided under an applicable income tax treaty).
However, the Fund will generally not be required to withhold tax on any amounts
paid to a non-U.S. investor with respect to dividends attributable to “qualified
short-term gain” (i.e.,
the excess of net short-term capital gain over net long-term capital loss)
designated as such by the Fund and dividends attributable to certain U.S. source
interest income that would not be subject to federal withholding tax if earned
directly by a non-U.S. person, provided such amounts are properly designated by
the Fund. A Fund may choose not to designate such amounts.
Notwithstanding
the foregoing, if a distribution described above is effectively connected with
the conduct of a trade or business carried on by a non-U.S. shareholder within
the United States (or, if an income tax treaty applies, is attributable to a
permanent establishment in the United States), federal income tax withholding
and exemptions attributable to foreign persons will not apply and such
distribution will be subject to the federal income tax, reporting and
withholding requirements generally applicable to U.S. persons described
above.
Under
U.S. federal tax law, a non-U.S. shareholder is not, in general, subject to
federal income tax or withholding tax on capital gains (and is not allowed a
deduction for losses) realized on the sale of shares of a Fund or on capital
gain dividends, provided that the Fund obtains a properly completed and signed
certificate of foreign status, unless (i) such gains or distributions are
effectively connected with the conduct of a trade or business carried on by the
non-U.S. shareholder within the United States (or, if an income tax treaty
applies, are attributable to a permanent establishment in the United States of
the non-U.S. shareholder); (ii) in the case of an individual non-U.S.
shareholder, the shareholder is present in the United States for a period
or
periods aggregating 183 days or more during the year of the sale and certain
other conditions are met; or (iii) the shares of the Fund constitute U.S.
real property interests ("USRPIs"), as described below.
Special
rules apply to foreign persons who receive distributions from a Fund that are
attributable to gains from USRPIs. The Code defines USRPIs to include
direct holdings of U.S. real property and any interest (other than an interest
solely as a creditor) in a “United States real property holding corporation” or
former United States real property holding corporation. The Code defines a
United States real property holding corporation as any corporation whose USRPIs
make up 50% or more of the fair market value of its USRPIs, its interests in
real property located outside the United States, plus any other assets it uses
in a trade or business. In general, if a Fund is a United States real
property holding corporation (determined without regard to certain exceptions),
distributions by the Fund that are attributable to (a) gains realized on the
disposition of USRPIs by the Fund and (b) distributions received by the Fund
from a lower-tier RIC or REIT that the Fund is required to treat as USRPI gain
in its hands will retain their character as gains realized from USRPIs in the
hands of the foreign persons and will be subject to U.S. federal withholding
tax. In addition, such distributions could result in foreign shareholder being
required to file a U.S. tax return and pay tax on the distributions at regular
U.S. federal income tax rates. The consequences to a non-U.S. shareholder,
including the rate of such withholding and character of such distributions
(e.g., ordinary income or USRPI gain) will vary depending on the extent of the
non-U.S. shareholder's current and past ownership of a Fund.
In
addition, if a Fund is a United States real property holding corporation or
former United States real property holding corporation, the Fund may be required
to withhold U.S. tax upon a redemption of shares by a greater-than-5%
shareholder that is a foreign person, and that shareholder would be required to
file a U.S. income tax return for the year of the disposition of the USRPI and
pay any additional tax due on the gain. However, no such withholding is
generally required with respect to amounts paid in redemption of shares of a
fund if the fund was a domestically controlled qualified investment entity, or,
in certain other limited cases, if a fund (whether or not domestically
controlled) holds substantial investments in RICs that are domestically
controlled qualified investment entities.
Subject
to the additional rules described herein, federal income tax withholding
will apply to distributions attributable to dividends and other investment
income distributed by the Funds. The federal income tax withholding rate may be
reduced (and, in some cases, eliminated) under an applicable tax treaty between
the United States and the non-U.S. shareholder’s country of residence or
incorporation. In order to qualify for treaty benefits, a non-U.S. shareholder
must comply with applicable certification requirements relating to its foreign
status (generally by providing a Fund with a properly completed
Form W-8BEN).
Sections
1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder
(collectively, the "Foreign Account Tax Compliance Act" or "FATCA") generally
requires a Fund to obtain information sufficient to identify the status of each
of its shareholders. If a shareholder fails to provide this information or
otherwise fails to comply with FATCA, a Fund may be required to withhold under
FATCA at a rate of 30% with respect to that shareholder on Fund dividends. A
Fund may disclose the information that it receives from (or concerning) its
shareholders to the IRS, non-U.S. taxing authorities or other parties as
necessary to comply with FATCA, related intergovernmental agreements or other
applicable law or regulation. Each investor is urged to consult its tax advisor
regarding the applicability of FATCA and any other reporting requirements with
respect to the investor’s own situation, including investments through an
intermediary.
Foreign
Bank
And
Financial
Accounts
And
Foreign
Financial Assets
Reporting
Requirements.
A shareholder that owns directly or indirectly more than 50% by vote or value of
a Fund, is urged and advised to consult its own tax advisor regarding its filing
obligations with respect to FinCen Form 114, Report of Foreign Bank and
Financial Accounts.
Tax-Exempt
Shareholders.
A tax-exempt shareholder could realize unrelated business taxable income
(“UBTI”) by virtue of its investment in a Fund if shares in the Fund constitute
debt financed property in the hands of the tax-exempt shareholder within the
meaning of Code Section 514(b).
It
is possible that a tax-exempt shareholder of a Fund will also recognize UBTI if
such Fund recognizes “excess inclusion income” (as described above) derived from
direct or indirect investments in REMIC residual interests or TMPs. Furthermore,
any investment in a residual interest of a CMO that has elected to be treated as
a REMIC can create complex tax consequences, especially if a Fund has state or
local governments or other tax-exempt organizations as
shareholders.
In
addition, special tax consequences apply to charitable remainder trusts (“CRTs”)
that invest in RICs that invest directly or indirectly in residual interests in
REMICs or in TMPs.
Tax
Shelter Reporting Regulations.
Under U.S. Treasury regulations, 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. 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 are urged and advised to consult
their own tax advisors to determine the applicability of these regulations in
light of their individual circumstances.
Shareholders
are urged and advised to consult their own tax advisor with respect to the tax
consequences of an investment in a Fund including, but not limited to, the
applicability of state, local, foreign and other tax laws affecting the
particular shareholder and to possible effects of changes in federal or other
tax laws.
Persons
or organizations beneficially owning more than 25% of the outstanding shares of
a Fund are presumed to “control” the Fund. As a result, those persons or
organizations could have the ability to influence an action taken by a Fund if
such action requires a shareholder vote.
As
of September 30, 2022, the name, address and percentage ownership of each entity
or person that owned of record or beneficially 5% or more of the outstanding
shares of any class of a Fund are as follows:
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Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
BALANCED
FUND CLASS A |
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 8.88 |
% |
|
BALANCED
FUND CLASS C |
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 32.70 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 16.18 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 10.30 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 9.66 |
% |
|
|
| AMERICAN
ENTERPRISE INVESTMENTS INC OMNIBUS 707 2ND AVE S MINNEAPOLIS MN
55402-2405 |
| 6.65 |
% |
|
BALANCED
FUND CLASS Y |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 20.64 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DRIVE SAN DIEGO CA 92121-3091 |
| 17.47 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 16.67 |
% |
|
|
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 10.37 |
% |
|
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Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| AMERICAN
ENTERPRISE INVESTMENTS INC OMNIBUS 707 2ND AVE S MINNEAPOLIS MN
55402-2405 |
| 8.33 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 |
| 7.46 |
% |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUND OPERATIONS 211 MAIN ST SAN FRANCISCO CA 94105-1905 |
| 5.65 |
% |
|
BALANCED
FUND CLASS R6 |
| J
P MORGAN SECURITIES LLC OMNIBUS ACCOUNT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMERS 4 CHASE METROTECH CENTER 3RD FLOOR MUTUAL FUND
DEPARTMENT BROOKLYN NY 11245 |
| 98.12 |
% |
|
CORE
MUNICIPAL BOND FUND CLASS A |
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 18.61 |
% |
|
|
| MLPF
& S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND
ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE, FL
32246 |
| 8.19 |
% |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUND OPERATIONS 211 MAIN ST SAN FRANCISCO CA 94105-1905 |
| 5.49 |
% |
|
CORE
MUNICIPAL BOND FUND CLASS C |
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 44.72 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 19.09 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES LLC 499 WASHINGTON BLVD JERSEY CITY, NJ
07310 |
| 13.77 |
% |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUND OPERATIONS 211 MAIN ST SAN FRANCISCO CA 94105-1905 |
| 13.35 |
% |
|
CORE
MUNICIPAL BOND FUND CLASS Y |
| BAND
& CO C/O US BANK NA N. RIVERCENTER DRIVE STE. 302 MILWAUKEE, WI
53212 |
| 24.15 |
% |
* |
|
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 18.91 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 9.09 |
% |
|
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Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| CHARLES
SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND
DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 |
| 8.88 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 8.73 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 8.23 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 |
| 7.30 |
% |
|
CORE
MUNICIPAL BOND FUND INSTITUTIONAL CLASS |
| WESTERN
& SOUTHERN LIFE AND INSURANCE COMPANY 400 BROADWAY MS
80 CINCINNATI OH 45202 |
| 68.29 |
% |
*,
** |
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 31.50 |
% |
|
INTERNATIONAL
EQUITY FUND CLASS A |
| INDEPENDENT
HEALTH ASSOC INC DEFINED BENEFIT PENSION PLAN MARK I JOHNSON &
MICHAEL W CROPP MD TTEES 511 FARBER LAKES DR WILLIAMSVILLE, NY
14221-8272 |
| 6.97 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 5.62 |
% |
|
|
| CHARLES
SCHWAB & CO INC ATTN MUTUAL FUNDS TEAM S 4500 CHERRY CREEK 3 DR
S FL DENVER, CO 80209 |
| 5.25 |
% |
|
INTERNATIONAL
EQUITY FUND
CLASS
C |
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 31.28 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 13.98 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 6.54 |
% |
|
|
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 5.02 |
% |
|
INTERNATIONAL
EQUITY FUND
CLASS
Y |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 41.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 10.32 |
% |
|
|
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 9.09 |
% |
|
|
| CHARLES
SCHWAB CO INC ATTN MUTUAL FUNDS TEAM S 4500 CHERRY CREEK 3 DR S
FL DENVER CO 80209-0000
|
| 5.20 |
% |
|
INTERNATIONAL
EQUITY FUND INSTITUTIONAL CLASS |
| SAXON
& CO. P.O. BOX 94597 CLEVELAND OH 44101 |
| 88.71 |
% |
*,
** |
|
| TD
AMERITRADE INC FOR THE EXCLUSIVE BENEFIT OF OUR CLIENTS PO BOX
2226 OMAHA NE 68103-2226 |
| 5.90 |
% |
|
INTERNATIONAL
GROWTH FUND CLASS A |
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 23.84 |
% |
|
|
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF
ITS CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY
10004-1901 |
| 10.83 |
% |
|
|
| MLPF
& S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND
ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE,FL
32246 |
| 8.17 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 5.94 |
% |
|
INTERNATIONAL
GROWTH FUND CLASS C |
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 11.62 |
% |
|
|
| MID
ATLANTIC TRUST COMPANY FBO THE PAIN CENTER OF JONESBORO RETIRE 1251
WATERFRONT PLACE, SUITE 525 PITTSBURGH, PA 15222 |
| 10.94 |
% |
* |
|
| MID
ATLANTIC TRUST COMPANY FBO ST. BERNARD'S HEALTHCARE 403B RETIR 1251
WATERFRONT PLACE, SUITE 525 PITTSBURGH, PA 15222 |
| 9.36 |
% |
|
|
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 7.31 |
% |
|
|
| MID
ATLANTIC TRUST COMPANY FBO D&H CONTRACTING, INC. 401(K)
PLAN 1251 WATERFRONT PLACE, SUITE 525 PITTSBURGH, PA 15222 |
| 6.88 |
% |
|
|
| MID
ATLANTIC TRUST COMPANY FBO JOHN SHANNON, D.D.S. 401(K) PLAN 1251
WATERFRONT PLACE, SUITE 525 PITTSBURGH, PA 15222 |
| 5.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| MID
ATLANTIC TRUST COMPANY FBO CRAIGHEAD NURSING CENTER 401(K) RET 1251
WATERFRONT PLACE, SUITE 525 PITTSBURGH, PA 15222 |
| 5.24 |
% |
|
INTERNATIONAL
GROWTH FUND CLASS Y |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 13.35 |
% |
|
|
| CHARLES
SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND
DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
| 10.01 |
% |
|
INTERNATIONAL
GROWTH FUND INSTITUTIONAL CLASS |
| CHARLES
SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO, CA
94104 |
| 85.95 |
% |
|
LARGE
CAP FOCUSED FUND CLASS A |
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 |
| 8.99 |
% |
|
LARGE
CAP FOCUSED FUND CLASS C |
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 22.82 |
% |
|
|
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 13.94 |
% |
|
|
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF
ITS CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY
10004-1901 |
| 11.39 |
% |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUND OPERATIONS 211 MAIN ST SAN FRANCISCO CA 94105-1905 |
| 8.95 |
% |
|
|
| LPL
FINANCIAL 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121-3091 |
| 8.01 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 |
| 7.80 |
% |
|
LARGE
CAP FOCUSED FUND CLASS Y |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 22.15 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 13.72 |
% |
|
|
| AMERICAN
ENTERPRISE INVESTMENTS INC OMNIBUS 707 2ND AVE S MINNEAPOLIS MN
55402-2405 |
| 10.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 8.15 |
% |
|
|
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF
ITS CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK NY
10004-1901 |
| 5.65 |
% |
|
|
| MLPF
& S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND
ADMISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE, FL
32246 |
| 5.21 |
% |
|
LARGE
CAP FOCUSED FUND INSTITUTIONAL CLASS |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 38.48 |
% |
|
|
| MARIL
& CO FBO 5A C/O RELIANCE TRUST COMPANY WI ATTN MF 4900 W
BROWN DEER ROAD MILWAUKEE, WI 53223 |
| 28.22 |
% |
|
|
| DCGT
AS TTEE AND/OR CUST FBO PLIC VARIOUS RETIREMENT
PLANS OMNIBUS ATTN NPIO TRADE DESK 711 HIGH STREET DES MOINES,
IA 50392 |
| 11.15 |
% |
|
LARGE
CAP FOCUSED FUND CLASS R6 |
| J
P MORGAN SECURITIES LLC OMNIBUS ACCOUNT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMERS 4 CHASE METROTECH CENTER 3RD FLOOR MUTUAL FUND
DEPARTMENT BROOKLYN NY 11245 |
| 28.30 |
% |
|
|
| OPPENHEIMER
& CO INC. FBO FBO HERBERT A ISAACS IRA PAS 25
SHENANDOAH DEERFIELD IL 60015-4430 |
| 13.80 |
% |
* |
|
| OPPENHEIMER
& CO INC CUSTODIAN FBO BRUCE H HALLETT IRA PAS DIRECTED 2116
SINCLAIR LN PLANO TX 75093 |
| 6.68 |
% |
* |
|
| OPPENHEIMER
& CO INC CUSTODIAN FBO ROBERT A MIDDLETON JR IRA PAS
FLEX 2106 KIRKMAN DR BIRMINGHAM AL 35242 |
| 5.50 |
% |
* |
LARGE
CAP FUND CLASS A |
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF
ITS CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY
10004-1901 |
| 38.49 |
% |
|
|
| MLPF
& S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND
ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE, FL
32246 |
| 11.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DRIVE SAN DIEGO, CA 92121 |
| 7.58 |
% |
|
LARGE
CAP FUND CLASS C |
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 63.60 |
% |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUND OPERATIONS 211 MAIN ST SAN FRANCISCO CA 94105-1905 |
| 8.69 |
% |
|
|
| AMERICAN
ENTERPRISE INVESTMENTS INC 707 2ND AVE S MINNEAPOLIS MN
55402-2405 |
| 6.06 |
% |
|
LARGE
CAP FUND CLASS Y |
| CHARLES
SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO, CA
94104 |
| 12.84 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 10.71 |
% |
|
|
| UBS
WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR
BLVD WEEHAWKEN, NJ 07086 |
| 5.32 |
% |
|
LARGE
CAP FUND INSTITUTIONAL CLASS |
| TLC
HOLDINGS LLC A PARTNERSHIP 1800 BAYBERRY CT STE 301 RICHMOND, VA
23226-3774 |
| 48.99 |
% |
|
|
| STEPHEN
MCCARTHY GODDARD AND CHERYL G GODDARD JTWROS RICHMOND, VA
23226-3774 |
| 15.99 |
% |
* |
|
| SEI
PRIVATE TRUST COMPANY C/O TRUIST ATTN: MUTUAL FUND
ADMINISTRATOR ONE FREEDOM VALLEY DR OAKS, PA 19456 |
| 15.59 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 6.32 |
% |
|
LARGE
COMPANY GROWTH FUND
CLASS
A |
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 21.74 |
% |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUND OPERATIONS 211 MAIN ST SAN FRANCISCO CA 94105-1905 |
| 10.00 |
% |
|
|
| BNYM
I S TRUST CO CUST ROLLOVER IRA PATRICIA WILSON CALIFORNIA, KY
41007-9145 |
| 9.22 |
% |
* |
|
| MOONLIGHT
90 INC 401K KENNETH L WINTER & DONIELLE R WINTER TTEES 325 W
3RD AVE STE 203 ESCONDIDO CA 92025-4140 |
| 5.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
LARGE
COMPANY GROWTH FUND
CLASS
C |
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF ITS
CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY 10004-1901 |
| 54.93 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 17.26 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 6.66 |
% |
|
|
| LEON
M FLESDRAGER 1622 DEERFIELD PT ALPHARETTA GA 30004-8956 |
| 6.47 |
% |
* |
LARGE
COMPANY GROWTH FUND
CLASS
Y |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 35.80 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 25.06 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 13.12 |
% |
|
|
| SEI
PRIVATE TRUST COMPANY C/O MELLON BANK ATTN: MUTUAL FUND
ADMINISTRATOR ONE FREEDOM VALLEY DRIVE OAKS, PA 19456 |
| 8.06 |
% |
|
LARGE
COMPANY GROWTH FUND
INSTITUTIONAL
CLASS |
| CHARLES
SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO, CA
94104 |
| 34.57 |
% |
** |
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 12.81 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 11.74 |
% |
|
|
| CAPINCO C/O
US BANK NA 1555 N RIVER CENTER DR STE 302 MILWAUKEE, WI
53212-3958 |
| 9.85 |
% |
* |
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 7.31 |
% |
|
SMALL
COMPANY FUND CLASS A |
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 11.37 |
% |
|
SMALL
COMPANY FUND CLASS C |
| LPL
FINANCIAL 4701 EXECUTIVE DRIVE SAN DIEGO, CA 92121-3091 |
| 19.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUNDS 211 MAIN STREET SAN FRANCISCO, CA 94105 |
| 12.54 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 12.51 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 11.17 |
% |
|
|
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF ITS
CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY 10004-1901 |
| 11.04 |
% |
|
|
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 7.46 |
% |
|
SMALL
COMPANY FUND CLASS Y |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 15.80 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 12.08 |
% |
|
|
| LPL
FINANCIAL 4707 EXECUTIVE DRIVE SAN DIEGO, CA 92121-3091 |
| 10.71 |
% |
|
|
| CHARLES
SCHWAB CO INC ATTN MUTUAL FUNDS TEAM S 4500 CHERRY CREEK 3 DR S
FL DENVER CO 80209-0000 |
| 10.69 |
% |
|
|
| AMERICAN
ENTERPRISE INVESTMENTS INC OMNIBUS 707 2ND AVE S MINNEAPOLIS MN
55402-2405 |
| 9.85 |
% |
|
|
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF ITS
CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY 10004-1901 |
| 8.76 |
% |
|
|
| NATIONWIDE
TRUST COMPANY FSB C/O IPO PORTFOLIO ACCOUNTING PO BOX
182029 COLUMBUS, OH 43218-2029 |
| 5.17 |
% |
|
SMALL
COMPANY FUND INSTITUTIONAL CLASS |
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 35.69 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 19.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| CHARLES
SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA
94104 |
| 14.06 |
% |
|
|
| HOCO 922
WALNUT ST MAILSTOP TBTS 2 KANSAS CITY, MO 64106 |
| 9.28 |
% |
* |
|
| SAXON
& CO. P.O. BOX 94597 CLEVELAND, OH 44101 |
| 7.16 |
% |
* |
SMALL
COMPANY FUND CLASS R6 |
| DCGT
AS TTEE AND/OR CUST FBO PLIC VARIOUS RETIREMENT
PLANS OMNIBUS ATTN NPIO TRADE DESK 711 HIGH STREET DES MOINES,
IA 50392 |
| 28.39 |
% |
|
|
| EMPOWER
TRUST FBO WESTERN & SOUTHERN FINANCIAL GROUP RETIREMENT 401K
SAVINGS PLAN 8515 E ORCHARD RD 2T2 GREENWOOD VILLAGE CO
80111 |
| 23.07 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 13.79 |
% |
|
|
| 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 |
| 6.22 |
% |
|
VALUE
FUND CLASS A |
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 10.30 |
% |
|
|
| PERSHING
LLC 1 PERSHING PLAZA JERSEY CITY, NJ 07399 |
| 10.07 |
% |
|
|
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 5.43 |
% |
|
VALUE
FUND CLASS C |
| FIRST
CLEARING LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF
CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103-2523 |
| 25.57 |
% |
|
|
| CHARLES
SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL
FUND OPERATIONS 211 MAIN ST SAN FRANCISCO CA 94105-1905 |
| 11.56 |
% |
|
|
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF ITS
CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY 10004-1901 |
| 7.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| RBC
CAPITAL MARKETS LLC MUTUAL FUND OMNIBUS PROCESSING OMNIBUS ATTN
MUTUAL FUND OPS MANAGER 60 SOUTH SIXTH STREET-P08 MINNEAPOLIS MN
55402-4400 |
| 6.58 |
% |
|
|
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 6.08 |
% |
|
|
| RAYMOND
JAMES & ASSOCIATES OMNIBUS FOR MUTUAL FUNDS ATTN: COURTNEY
WALLER 880 CARILLON PKWY ST PETERSBURG FL 33716-1100 |
| 5.15 |
% |
|
VALUE
FUND CLASS Y |
| LPL
FINANCIAL 4701 EXECUTIVE DR SAN DIEGO CA 92121 |
| 21.89 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 15.07 |
% |
|
|
| CHARLES
SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND
DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 |
| 8.56 |
% |
|
|
| EMPOWER
TRUST FBO WESTERN & SOUTHERN FINANCIAL GROUP RETIREMENT 401K
SAVINGS PLAN 8515 E ORCHARD RD 2T2 GREENWOOD VILLAGE CO
80111 |
| 8.33 |
% |
|
|
| CHARLES
SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND
DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 |
| 7.63 |
% |
|
|
| MORGAN
STANLEY SMITH BARNEY LLC FOR THE EXCLUSIVE BENEFIT OF ITS
CUSTOMERS 1 NEW YORK PLAZA FL 12 NEW YORK, NY 10004-1901 |
| 7.36 |
% |
|
VALUE
FUND INSTITUTIONAL CLASS |
| CHARLES
SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO, CA
94104 |
| 21.26 |
% |
|
|
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY, NJ
07310-2010 |
| 17.40 |
% |
|
|
| OLTRUST
& CO. - CASH/CASH P.O. BOX 966 EVANSVILLE |
| 13.62 |
% |
* |
|
| VOYA
INSTITUTIONAL TRUST COMPANY 1 ORANGE WAY WINDSOR CT
06095-4774 |
| 13.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund
Name and Share Class |
| Name and Address |
| Percentage
of Class |
|
|
| TIAA,
FSB CUST/TTEE FBO: RETIREMENT PLANS FOR WHICH TIAA ACTS AS
RECORDKEEPER ATTN: TRUST OPERATIONS 211 NORTH BROADWAY, SUITE
1000 ST. LOUIS, MO 63102-2733 |
| 11.80 |
% |
|
VALUE
FUND CLASS R6 |
| NATIONAL
FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS
DEPARTMENT 4TH FL 499 WASHINGTON BLVD JERSEY CITY NJ
07310-2010 |
| 96.17 |
% |
|
*
Indicates that shares are held beneficially.
**
May be deemed to control a Fund because it owned beneficially more than 25%
of the outstanding shares of a Fund as of September 30, 2022.
As
of September 30, 2022, the Trustees and principal officers of the Trust as
a group owned of record or beneficially less than 1% of any class of each Fund's
outstanding shares.
Brown
Brothers Harriman & Co. (“BBH”), 50 Post Office Square, Boston,
Massachusetts 02110, is the Trust’s custodian. BBH acts as the Trust’s
depository, safe keeps its portfolio securities, collects all income and other
payments with respect thereto, disburses money as instructed and maintains
records in connection with its duties.
On
September 7, 2021, BBH announced to its clients that it had entered into an
agreement to sell its Investor Services business, including its custody,
accounting, fund administration, global markets, securities lending and
technology services, to State Street Bank and Trust Company (“State Street”) and
asked its clients, including the Trust, to consent to the assignment of all
client agreements that are part of the BBH’s Investor Services business to State
Street. The Board approved and the Trust consented to the continuation of the
Custody Agreement with State Street.
K&L
Gates LLP, State Street Financial Center, One Lincoln Street, Boston,
Massachusetts 02111, serves as counsel to the Trust.
The
firm of Ernst & Young LLP, 221 E. 4th Street, #2900, Cincinnati, Ohio
45202, has been selected as the independent registered public accounting firm
for the Trust for the fiscal year ending June 30, 2023. Ernst &
Young LLP will perform an annual audit of the Trust’s financial statements, and
advise the Trust as to certain accounting matters.
Transfer
Agent.
The Trust’s transfer agent is BNY Mellon Investment Servicing (US) Inc. ("BNY
Mellon IS"), 4400 Computer Drive, Westborough, Massachusetts 01581. BNY Mellon
IS maintains the records of each shareholder’s account, answers shareholders’
inquiries concerning their accounts, processes purchases and redemptions of the
Funds’ shares, acts as dividend and distribution disbursing agent and performs
other shareholder servicing functions. For providing transfer agent and
shareholder services to the Trust, BNY Mellon IS receives a monthly per account
fee from each Fund, plus out of-pocket expenses.
The
Funds may also pay a fee to certain servicing organizations (such as
broker-dealers and financial institutions) that provide sub-transfer agency
services. These services include maintaining shareholder records, processing
shareholder transactions and distributing communications to
shareholders.
Sub-Administrative
Agent.
The Advisor provides administrative services to the Trust under an
Administration Agreement and has sub-contracted certain accounting and
administrative services to The Bank of New York Mellon ("BNY Mellon"). The
sub-administrative services sub-contracted to BNY Mellon include accounting and
pricing services, SEC and state security filings, providing executive and
administrative services and providing reports for meetings of the Board. The
Advisor pays BNY Mellon a sub-administrative fee out of its administration
fee.
Set
forth below are the sub-administrative fees paid by the Advisor to BNY Mellon
with respect to each Fund during the fiscal years (or periods) ended June
30.
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Date
of Fiscal Period End |
| Sub-Administration
Fees Paid |
Balanced
Fund |
6/30/2020 |
| $ |
89,485 |
|
6/30/2021 |
| $ |
111,315 |
|
6/30/2022 |
| $ |
194,729 |
|
Core
Municipal Bond Fund |
6/30/2020 |
| $ |
26,531 |
|
6/30/2021 |
| $ |
25,665 |
|
6/30/2022 |
| $ |
28,864 |
|
International
Equity Fund |
6/30/2020 |
| $ |
44,138 |
|
6/30/2021 |
| $ |
39,747 |
|
6/30/2022 |
| $ |
41,064 |
|
International
Growth Fund |
6/30/2020 |
| $ |
43,848 |
|
6/30/2021 |
| $ |
34,500 |
|
6/30/2022 |
| $ |
32,495 |
|
Large
Cap Focused Fund |
6/30/2020 |
| $ |
359,171 |
|
6/30/2021 |
| $ |
400,833 |
|
6/30/2022 |
| $ |
612,426 |
|
Large
Cap Fund |
6/30/2020 |
| $ |
75,544 |
|
6/30/2021 |
| $ |
79,048 |
|
6/30/2022 |
| $ |
85,755 |
|
Large
Company Growth Fund |
6/30/2020 |
| $ |
59,183 |
|
6/30/2021 |
| $ |
65,008 |
|
6/30/2022 |
| $ |
62,809 |
|
Small
Company Fund |
6/30/2020 |
| $ |
199,080 |
|
6/30/2021 |
| $ |
180,854 |
|
6/30/2022 |
| $ |
202,033 |
|
Value
Fund |
6/30/2020 |
| $ |
80,272 |
|
6/30/2021 |
| $ |
77,906 |
|
6/30/2022 |
| $ |
128,395 |
|
The
Funds’ audited financial statements for the fiscal year ended June 30,
2022, including the notes thereto and the reports of Ernst & Young LLP
thereon, included in the annual
report
to shareholders (the “Annual Report”), are hereby incorporated into this SAI by
reference. A copy of the Trust's prospectus and the Annual Report may be
obtained without charge by writing to the Trust at P.O. Box 9878,
Providence, Rhode Island 02940, by calling 1.800.543.0407, or by downloading a
copy at TouchstoneInvestments.com. You may also obtain the annual report or
unaudited semi-annual report, as well as other information about the Trust, from
the EDGAR Database on the SEC’s website at http://www.sec.gov.
DESCRIPTION
OF SECURITIES RATINGS(1)
Moody’s
Investors Service, Inc. (“Moody’s”) and Standard &
Poor’s®
(“S&P”) are private services that provide ratings of the credit quality of
debt obligations. A description of the ratings assigned by Moody’s and
S&P are provided below. These ratings represent the opinions of these
rating services as to the quality of the securities that they undertake to rate.
It should be emphasized, however, that ratings are general and are not absolute
standards of quality. An advisor attempts to discern variations in credit
rankings of the rating services and to anticipate changes in credit ranking.
However, subsequent to purchase by a fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the fund. In that event, an advisor will consider whether it is in
the best interest of a fund to continue to hold the securities.
Moody’s
credit ratings are current opinions of the relative future credit risk of
entities, credit commitments, or debt or debt-like securities. Moody’s defines
credit risk as the risk that an entity may not meet its contractual, financial
obligations as they come due and any estimated financial loss in the event of
default. Credit ratings do not address any other risk, including but not limited
to: liquidity risk, market value risk, or price volatility. Credit ratings are
not statements of current or historical fact. Credit ratings do not constitute
investment or financial advice, and credit ratings are not recommendations to
purchase, sell, or hold particular securities. Credit ratings do not comment on
the suitability of an investment for any particular investor. Moody’s issues its
credit ratings with the expectation and understanding that each investor will
make its own study and evaluation of each security that is under consideration
for purchase, holding, or sale.
An
S&P issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium-term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The opinion reflects S&P’s
view of the obligor’s capacity and willingness to meet its financial commitments
as they come due, and may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event of
default.
(1)
This Appendix A may contain information obtained from third parties, including
ratings from credit ratings agencies such as S&P. Reproduction and
distribution of third party content in any form is prohibited except with the
prior written permission of the related third party. Third party content
providers do not guarantee the accuracy, completeness, timeliness or
availability of any information, including ratings, and are not responsible for
any errors or omissions (negligent or otherwise), regardless of the cause, or
for the results obtained from the use of such content. THIRD PARTY CONTENT
PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED
TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY
DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE,
SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES
(INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY
NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS.
Credit ratings are statements of opinions and are not statements of fact or
recommendations to purchase, hold or sell securities. They do not address the
suitability of securities or the suitability of securities for investment
purposes, and should not be relied on as investment advice. they issue, as well
as structured finance securities backed by receivables or other financial
assets.
Short-Term
Credit Ratings
Moody’s
Moody’s
short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs
or to individual short-term debt instruments. Such obligations generally have an
original maturity not exceeding thirteen months, unless explicitly
noted.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
“P-1”
- Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
“P-2”
- Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
“P-3”
- Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
“NP”
- Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Note:
Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the
senior-most long-term rating of the issuer, its guarantor or
support-provider.
S&P
S&P’s
short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means
obligations with an original maturity of no more than 365 days-including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term rating
addresses the put feature, in addition to the usual long-term
rating.
The
following summarizes the rating categories used by S&P for short-term
issues:
“A-1”
- Obligations are rated in the highest category and indicate that 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”
- Obligations are 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”
- Obligations exhibit 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”
- Obligations are regarded as having 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”
- Obligations are currently vulnerable to nonpayment and are dependent upon
favorable business, financial and economic conditions for the obligor to meet
its financial commitment on the obligation.
“D”
- Obligations are in payment default. The “D” rating category is used when
payments on an obligation are not made on the date due, unless S&P 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 if payments on an obligation are
jeopardized.
Local
Currency and Foreign Currency Risks
- Country risk considerations are a standard part of S&P’s analysis for
credit ratings on any issuer or issue. Currency of repayment is a key factor in
this analysis. An obligor’s capacity to repay foreign currency obligations may
be lower than its capacity to repay obligations in its local currency due to the
sovereign government’s own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.
Long-Term
Credit Ratings
Moody’s
Moody’s
long-term ratings are opinions of the relative credit risk of financial
obligations with an original maturity of one year or more. They address the
possibility that a financial obligation will not be honored as promised. Such
ratings use Moody’s Global Scale and reflect both the likelihood of default and
any financial loss suffered in the event of default.
The
following summarizes the ratings used by Moody’s for long-term
debt:
“Aaa”
- Obligations rated “Aaa” are judged to be of the highest quality, subject to
the lowest level of credit risk.
“Aa”
- Obligations rated “Aa” are judged to be of high quality and are subject to
very low credit risk.
“A”
- Obligations rated “A” are judged to be upper-medium grade and are subject to
low credit risk.
“Baa”
- Obligations rated “Baa” are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative
characteristics.
“Ba”
- Obligations rated “Ba” are judged to be speculative and are subject to
substantial credit risk.
“B”
- Obligations rated “B” are considered speculative and are subject to high
credit risk.
“Caa”
- Obligations rated “Caa” are judged to be of poor standing and are subject to
very high credit risk.
“Ca”
- Obligations rated “Ca” are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
“C”
- Obligations rated “C” are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from “Aa” through “Caa.” The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of that generic rating category.
S&P
Issue
credit ratings are based, in varying degrees, on S&P’s analysis of the
following considerations:
•Likelihood
of payment — capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the
obligation;
•Nature
of and provisions of the obligation;
•Protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors’ rights.
Issue
ratings are an assessment of default risk, but may incorporate an assessment of
relative seniority or ultimate recovery in the event of default. Junior
obligations are typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company
obligations.)
The
following summarizes the ratings used by S&P for long-term
issues:
“AAA”
- An obligation rated “AAA” has the highest rating assigned by S&P. 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 S&P expects
default to be a virtual certainty, regardless of the anticipated time to
default.
“C”
- An obligation rated "C" is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared with obligations that are rated higher.
“D”
- An obligation rated "D" is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the "D" rating category is used when payments on
an obligation are not made on the date due, unless S&P 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. A rating on an
obligation is lowered to "D" if it is subject to a distressed exchange
offer.
Plus
(+) or minus (-) - The ratings from “AA” to “CCC” may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories.
“NR”
- This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.
Local
Currency and Foreign Currency Risks
- Country risk considerations are a standard part of S&P’s analysis for
credit ratings on any issuer or issue. Currency of repayment is a key factor in
this analysis. An obligor’s capacity to repay foreign currency obligations may
be lower than its capacity to repay obligations in its local currency due to the
sovereign government’s own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.
Municipal
Note Ratings
Moody’s
Moody’s
uses three rating categories for short-term municipal obligations that are
considered investment grade. These ratings are designated as Municipal
Investment Grade (“MIG”) and are divided into three levels - “MIG 1” through
“MIG 3”. In addition, those short-term obligations that are of speculative
quality are designated “SG”, or speculative grade. MIG ratings expire at the
maturity of the obligation.
The
following summarizes the ratings used by Moody’s for these short-term
obligations:
“MIG
1” - This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
“MIG
2” - This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
“MIG
3” - This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
“SG”
- This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
In
the case of variable rate demand obligations (“VRDOs”), a two-component rating
is assigned; a long- or short-term debt rating and a demand obligation rating.
The first element represents Moody’s evaluation of risk associated with
scheduled principal and interest payments. The second element represents Moody’s
evaluation of risk associated with the ability to receive purchase price upon
demand (“demand feature”). The second element uses a rating from a variation of
the MIG scale called the Variable Municipal Investment Grade or “VMIG” rating
scale.
When
either the long- or short-term aspect of a VRDO is not rated, that piece is
designated “NR”, e.g.,
“Aaa/NR” or “NR/VMIG 1”.
VMIG
rating expirations are a function of each issue’s specific structural or credit
features.
“VMIG
1” - This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
“VMIG
2” - This designation denotes strong credit quality. Good protection is afforded
by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
“VMIG
3” - This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
“SG”
- This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
S&P
An
S&P U.S. municipal note rating reflects S&P’s opinion about the
liquidity factors and market access risks unique to notes. Notes due in three
years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In
determining which type of rating, if any, to assign, S&P’s analysis will
review the following considerations:
•Amortization
schedule-the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
•Source
of payment-the more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.
Note
rating symbols are as follows:
“SP-1”
- The issuers of these municipal notes exhibit a strong capacity to pay
principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
“SP-2”
- The issuers of these municipal notes exhibit a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
“SP-3”
- The issuers of these municipal notes exhibit speculative capacity to pay
principal and interest.
Barrow,
Hanley, Mewhinney & Strauss, LLC
Proxy
Voting
Barrow
Hanley has accepted responsibility to vote proxies for equity securities for its
clients who have delegated this responsibility to us, and the Firm’s policy is
to vote our clients’ proxies in the best economic interests of our clients, the
beneficial owners of the shares. Barrow Hanley has adopted this Proxy Voting
Policy and maintains written procedures for handling research, voting, reporting
of proxy votes, and making appropriate disclosures about proxy voting on behalf
of our clients.
It
is Barrow Hanley’s policy to vote all clients’ proxies the same based on this
Proxy Voting Policy and Barrow Hanley’s Proxy Voting Guidelines. If or when
additional costs to clients are identified in association with voting the
client’s proxy, Barrow Hanley will determine whether such costs exceed the
expected economic benefit of voting the proxy and may determine that abstaining
from voting is the better action for ERISA Plan clients. However, if/when such
voting costs are borne by Barrow Hanley and not by the client, all proxies will
be voted for all clients. Barrow Hanley’s Proxy Voting Guidelines provide a
framework for assessing proxy proposals. Disclosure information about the Firm’s
Proxy Voting is included in Barrow Hanley’s Form ADV Part 2.
To
assist in the proxy voting process, at its own expense Barrow Hanley retains the
services of Glass Lewis & Co. Glass Lewis provides:
•Research
on corporate governance, financial statements, business, legal and accounting
risks;
•Proxy
voting recommendations, including ESG voting guidelines;
•Portfolio
accounting and reconciliation of shareholdings for voting purposes;
•Proxy
voting execution, record keeping, and reporting services.
Proxy
Oversight Committee, Proxy Coordinators, and Proxy Voting Committee
•Barrow
Hanley’s Proxy Oversight Committee is responsible for implementing and
monitoring Barrow Hanley’s proxy voting policy, procedures, disclosures, and
recordkeeping, including outlining our voting guidelines in our procedures.
•The
Proxy Oversight Committee conducts periodic reviews to monitor and ensure that
the Firm’s policy is observed, implemented properly, and amended or updated, as
appropriate.
•The
Proxy Oversight Committee is made up of the CCO, the Responsible Investing
Committee Lead, the Head of Investment Operations, the ESG Research Coordinator,
and an At-Large Portfolio Manager.
•Proxy
Coordinators are assigned from the Investment Operations
department.
•Proxy
Coordinators review and organize the data and recommendations provided by the
proxy service.
•Proxy
Coordinators are responsible for ensuring that the proxy ballots are routed to
the appropriate research analyst based on industry sector coverage.Research
Analysts review and evaluate proxy proposals and make recommendations to the
Proxy Voting Committee to ensure that votes are consistent with the Firm’s
analysis and are in the best economic interest of the shareholders, our clients.
•Equity
Portfolio Managers are members of the Proxy Voting Committee.
•Equity
Portfolio Managers vote proxy proposals based on shareholders’ economic
interests utilizing the Firm’s Proxy Voting Guidelines, internal research
recommendations, and the research from Glass Lewis. Proxy votes must be approved
by the Proxy Voting Committee before submitting to the proxy service
provider.
•Proxies
for the Diversified Small Cap Value accounts are voted in accordance with the
proxy service provider’s recommendations for the following reasons:
◦Investments
are based on a quantitative model. Fundamental research is not performed for the
holdings.
◦The
holding period is too short to justify the time for analysis to
vote.
Conflicts
of Interest
Potential
conflicts may arise when:
•Clients
elect to participate in securities lending arrangements; in such cases, the
votes follow the shares, and because Barrow Hanley has no information about
clients’ shares on loan, the proxies for those shares may not be
voted.
•Barrow
Hanley invests in equity securities of corporations who are also clients of the
Firm; in such cases, Barrow Hanley seeks to mitigate potential conflicts
by:
◦Making
voting decisions for the benefit of the shareholder(s), our clients;
◦Uniformly
voting every proxy based on Barrow Hanley’s internal research and consideration
of Glass Lewis’ recommendations; and
◦Documenting
the votes of companies who are also clients of the Firm.
•If
a material conflict of interest exists, members from the Proxy Voting and
Oversight Committees will determine if the affected clients should have an
opportunity to vote their proxies themselves, or whether Barrow Hanley will
address the specific voting issue through other objective means, such as voting
the proxies in a manner consistent with a predetermined voting policy or
accepting the voting recommendation of Glass Lewis.
Other
Policies and Procedures
•Barrow
Hanley sends a daily electronic transfer of equity positions to the proxy
service provider.
•The
proxy service provider identifies accounts eligible to vote for each security
and posts the proposals and research on its secure, proprietary online
system.
•Barrow
Hanley sends a proxy report to clients at least annually (or as requested by
client), listing the number of shares voted and disclosing how proxies were
voted.
•Voting
records are retained on the network, which is backed up daily. The proxy service
provider retains records for seven years.
•Barrow
Hanley’s Proxy Voting Guidelines are available upon request by calling: (214)
665-1900, or by e-mailing: [email protected].
•Proxy
Coordinators retain the following proxy records for at least seven
years:
◦These
policies and procedures and any amendments;
◦Proxy
statements received regarding our clients’ securities;
◦A
record of each proxy voted;
◦Proxy
voting reports that are sent to clients annually;
◦Any
document Barrow Hanley created that was material to making a decision on how to
vote proxies, or that memorializes that decision; and
◦Records
of any client’s request for proxy voting information.
Clients
may elect to participate in securities lending programs through their custodial
bank. Typically, Barrow Hanley is not notified of shares on loan, and whether
shares are loaned is not considered when our Portfolio Manager’s make and
implement investment selection. When we determine a proxy voting issue to be of
material significance, Barrow Hanley makes a best-efforts attempt to alert
clients and their custodial bank to recall shares from loan so that we can vote
the proxies. In this context, Barrow Hanley defines material significance to be
any proxy issue deemed by our investment team to have significant economic
impact or likely cause a market movement. The ultimate decision on whether or
not to recall shares is the responsibility of the client.
Voting
Debt and/or Bank Loan Securities
Barrow
Hanley has the responsibility to vote proxies and related interests for its
clients who have delegated this responsibility to the Firm, which may include
voting on proposals, amendments, consents, or resolutions solicited by or in
respect to the issuers of securities, including Bank Loan debt instruments.
Barrow Hanley votes proxies and related interests in the best interest of the
securities’ owners, its clients.
Exceptions
Limited
exceptions may be permitted based on a client’s circumstances, such as foreign
regulations that create a conflict with U.S. practices, expenses to facilitate
voting when the costs outweigh the benefit of voting the proxies, or other
circumstances.
DSM
CAPITAL PARTNERS LLC
PROXY
VOTING POLICY AND PROCEDURES
POLICY
It
is DSM’s policy that all proxies be voted solely in the best interests of the
beneficial owners of the securities. DSM’s proxy voting policy may be amended
from time to time. DSM’s Proxy Voting Policy is below. The policy indicates how
DSM typically votes proxies on certain issues.
In
addition, DSM has contracted with an independent third party (currently,
Institutional Shareholder Services, LLC) (the “Third Party Administrator”) to
provide issue analysis and vote recommendations with respect to all proxy
proposals. The Third-Party Administrator offers a U.S. policy, a European
policy, a Canadian policy as well as specialty policies such as a Sustainability
policy, a Faith-Based policy, a Taft-Hartley policy and a Public Fund policy,
along with custom policies defined by its clients.
On
June 1, 2021, in an effort to better align its proxy voting policy with its role
as a signatory to the Principles for Responsible Investing (PRI), DSM switched
policies from the U.S. policy and the European policy to the Sustainability
policy. A copy of all policies can be found at www.issgovernance.com.
Each
year, the Third-Party Administrator undertakes a process to update the policies
that inform its proxy voting recommendations. Typically, the Third-Party
Administrator has a policy formulation process that collects feedback from a
diverse range of market participants through multiple channels: an annual policy
survey of institutional investors and corporate issuers, roundtables with
industry groups, and ongoing feedback during proxy season. The Third-Party
Administrator uses this input to develop draft policy updates on important
governance issues, which are then published for open review and comment. This
information is also available at www.issgovernance.com.
Updates and revisions by the Third-Party Administrator are reviewed by DSM to
determine whether they are consistent with its principals. Because the
Third-Party Administrator conducts issue analysis and makes vote recommendations
based on its independent, objective analysis, the proxy voting process is
designed to cast votes in the best interests of DSM’s Clients.
While
it is DSM’s policy to follow the vote recommendations of the Third-Party
Administrator, DSM retains the authority to vote differently than the
recommendation on any proxy proposal. However, this action is subject to an
internal approval process, which includes a determination that the proxy
decision is not influenced by any conflicts of interest. In instances in which
the Third-Party Administrator is unable to make a vote recommendation, DSM’s
Proxy Voting Committee will, based on such advice as it deems necessary,
determine the manner in which, if at all, to vote such proxy.
DSM,
as a matter of policy, votes proxies for pooled investment vehicles that it
manages, for ERISA accounts that require the investment manager to vote proxies
and for Clients who ask DSM to vote their proxies. Clients may wish to vote
their own proxies. Further, DSM does not vote proxies for unsupervised
securities, or for proxies associated with securities that were transferred to
DSM but subsequently sold because the securities were not in DSM’s model
portfolio at that time. DSM also reserves the right to not accept a potential
client account if DSM believes that a custom proxy policy is too undefined or
too complex to implement.
Mutual
Fund Proxies
DSM
does not normally invest in mutual funds in the separate accounts of its Clients
and therefore does not generally take any action on these
proposals.
Material
Conflicts of Interest
DSM
does not engage in any investment banking or corporate finance activities, nor
does DSM produce research for publication. However, DSM personnel may have
interests in securities, instruments, and companies that may be purchased or
sold by DSM for its Clients’ accounts. The interests of DSM and/or its personnel
may conflict with the interests of DSM Clients in connection with any proxy
issue. In addition, DSM may not be able to identify all of the conflicts of
interest relating to any proxy matter. If a potential conflict does arise, it is
to be brought to the attention of the CCO to be resolved.
DSM
PROXY VOTING COMMITTEE
DSM
has a Proxy Voting Committee (the "Committee") comprised of Daniel Strickberger,
Meredith Meyer, Christopher Bertoni, Blair Barton and Russell Katz. The
Committee is to administer DSM’s proxy voting policy. The Committee will meet as
necessary to discuss proxy issues. In addition, on an annual basis, the
Committee will review the proxy voting policy of the Third-Party Administrator.
DSM
PROCEDURES
The
Proxy Voting Committee will administer the voting of all Client proxies. DSM has
engaged the Third-Party Administrator to assist in issue analysis and the voting
of client proxies. Such entity will coordinate with each Client’s custodian to
help ensure that proxy materials reviewed by the custodians are processed in a
timely fashion.
An
analysis of proxy issues and vote recommendations will be provided or made
available to DSM by the Third-Party Administrator. The Proxy Voting Committee
will notify the Third-Party Administrator of any changes to the DSM policy
voting policy or any deviations thereof.
DSM
conducts reviews of the Third-Party administrator which are reasonable designed
to assess the adequacy and quality of its staffing and personnel, and whether it
has policies and procedures that enable it to make proxy voting recommendations
based on current and accurate information and to identify and address conflicts
of interest relating to its voting recommendations. The firm periodically
samples the voting activity by the Third-Party administrator for compliance with
firm instructions and conducts sample reconciliations with client account
holdings for accuracy.
Recordkeeping
DSM
is required to maintain in an easily accessible place for five years all records
relating to proxy voting. These records include the following:
●
a copy of the proxy voting policy;
●
a copy of each proxy statement received on behalf of DSM’s Clients;
●
a record of each vote cast on behalf of DSM’s Clients;
●
a copy of all documents created by DSM’s personnel that were material to making
a decision on a vote or that memorializes the basis for the decision;
and
●
a copy of each written request by a Client for information on how DSM voted
proxies, as well as a copy of any written response.
DSM
reserves the right to maintain certain proxy records with the Third-Party
Administrator or any other entity in accordance with all applicable
regulations.
Disclosure
Any
Client may obtain information about how DSM voted its security ballots (but not
the security ballots of any other Client) and/or a copy of DSM’s proxy voting
policy, without cost, by calling 561-618-4000 or by writing to DSM at 7111
Fairway Drive, Suite 350, Palm Beach Gardens, Florida 33418, Attn: Legal and
Compliance.
Specific
Proxy Issues
The
following is DSM’s typical position on certain proxy issues.
Operational
Items – DSM
generally supports policies that strengthen shareholders’ rights with regard to:
annual and special shareholder meetings; ratification of auditors (unless the
auditor has a financial interest, has rendered an inaccurate opinion, or has
poor accounting practices); and maintaining shareholders’ ability to vote on
transactions, compensation or other general corporate issues that may arise.
Board
of Directors
– DSM
normally supports policies that allow for strong corporate governance, including
a majority of independent directors and key committees that are chaired by
independent directors. Declassified boards are generally supported and
cumulative voting of stock is viewed on a case-by-case basis. DSM also normally
supports liability protections for directors but not protection for willful
misconduct or fraud. DSM prefers stock ownership by boards but does not require
it.
DSM
will typically vote on director nominees on a case-by-case basis, generally
withholding or voting against a nominee for attending less than 75% of meetings,
sitting on more than five public company boards, or serving as CEOs of public
companies while sitting on boards of more than two public companies besides
their own. DSM also generally votes against directors who lack accountability
and oversight coupled with sustained poor performance.
Proxy
Contests
– In
contested elections, the following is commonly taken into account by DSM: the
target company’s long-term financial performance relative to its industry;
management’s track record; background to the proxy contest; qualifications of
director nominees (both slates), stock ownership positions; evaluation of what
each side is offering shareholders, and the likelihood that the proposed
objectives and goals can be met. DSM generally supports confidential
voting.
Mergers
and Corporate Restructuring
– For
mergers, acquisitions, divestitures, joint ventures, private placements,
spin-offs, DSM evaluates the merits and drawbacks of the proposed transaction,
taking into consideration the following factors:
•Valuation
- is the value to be received (or paid) reasonable. Emphasis is placed on the
offer premium, market reaction and strategic rationale;
•Market
Reaction
- how has the market reacted to the proposed deal;
•Strategic
Rationale
- does the deal make sense strategically. Cost and revenue synergies should be
reasonably achievable. Management should have a favorable track record of
successful integration of historical acquisitions;
•Negotiations
and process
- is the process fair and equitable;
•Governance
-
will the combined company have better or worse governance than the current
governance profiles of the respective parties to the transaction;
•Dilution
to existing shareholders;
•Control
issues; and
•Other
financial issues.
PROXY
VOTING POLICY
FORT
WASHINGTON INVESTOR ADVISORS, INC.
Fort
Washington's policy is to vote proxies in the best interests of the Fund at all
times. Fort Washington has adopted procedures that it believes are
reasonably designed to ensure that proxies are voted in the best interests of
the Fund in accordance with its fiduciary duties and SEC rules governing
investment advisers. Reflecting a basic investment philosophy that good
management is shareholder focused, proxy votes will generally be cast in support
of management on routine corporate matters and in support of any management
proposal that is plainly in the interest of all shareholders.
Specifically, proxy votes generally will be cast in favor of proposals
that:
•maintain
or strengthen the shared interests of stockholders and management;
•increase
shareholder value; and
•maintain
or increase shareholder rights generally.
Proxy
votes will generally be cast against proposals having the opposite effect of the
above. Where Fort Washington perceives that a management proposal, if
approved, would tend to limit or reduce the market value of the company's
securities, it will generally vote against it. Fort Washington generally
supports shareholder rights and recapitalization measures undertaken
unilaterally by boards of directors properly exercising their responsibilities
and authority, unless we believe such measures could have the effect of reducing
shareholder rights or potential shareholder value. In cases where
shareholder proposals challenge such actions, Fort Washington's voting position
will generally favor not interfering with the directors' proper function in the
interest of all shareholders.
Fort
Washington may delegate its responsibilities under its proxy voting procedures
to a third party, provided that Fort Washington retains final authority and
fiduciary responsibility for proxy voting. Fort Washington has retained
ISS to assist it in the proxy voting process and will use ISS' proxy voting
guidelines as a resource in its proxy voting.
Fort
Washington will review proxies to assess the extent, if any, to which there may
be a material conflict between it and the interests of the Fund. If Fort
Washington determines that a potential conflict may exist, it will be reported
to the Proxy Voting Committee. The Proxy Voting Committee is authorized to
resolve any conflict in a manner that is in the collective best interests of the
Fund (excluding a potential conflict). The Proxy Voting Committee may
resolve a potential conflict in any of the following manners:
•If
the proposal is specifically addressed in the proxy voting procedures, Fort
Washington may vote the proxy in accordance with these policies, provided that
such pre-determined policy involves little discretion on Fort Washington's
part;
•Fort
Washington may engage an independent third party to determine how the proxy
should be voted;
•Fort
Washington may establish an ethical wall or other informational barriers between
the person involved in the potential conflict and the persons making the voting
decision in order to insulate the potential conflict from the decision
maker.
PROXY
VOTING POLICY
LONDON
COMPANY OF VIRGINIA D/B/A THE LONDON COMPANY
I.
POLICY
London
Company of Virginia (the “Advisor”) acts as discretionary investment adviser for
various clients, including clients governed by the Employee Retirement Income
Security Act of 1974 (“ERISA”) and registered open-end investment companies
(“mutual funds”). The Advisor’s authority to vote proxies is established through
the delegation of discretionary authority under its investment advisory
contracts. Therefore, unless a client (including a “named fiduciary” under
ERISA) specifically reserves the right, in writing, to vote its own proxies, the
Adviser will vote all proxies in a timely manner as part of its full
discretionary authority over client assets in accordance with these Policies and
Procedures.
When
voting proxies, the Advisor’s utmost concern is that all decisions be made
solely in the best interest of the client (and for ERISA accounts, plan
beneficiaries and participants, in accordance with the letter and spirit of
ERISA). The Advisor will act in a prudent and diligent manner intended to
enhance the economic value of the assets of the client’s account.
II.
PURPOSE
The
purpose of these Policies and Procedures is to memorialize the procedures and
policies adopted by the Advisor to enable it to comply with its fiduciary
responsibilities to clients and the requirements of Rule 206(4)-6 under the
Investment Advisers Act of 1940, as amended (the “Advisers Act”). These Policies
and Procedures also reflect the fiduciary standards and responsibilities set
forth by the Department of Labor for ERISA accounts.
III.
PROCEDURES
A.
The Advisor is ultimately responsible for ensuring that all proxies received by
the Adviser are voted in a timely manner and in a manner consistent with the
Advisor’s determination of the client’s best interests. Although many proxy
proposals can be voted in accordance with the Adviser’s established guidelines
(see Section V. “Guidelines” below), the Advisor recognizes that some
proposals require special consideration which may dictate that the Advisor makes
an exception to the Guidelines. The Advisor will vote the recommendation of ISS
on all proxy votes, unless otherwise directed by the Portfolio
Managers
B.
Conflicts
of Interest
Where
a proxy proposal raises a material conflict between the Advisor’s interests and
a client’s interest, including a mutual fund client, the Adviser will resolve
such a conflict in the manner described below:
1.
Vote
in Accordance with the Guidelines.
To the extent that the Advisor has little or no discretion to deviate from the
Guidelines with respect to the proposal in question, the Advisor shall vote in
accordance with such pre-determined voting policy.
2.
Obtain
Consent of Clients.
To the extent that the Advisor has discretion to deviate from the Guidelines
with respect to the proposal in question, the Advisor will disclose the conflict
to the relevant clients and obtain their consent to the proposed vote prior to
voting the securities. The disclosure to the client will include sufficient
detail regarding the matter to be voted on and the nature of the Advisor’s
conflict that the client would be able to make an informed decision regarding
the vote. If a client does not respond to such a conflict disclosure request or
denies the request, the Advisor will abstain from voting the securities held by
that client’s account.
3.
Client
Directive to Use an Independent Third Party.
Alternatively, a client may, in writing, specifically direct the Advisor to
forward all proxy matters in which the Advisor has a conflict of interest
regarding the client’s securities to an identified independent third party for
review and recommendation. Where such independent third party’s recommendations
are received on a timely basis, the Advisor will vote all such proxies in
accordance with such third party’s recommendation. If the third party’s
recommendations are not timely received, the Advisor will abstain from voting
the securities held by that client’s account.
The
Advisor will review the proxy proposal for conflicts of interest as part of the
overall vote review process. All material conflict of interest so identified by
the Adviser will be addressed as described above in this
Section III.A.
C.
Limitations
In
certain circumstances, in accordance with a client’s investment advisory
contract (or other written directive) or where the Advisor has determined that
it is in the client’s best interest, the Advisor will not vote proxies received.
The following are certain circumstances where the Advisor will limit its role in
voting proxies:
1.
Client
Maintains Proxy Voting Authority:
Where client specifies in writing that it will maintain the authority to vote
proxies itself or that it has delegated the right to vote proxies to a third
party, the Advisor will not vote the securities and will direct the relevant
custodian to send the proxy material directly to the client. If any proxy
material is received by the Advisor, it will promptly be forwarded to the client
or specified third party.
2.
Terminated
Account:
Once a client account has been terminated with the Advisor in accordance with
its investment advisory agreement, the Advisor will not vote any proxies
received after the termination. However, the client may specify in writing that
proxies should be directed to the client (or a specified third party) for
action.
3.
Limited
Value:
If the Adviser determines that the value of a client’s economic interest or the
value of the portfolio holding is indeterminable or insignificant, the Advisor
may abstain from voting a client’s proxies. The Advisor also will not vote
proxies received for securities which are no longer held by the client’s
account.
4.
Securities
Lending Programs:
When securities are out on loan, they are transferred into the borrower’s name
and are voted by the borrower, in its discretion. However, where the Advisor
determines that a proxy vote (or other shareholder action) is materially
important to the client’s account, the Advisor may recall the security for
purposes of voting.
5.
Unjustifiable
Costs:
In certain circumstances, after doing a cost-benefit analysis, the Advisor may
abstain from voting where the cost of voting a client’s proxy would exceed any
anticipated benefits to the client of the proxy proposal.
IV.
RECORDKEEPING
In
accordance with Rule 204-2 under the Advisers Act, the Advisor will
maintain for the time periods set forth in the Rule (i) these proxy
voting procedures and policies, and all amendments thereto; (ii) all proxy
statements received regarding client securities (provided however, that the
Advisor may rely on the proxy statement filed on EDGAR as its records);
(iii) a record of all votes cast on behalf of clients; (iv) records of
all client requests for proxy voting information; (v) any documents
prepared by the Advisor that were material to making a decision how to vote or
that memorialized the basis for the decision; and (vi) all records relating
to requests made to clients regarding conflicts of interest in voting the
proxy.
The
Advisor will describe in its Part II of Form ADV (or other brochure
fulfilling the requirement of Rule 204-3) its proxy voting policies and
procedures and will inform clients how they may obtain information on how the
Advisor voted proxies with respect to the clients’ portfolio securities. Clients
may obtain information on how their securities were voted or a copy of the
Advisor’s Policies and Procedures by written request addressed to the Advisor.
The Advisor will coordinate with all mutual fund clients to assist in the
provision of all information required to be filed by such mutual funds on
Form N-PX.
V.
GUIDELINES
The
ISS Investment Manager Guidelines are designed to maximize returns for
investment managers by voting in a manner consistent with such managers’ active
investment decision-making. The guidelines are designed to increase investors’
potential financial gain through the use of the shareholder vote, while also
allowing management and the board discretion to direct the operations, including
governance and compensation, of the firm. The guidelines will ensure that all
issues brought to shareholders are analyzed in light of the fiduciary
responsibilities unique to investment advisors and investment companies on
behalf of individual investor clients including mutual fund shareholders. The
guidelines will encourage the maximization of return for such clients through
identifying and avoiding financial, audit and corporate governance
risks.
Management
Proposals
Election
of Directors
In
analyzing directors and boards, ISS’ Investment Manager Guidelines generally
support the election of incumbent directors, except when a majority of the
company’s directors are not independent or where directors fail to attend at
least 75% of board and committee meetings. In a contested election, we will
apply the standard ISS recommendation.
Auditor
The
ISS Investment Manager Guidelines will generally support auditor ratification,
except when the non-audit fees exceed the audit fees paid to the auditor, there
have been recent restatements
Compensation
ISS
recognizes the importance in designing appropriate executive compensation plans
that truly reward pay for performance. We evaluate equity compensation plans
based upon their specific features and will vote against plans than would result
in total overhang greater than 20% or that allow the re-pricing of options
without shareholder approval. The Investment Manager Guidelines will support
management advisory votes on compensation with the belief that an independent
compensation committee is in the best position to design an appropriate
compensation program for the company.
Authorized
Shares
Having
sufficient available authorized shares allows management to avail itself of
rapidly developing opportunities as well as to effectively operate the business.
However, we believe that for significant transactions management should seek
shareholders’ approval to justify the use of additional shares.
Therefore
shareholders should not approve the creation of a large pool of unallocated
shares without some rational of the purpose of such shares. Accordingly, where
we find that the company has not provided an appropriate plan for use of the
proposed shares, or where the number of shares far exceeds those needed to
accomplish a detailed plan, we typically vote against the authorization of
additional shares. We also vote against the creation of or increase in
(i) blank check preferred shares and (ii) dual or multiple class
capitalizations.
Shareholder
Rights
ISS
Investment Manager Guidelines will generally support proposals increasing or
enhancing shareholder rights such as declassifying the board, allowing
shareholders to call a special meeting, eliminating supermajority voting and
adopting majority voting for the election of directors. Similarly, the
Investment Manager Guidelines will generally vote against proposals to eliminate
or reduce shareholder rights.
Mergers/Acquisitions
ISS
undertakes a thorough examination of the economic implications of a proposed
merger or acquisition to determine the transaction’s likelihood of maximizing
shareholder return. We examine the process used to negotiate the transaction as
well as the terms of the transaction in making our voting recommendation. The
ISS Investment Manager Guidelines will vote in accordance with the standard ISS
policy recommendation on mergers, acquisitions and other financing
transactions.
Shareholder
Proposals
We
review and vote on shareholder proposals on a case-by-case basis. We recommend
supporting shareholder proposals if the requested action would increase
shareholder value, mitigate risk or enhance shareholder rights but generally
recommend voting against those that would not ultimately impact
performance.
Governance
The
ISS Investment Manager Guidelines will support reasonable initiatives that seek
to enhance shareholder rights, such as the introduction of majority voting to
elect directors, elimination in/reduction of supermajority provisions, the
declassification of the board and requiring the submission of shareholder
rights’ plans to a shareholder vote. The guidelines generally support
reasonable, well-targeted proposals to allow increased shareholder participation
at shareholder meetings through the ability to call special meetings and ability
for shareholders to nominate director candidates to a company’s board of
directors. However, the Investment Manager Guidelines will vote against
proposals to require separating the roles of CEO and chairman.
Compensation
The
ISS Investment Manager Guidelines will generally oppose any shareholder
proposals seeking to limit compensation in amount or design. However, the
guidelines will vote for reasonable and properly-targeted shareholder
initiatives such as to require shareholder approval to re-price options, to link
pay with performance, to eliminate or require shareholder approval of golden
coffins, to allow a shareholder vote on excessive golden parachutes
(i.e.,
greater than 2.99 times annual compensation) and to clawback unearned bonuses.
The Investment Manager Guidelines will vote against requiring companies to allow
shareholders an advisory compensation vote.
Environment
ISS’
Investment Manager Guidelines vote against proposals seeking to cease a certain
practice or take certain action related to a company’s activities or operations
with environmental. Further, the ISS’
Investment
Manager Guidelines generally vote against proposals regarding enhanced
environment disclosure and reporting, including those seeking sustainability
reporting and disclosure about company’s greenhouse gas emissions, as well as
advocating compliance with international environmental conventions and adherence
to environmental principles like those promulgated by CERES.
Social
ISS’
Investment Manager Guidelines generally oppose proposals requesting companies
adhere to labor or worker treatment codes of conduct, such as those espoused by
the International Labor Organization, relating to labor standards, human rights
conventions and corporate responsibility at large conventions and principles.
The guidelines will also vote against proposals seeking disclosure concerning
the rights of workers, impact on local stakeholders, workers’ rights and human
rights in general. Furthermore, the Investment Manager Guidelines oppose
increased reporting and review of a company’s political and charitable spending
as well as its lobbying practices.
PROXY
VOTING POLICY
Sage
Advisory Services, Ltd. Co. (“Sage”)
Proxy
Voting Policy
Overview
This
proxy voting policy is designed to provide reasonable assurance that proxies are
voted in the clients’ best economic interest, when the responsibility for voting
client proxies rests with Sage. Sage will vote proxies for clients pursuant to
the authority granted in the investment management agreement between Sage and
its client, or as granted by written direction from the client.
Mr.
Wade Uloth, the Chief Compliance Officer (“CCO”), is responsible for oversight
of this policy. Questions regarding this policy should be directed to the
CCO.
Conflicts
of Interest
A.Overview
Sage
may encounter a material conflict in voting client proxies. Sage has a duty to
recognize a material conflict and to resolve the conflict before voting the
proxy. For purposes of this policy, material conflicts of interest are defined
as those conflicts that a reasonable investor would view as important in making
a decision regarding how to vote a proxy.
Examples
of material conflicts include (but are not limited to):
1.Sage
provides investment management services to a publicly traded company and also
holds that same security within client portfolios which is subject to a proxy;
and
2.A
Sage employee has a business or personal relationship (such as a close friend or
spouse) with a member of executive management, a participant in the proxy
contest, or a corporate director of the company.
B.Identifying
Conflicts of Interest
1.Sage
shall maintain a listing of all material business conflicts of interests – those
business relationships between the firm and other parties that are deemed to be
material and may result in a conflict with respect to a future proxy
contest.
2.All
employees are required to disclose all personal and familial relationships that
may present a material conflict of interest with respect to a future proxy
contest. Employees who are unsure whether a relationship should be disclosed as
a material conflict should consult the CCO for guidance.
C.Resolving
Material Conflicts of Interest
Unless
a client requests otherwise, Sage will take one of the following actions to
ensure the proxy voting decision is based on the client’s best interests and is
not a result of the conflict.
1.Engage
an independent party to determine how to vote the proxy;
2.Prepare
a report that (i) describes the conflict of interest; (ii) discusses procedures
used to address such conflict of interest; (iii) discloses any contacts from
outside parties (other than routine communications from proxy solicitors)
regarding the proposal; and (iv) confirms the recommendation was made solely on
the investment merits and without regard to any other
consideration;
3.Refer
the proxy to a client or to a representative of the client for voting
purposes;
4.Disclose
the conflict to the affected clients and seek their consent to vote the proxy
prior to casting the vote; or
5.Vote
in accordance with a pre-determined voting policy, as disclosed to
clients.
Disclosures
to Clients
A
client may request Sage to deliver this Proxy Voting Policy as well as a record
of how Sage has voted that client’s proxies. Sage will use the firm’s Part 2A of
Form ADV disclosure to:
A.Notify
clients of how they may obtain a copy of this policy;
B.Notify
clients of how they may obtain a record of how their securities were voted;
and
C.Summarize
the firm’s proxy voting policies.
Voting
Guidelines
Sage
strives to vote all proxies in the best economic interests of its clients. The
decision of how to vote follows the same criteria Sage uses in managing client
accounts – to vote for proposals in such a manner that, in Sage’s opinion, will
increase shareholder value.
A.General
Overview
In
evaluating a particular proxy proposal, Sage takes into consideration, among
other items:
1.Management’s
assertions regarding the proxy proposal;
2.Sage’s
determination of how the proxy proposal will impact its clients;
and
3.Sage’s
determination of whether the proxy proposal will create dilution for
shareholders.
B.Proxy
Proposals Regarding Business Operations Matters
Sage
will generally support management’s recommendations on proxy issues related to
business operations matters. Sage believes a company’s management should
generally have the latitude to make decisions related to the company’s business
operations. However, when Sage believes the company’s management is acting in an
inconsistent manner with its clients’ best interests Sage will vote against
management’s recommendations.
C.Proxy
Proposals Regarding Compensations Matters
1.Sage
will generally vote against non-salary compensation plans (such as stock
compensation plans, employee stock purchase plans and long-term incentive plans)
unless, in Sage’s opinion, such plans are structured to not create serious
dilution to shareholders; and
2.Sage
will analyze all other compensation plans on a case-by-case basis.
D.Proxy
Proposals Regarding Control Matters
1.Sage
will review proxy proposals regarding control matters (e.g., mergers and
anti-takeover tactics) related to a company on a case-by-case
basis;
2.Sage
generally opposes measures limiting the rights of shareholders; and
3.Sage
generally opposes measures preventing shareholders from accepting an offer of a
sale of a company.
Record
Retention Requirements
Sage
shall keep the following proxy voting records:
A.These
proxy voting policies and procedures;
B.Proxy
statements received regarding client securities. Electronic statements, such as
those maintained on EDGAR or by a proxy voting service, are
acceptable;
C.Records
of proxy votes cast on behalf of each client;
D.Records
of client requests for proxy voting information, including a record of the
information provided by Sage; and
E.Documents
prepared by Sage that were material to making the decision of how to
vote.
Sage
will keep these records in accordance with its Record Retention
Policy.
Approved:
January 14, 2014
Revised:
August 1, 2020
TSF-54BB-TST-SAI-2210